Taxes

If you run a small business or are self-employed and need to pay business taxes annually, you could be losing money due to inefficiencies in your tax planning process. Paying your tax bill all at once at the end of the fiscal year might seem like the most efficient thing to do, but it can result in poor cash flow and IRS penalties.

In this article, we look at the tax-efficient process of tax planning with a Certified Public Accountant (CPA) versus the more inefficient transactional tax preparation process. If you don’t know where to begin, then a CPA can help you get organized and ensure that you aren’t paying too much, or too little, in taxes.

What Is Tax Preparation?

Tax preparation is the once-a-year process of preparing the fiscal year’s tax return. It involves gathering all the documents and data you will need to file your taxes, and organizing this data in line with present IRS reporting. tax preparation is a transactional course of action that doesn’t allow for ongoing advice that can help lower taxes, especially when compared with the ongoing nature of tax planning.

Depending on what industry you’re in, or the level of experience you have, your tax preparation can take a while to arrange and complete. It’s recommended that you start tax preparation early, but tax preparation generally doesn’t give you the time you need to maximize your savings. 

If you are unsure of the complexities preparing your taxes can bring, along with confusions of how to legally minimize your taxes as much as possible, the process can be frustrating and extremely time consuming.

What Is Tax Planning?

Find yourself filing taxes in the spring and hear ‘you should have contacted me last year to help save you money’? If this is you, a CPA can help! 

When you own a pass-thru business, each year your tax due on your taxable business profits are due when filing your personal IRS1040 tax return. The amount of tax payable is determined by several factors, including how much revenue is earned less related expenses. Many companies wait until taxes are due and pay in a lump sum, but this is extremely tax-inefficient, and depending on how much is owed may result in additional IRS late-payment penalty.

Tax planning is the process of estimating your tax-due regularly throughout the year by understanding and keeping track of what you owe. This can include continual, ongoing advisory based on your income less expenses and making recommendations throughout the year that not only helps advise on taxes due for the year, and also deferral options to lowering your taxable income for the year before the year is over. 

Consulting with your CPA on an ongoing basis throughout the current tax year is an excellent way to stay on top of things. Tax planning takes into account your cash flow needs and wealth goals, and it gives you time to uncover deductions in the current tax year. Efficient tax planning can improve your cash flow and save you money. 

For example, if a company waits until the end of the year to prepare its taxes, it may have overspent through the tax year. Conversely, with ongoing tax planning, the company is able to manage its taxable income throughout the year, only pay the required taxes when necessary, and know what cash flow is available for wealth planning and deferring taxable income. 

Why Is Tax Planning Beneficial? 

Tax planning is all-around beneficial to a business. As mentioned above, ongoing planning will alleviate cash flow when taxes are due in April each year and increase tax-efficiency lowering your taxable income during the current tax year as much as legally possible. 

Additionally, ongoing planning can reduce the amount of tax you pay, give you control over when and how you pay taxes, and prevent you from paying unnecessary tax. When implemented correctly, tax planning is the most reliable way to operate your business. 

What Can A CPA Firm Do? 

Certified Public Accountants (CPAs) are professionally licensed individuals dedicated to understanding all things tax, understanding the IRS Code, and working closely with businesses like yours helping with monthly accounting in order to provide ongoing tax planning strategy. Ongoing advisory throughout the tax year allows CPAs to advise you are only paying the right amount of tax due and helping save current taxes with tax deferral strategy planning.

CPAs are also trained in federal tax laws. They know the most up-to-date regulations and can advise you accordingly. This information can be extremely beneficial as the IRS often changes policy, and if you are not in the loop of changes this can result in missed deduction opportunities, or worse—penalties and fines. 

A CPA firm can do the planning for you, alleviating pressure and allowing you to focus on your day-to-day operations. Paying taxes might feel like an enormous expense if you are shouldering your business’s tax planning, but outsourcing to CPA professionals can save you money and even help you grow your wealth.

Tax planning is an effective, essential way to maintain your company’s tax responsibilities. With planning, you create financial structure in your business and are continually looking for ways to save on taxes. With a qualified CPA team, tax planning can be a huge win for your business and your personal tax savings.

Are you ok paying more to the IRS this year? Tax planning strategy happens year-round with ongoing clients at Insogna CPA. Contact us today for ongoing tax strategy planning.

The coronavirus pandemic has had a major impact on the business world and the global economy. In our nation’s current situation, businesses and business owners are having to take steps to reassess the way they handle the financial aspect of their businesses, especially with 2020 business taxes due in a few short months.

Business finances could potentially take a major hit as a result of this pandemic, but there are many nuances to 2020 business taxes that, if understood correctly, could help avoid unnecessary headaches. 

CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has the potential to help you improve the state of your 2020 business taxes following the difficulties that the coronavirus pandemic has brought on. The CARES Act came about in March of this year and was designed to provide relief and financial help for companies and individuals.

Listed below are some potential effects of the CARES Act that you can either benefit from or need to keep an eye out for as a business owner.

