Guest Post - Four Factors That Can Help Business Tax Compliance

Here is a guest post from Jayson Mullin, a partner at the tax debt resolution company Top Tax Defenders, offering helpful tips for small businesses to reduce tax headaches and feel more comfortable dealing with complex taxes which likely won't get much easier for businesses even with tax reform.

Whew! Tax Day is more than a month behind us. For many small business owners, that's a huge weight lifted. For others, it means playing the procrastination game against a filed extension, or continued concern that taxes weren't filed correctly, sparking the dread of a potential audit.

There are four things small business owners can do for a more stress-free tax experience (no, that's not an oxymoron):

•  Be financially prepared.
• Be organized enough to file on time.
•  Have a decent understanding of complicated tax laws, rules and the paperwork required.
• Understanding differences between federal and state reporting.

According to Rep. Tim Huelskamp, R-Kan, chairman of the House Subcommittee on Economic Growth, Tax and Capital Access, small businesses that employ between 1-5 employees spend an average of $4,308 to $4,276 per employee in order to comply with the United States tax code. That's a notable financial burden.

4 Factors to Protect Your Business's Tax Compliance & Bottom Line

Filing incorrectly can mean sizable penalties. Even if you opt not to use a certified tax professional to file your taxes, it's a good idea to consult with one to make sure that you are filing taxes correctly. Let's take a look at each of the above factors in greater detail.

Get Tax Finances in Order

In almost all cases, small business owners should be filing quarterly taxes. While that may seem like just one more thing to do, there are several benefits to this method. First, it works as a budgeting tool for small business owners, allowing them to get money sent in to the IRS in the hopes that they will not owe anything more, or that the amount they owe will be significantly reduced when taxes are due.   Also, being faithful about paying quarterly taxes is a good way to "be prepared" as the old Boy Scout Motto goes. Accurate tax filing requires organization and preparation. Ideally, if you're doing your homework to get accurate quarterly tax figures, you will have less to contend with as tax day approaches.

Be Organized Enough to File on Time

Yes, certain small businesses (primarily partnerships) can file for a tax extension but we never recommend this route. The goal for tax compliance is to be on time. Filing an extension usually translates to "more time to procrastinate," and this isn't helpful when you're scrambling a few months down the road.   It's much better to consider tax compliance as a year-round event. Pay attention to small business tax updates provided by the IRS. Keep your paperwork in order. Work with a CPA to determine which things your business can deduct and which you can't. Then, keep individual files for deductions so they are easy to itemize later.   Make sure you:

• Separate personal and business expenses.
• Track mileage and relevant car expenses (check the IRS publication pertaining to Car Expenses).
• Don't exaggerate deductions; the IRS has a good idea of which expenses make the most sense for specific industries.
• Keep payroll records up-to-date (it's often worth the expense of hiring a payroll company to make sure this item is taken care of).
• Reconcile, track and support expenses with a receipt.

The more organized you are, the easier it is to do your own taxes, or streamline the work you'll do with a professional.

Have an Understanding of Current Tax Laws and Relevant Paperwork

That's simple enough, right? It's no mystery that small businesses have it rough when it comes to tax compliance. The U.S. Tax Code contains more than 10 million words! It's impossible for a small business owner to keep up with each and every code included there. 

Should you choose to go it alone, there are helpful IRS tools you can access, like the Small Business & Self-Employed Tax Center or IRS-Hosted Webinars and Tax Workshops.   While there are some new breaks, such as Section 179, which allows small business owners to write off equipment purchases and leases (up to $500,000), the tax code is a very complicated web to navigate.

This is the most compelling reason to work a tax professional is so important, ideally a CPA or licensed tax professional with experience and an impeccable reputation. At the end of the day, you are ultimately responsible for any discrepancies in compliance.

Variances Between Federal, State & Local Compliance

That segues to the fourth factor: knowing the variances between the federal and state tax codes. Then there are the other local taxes you're responsible for. Many business owners get so caught up in the stress of federal tax compliance that they forget about their other tax obligations such as self-employment, property, payroll, local and excise taxes. 

Again, even a series of consultations with the right tax professional will help you remain organized and ahead of the curve with small business tax compliance.

Can IRS stop printing forms and pubs?

Excerpt from Form 1040 instructions for 1954

Who remembers when the IRS mailed a packet with blank tax forms and instructions AND your Social Security number printed on your mailing label?  Several years ago the IRS reduced mailings such as when they could tell the taxpayer prepared their return with software the year before and for the past few years don't mail forms.  They do still print them to pick up at IRS service locations. All of the forms, instructions and publications can be read or printed from the IRS website.

On april 19, 2016, the House passed H.Res. 673. Per the Congressional Research Service, this resolution, “Expresses the sense of the House of Representatives that the Internal Revenue Service (IRS) should provide U.S. taxpayers with free printed copies of IRS Publication 17, which is entitled "Your Federal Income Tax" and provides individuals with general instructions for filing tax returns..

Statements in the Congressional Record (H1825-H1827 (4/19/16)) provide some additional considerations. Congressman Levin (D-MI) notes that the cost of printing and mailing Pub 17 is $500,000 and the H. Res. 673 does not include additional IRS funding to cover the cost. Congressman Benichek (R-MI) noted that he previously introduced the PAPER act (H.R. 3673) to require the IRS to mail paper tax forms and instructions to any taxpayer who filed on paper in the past. All good points.