Paycheck Protection Program (PPP) Loan

Small Business Administration (SBA) loans were designed to aid small businesses in maintaining employees during the pandemic, helping to reduce layoffs and lessen the pandemic’s economic impact. The loan was intended to be put toward payroll and operating costs. Applications for PPP loans closed on August 8, 2020. 

These loans have the potential to be forgiven, if they were used as the government intended, but applications for partial and full forgiveness might not be processed by the time tax season starts. Whether or not the loan is forgiven will affect a company’s accounting, so delays in forgiveness notifications could make it difficult to wrap up the 2020 taxes for some businesses.

PPP Flexibility Act

Amendments were made to the PPP on June 5, 2020. Loans granted after this date carry a maturity period of five years; originally, the SBA had set a two-year term to PPP loans. Modifications were made to extend the covered period for loan forgiveness, too: 24 weeks after the loan is received or December 31, 2020, whichever comes first.

The amendments updated the amount of the loan that small businesses could spend on non-payroll costs and still be eligible for partial loan forgiveness. They also extended the timeline for businesses to qualify for FTE and Salary/Hourly Wage reduction safe harbors from June 30, 2020 to December 31, 2020, contingent on the business fully restoring FTEs and/or salary/hourly wages. A new FTE Reduction Exemption was made to provide loan forgiveness will not be affected if FTE reduction was a result of not being able to rehire employees or go back to pre-pandemic business conditions.

Economic Injury Disaster Loans (EIDL)

Similar to PPP loans, EIDL are SBA loans that can be used to support businesses negatively affected by COVID-19 and are beneficial to those who are self employed and who do not have employees. Keep in mind that funds from both programs cannot be used for the same purpose. EIDL have to be repaid in full and has different terms than PPP Loans.

Businesses who applied for EIDL received up to $10,000 in advance, a sum of money separate from the loan and technically considered to be a grant. Because the EIDL advance isn’t a part of the loan that needs to be repaid, it won’t be treated as a loan on your financial statements and tax return. 

The IRS has issued recent Notice that this advance will be considered taxable income and will not change unless Congress passes legislation to alter it. This forgiveness amount should be included with 2020 taxes as Other income, to offset 2020 PPP-related expenses, if the loan “can be reasonably expected” to be forgiven. 

While EIDL and PPP loans aren’t necessarily taxable, expenses paid for by the loans cannot be included as tax deductions. So, while you won’t have to pay taxes on the SBA loans, you miss out on otherwise deductible expenses that you will have to pay taxes for. Keep in mind that this is what has been directed by the IRS in recent Notice’s; future Congressional amendments to these current guidelines could change how this forgiveness money is taxed.

Employee Retention Credit (ERC)

If a business did not get an SBA loan, they might qualify for an ERC. An ERC is a refundable tax credit equal to 50% of up to $10,000 of qualified wages per eligible employee paid after March 12, 2020, through Dec. 31. 
Eligible employers include entities with any number of employees who have been affected by COVID-19 in one of two ways.

1. Operations were partially or completely stopped in accordance with a government order.
2. More than a 50% reduction in gross income for a calendar quarter when compared to the same quarter of the previous year.

There are plenty of things to consider when looking at how your business accounting might be impacted for the upcoming 2021 tax season, and you would be wise to begin planning now. 

2020 taxes are more complicated with PPP, CARES Act and your growing profits. Contact Insogna CPA today for helping minimize your taxes as much as legally possible.

If your company had to close its doors as a result of the pandemic, you should find out if remote working creates nexus for your business. Nexus is a term used when a company deals with any aspect of its business outside of its own state. To put it simply, nexus is another word for connections that have a taxing jurisdiction.

It essentially allows you to subject your business to different tax laws, depending on what municipality, state, or country you have nexus in. Nexus laws constantly change, so it’s important to keep yourself updated on the topic if it’s relevant to you and your business.

How to Know If Remote Working Creates Nexus

The pandemic has resulted in a lot of remote working and nexus for companies that might not have had either in the past. If your company has employees who went out of state to quarantine in their own homes or other locations with family members or friends, chances are they’ve created nexus. 

We are in a unique situation, one that has surely resulted in more businesses having nexus in a variety of new places. What does this mean for your company? Well, if you had an employee who worked for you from another state, it could result in you needing to pay withholding on wages for employees working in that specific area. It could be collecting sales tax on sales, dealing with income tax, licenses, etc.

As the IRS extends tax filing and payment due dates, there have been issues as a result of states conforming or not conforming to current circumstances. There are some possible problems that may come from employees working outside of the state they were hired to work in.

Individual Income Tax Payment And Withholding

Any individual income tax and related payroll withholdings are usually sourced to the state where the employee performed their work. As many employees are now telecommuting due to COVID-19, certain states and cities have adopted the ‘Convenience of the Employer’ test. 

This means that the wages of those remote workers are sourced to the employer’s location unless it was decided to have the employee in another state based on the employer’s necessity, rather than the employee’s convenience. For example, Philadelphia-based employers who are working outside the city are exempt from the city’s wage tax for the days spent working.