Will the IRS ever be able to stop printing forms, instructions and publications? I think so. While not everyone has access to computers and printers, there are VITA sites and there could be more.  Also, the federal government could work with states to help ensure that libraries and schools can assist in providing what people need.  They could print Pub 17 and have it available. Perhaps grocery stores could sell it at a reduced cost.

That might sound bad to have people pay for an IRS publication, but printing at home or elsewhere also costs. A few decades ago publications cost a small amount. The instructions to the 1954 Form 1040 state that you can buy "Your Federal Income Tax" from the Government Printing Office for 25 cents!  That is about $2.25 today.

What do you think? When can the IRS stop printing paper?

Tax To Do List for the Upcoming Filing Season

 

If you're looking for things to do to get ready for the upcoming filing season or want to check your list against another, I have one for you.  Please see "Preparing for the 2016 Filing Season," AICPA Tax Insider, 12/17/15.

The article was written before passage of the extenders and appropriations tax package.  Here is a list of links to that legislation you may find useful along with a list of some items for immediate consideration.

P.L. 114-113 (12/18/15) – H.R. 2029, Consolidated Appropriations Act 2016 – includes appropriations and other changes along with the Protecting Americans from Tax Hikes Act of 2015 (PATH), which is the extenders bill.

NOTE ON EXTENDERS: The bulk of the tax changes are in PATH, although a few, including a two year extension of the Cadillac ACA tax (§4980I) from 2018 to 2020 (and making it deductible) is in the appropriations bill H.R. 2029 (see 1 page summary of the non-PATH tax changes from the House Ways and Means Committee).  

Resources on PATH (extenders):

§  Overview from House Ways and Means Committee (4 pages)

§  Section-by-Section summary from Senate Finance Committee (20 pages).

§  Text of PATH (233 pages)

§  Joint Committee on Taxation documents:

·         Technical Explanation (JCX-144-15 (12/17/15) (268 pages)

·         Estimated Revenue Budget Effects (JCX-143-15; 12/16/15)

·         Estimated Budget Effects (non-PATH items) (JCX-142-15; 12/16/15)

§  Ways and Means Committee statement on the “cost” of tax extenders.

§  12/15/15 pressrelease from Senators Hatch and Wyden and Congressman Brady.

All key expired items were extended at least for 2015, several items were extended for longer or permanently. A few items to consider immediately include:

• Truncating SSNs on Form W-2 – Congress will now allow the IRS to permit truncated SSNs on the W-2 sent to the employee. This is effective on 12/18/15. Thus, pending regulations by the IRS, this might apply to the 2015 Forms W-2. Regulations issued in 2014 (TD 9675 (7/15/14)) allowed truncating of SSNs and EINs on almost all tax forms other than W-2 as the IRS believed that a legislation change to §6051 was needed. That change has now been made.
• Parking and Transit Parity – As in past years, the retroactive extension of the maximum monthly exclusion for transit passes ($130 prior to extension) to match the parking benefit exclusion ($250 prior to extension) will require employers to make payroll adjustments. Hopefully the IRS will again issue guidance on how to do this. The guidance for 2014 is in Notice 2015-02.  Watch for updated guidance and consider that changes will likely be required for the fourth quarter Form 941 and W-2s need to reflect the updated figures.
• Residency Requirement for ABLE Accounts – The requirement to set up the plan in your state of residency is eliminated to allow individuals to set up accounts in the state “that best fits their needs, such as with regard to investment options, fees, and account limits” (per the Summary-by-Summary analysis). This is effective for tax years beginning after 12/31/14.
• Section 529 Accounts – per the Summary-by-Summary analysis, “The provision treats a refund of tuition paid with amounts distributed from a 529 account as a qualified expense if such amounts are re-contributed to a 529 account within 60 days. The provision is effective for distributions made or refunds after 2014, or in the case of refunds after 2014 and before the date of enactment, for refunds re-contributed not later than 60 days after date of enactment.”
• Retroactive EITC, Child Tax Credit and AOTC Claims – Individuals may not retroactively claim an EITC, child tax credit or American Opportunity Tax Credit on an amended return or a late-filed original return for a prior tax year where the individual did not have a valid SSN. This applies to returns and any amendment or supplement to it filed after 12/18/15.
• REITs – Numerous changes were made with varying effective dates.  See the distributions made or refunds after 2014, or in the case of refunds after 2014 and before the date of enactment, for refunds re-contributed not later than 60 days after date of enactment. See Summary-by-Summary analysis and Text of PATH.

Anything to add to the list?

What do you think of the extenders package?  I'll have more later on the relevance of the package to tax reform.

Poor recordkeeping - complexity or too busy

Every year there are several tax cases where taxpayers think they'll get a better result in court despite poor records. They almost always lose. I've got a short article in today's AICPA Tax Insider on some of these cases, including a few involving marijuana businesses.  I hope you'll take a look - Poor Recordkeeping Hurts Taxpayers: Problems and Preventions.  I don't think these are really problems due to tax law complexity because businesses should maintain records for both tax and non-tax reasons. Of course, where a tax rule requires records beyond what is required for bookkeeping or financial reporting purposes, that should be examined as part of tax reform.  You'll see that in a few cases mentioned in the article that people were claiming deductions they were not entitled to, such as expenses of a car you don't own (including depreciation!).

What do you think?  Do you know of any new apps or other tools to help busy business owners maintain proper records?