Apportionment

There’s also the issue of apportionment; many states still use a three-factor method of property, payroll, and sales to help calculate the business tax apportionment factor. As employees are now working from home, states could insist that the compensation paid is creating a payroll factor numerator.

This topic hasn’t been addressed explicitly during COVID-19 by all states, but those states who are facing it have said that they won’t adjust a company’s apportionment percentage due to the result of employees telecommuting from the state in question.

State Taxes

When it comes to the physical presence of employees in multiple states, the state taxes that a business pays could be affected. Under normal circumstances, a business would have nexus for state tax purposes if it has a physical presence in a state. This would affect things like income, sales, use, receipts, gross, and franchise tax. 

Now, however, employers have very control over where their employees work from. These could be normal conditions for the foreseeable future; until this pandemic is over employers might be hesitant to gather all of their employees in one place again.

Even though dozens of states have announced that they won’t impose nexus on employers, there are still many gray areas surrounding the issue. There’s no specific guidance around COVID-19 related telecommuting and whether states will end up creating nexus for tax purposes. The guidance issued seems to be temporary, so the future of this issue is up in the air.

What States Are Doing

As of September 16, 2020, each state is on its own in regard to telecommuting and nexus during the pandemic. For Alabama, there’s no nexus to be introduced, yet Arkansas has not released a statement whatsoever. Neither Florida nor Hawaii have issued guidance either, as seems to be the case for quite a few states. 

On the other hand, there are those who have imposed nexus, like Nebraska and Utah. It’s also interesting to see a few states saying yes to some and no or maybe to others, depending on circumstance. For example, Arizona has said ‘no’ to Nexus being imposed for corporate income tax but a ‘maybe’ for transaction privilege tax.

It seems that there’s still a lot of uncertainty and confusion for employers whose employees are currently working from a variety of places. As COVID continues to affect working conditions, it doesn’t seem like this is an issue that will disappear anytime soon. 

If remote working creates nexus for your company as a result of COVID-19, you might consider partnering with a team of CPA experts to help you figure out what might be your most complicated tax year to date.

Contact us at Insogna CPA for help with all of your business accounting needs.

The coronavirus pandemic has impacted everyone’s livelihoods in the year 2020. Many people have struggled with their health and their finances as government restrictions attempted to control the virus’s spread. With tax season just around the corner, many are now wondering how the pandemic affects taxes.

Thankfully, new measures were put in place in March to help support those in need and stimulate the economy. The CARES Act, or the Coronavirus Aid, Relief, and Economic Security Act, is a $2 trillion aid package created to help ease the burden on many people who had been negatively affected. Here is how it might affect your tax.

RMDs 

RMD stands for Required Minimum Distribution. It refers to the amount of money that must be withdrawn from a retirement account to avoid tax consequences. This must be done by qualifying individuals on an annual basis and from every relevant account—even if you have multiple retirement accounts. 

As of 2020, the age for withdrawing from your retirement fund has changed from 70.5 years old to 72 years old. However, as of March 2020, the CARES act’s introduction has suspended the requirement for RMD withdrawals for the current year. This gives those accounts time to recover and provides a tax break for qualifying individuals. 

Charitable Deductions 

The US economy is a major contributor to charitable organizations such as churches, healthcare groups, foundations dedicated to feeding the hungry, and many other non-profits. Due to the pandemic, many of these charitable organizations are struggling and are in need of relief. The CARES Act provides this relief in the form of a charitable tax deduction for qualifying individuals, encouraging people to do good and in return the pandemic affects their taxes positively. 

For the tax year beginning in 2020, the CARES Act allows a deduction of $300 for eligible individuals who contribute to charitable organizations. This only includes amounts up to $300. Charitable contributions that exceed this limit cannot be carried forward to future tax years. Furthermore, contributions made before this year will not be eligible.

Stimulus Checks 

Stimulus checks are money that taxpayers receive from the US government to help stimulate the economy by providing some spending money to help the economy recover. In 2020 stimulus checks have been distributed to encourage spending and to help with everyday costs. Some people may be wondering whether this government money is taxable and needs to be put through the books. 

According to tax experts, stimulus checks are not taxable by the IRS. The checks are more like a non-taxable grant designed to boost consumption and drive revenues. Any changes to your stimulus payments are likely to work in your favor, according to experts. If mistakes are made in your grant calculation, it may be factored into a future grant payment. 

Unemployment 

The pandemic has been devastating to the economy. It has caused the closure of small businesses and a high number of job losses. As unemployment soared, the US government fulfilled its duty to provide economic assistance to citizens in need. Regardless of whether you were employed, unemployed, self-employed, or an employer, the CARES Act essentially provided relief opportunities for all types of workers. 

If you lost your job due to the COVID-19 pandemic, you would have been entitled to up to an additional $600 per week in unemployment compensation, on top of what you were already receiving. If you were self-employed or worked independently, you were previously not entitled to unemployment benefit, but that changed under the CARES Act. This aspect of the pandemic affects taxes for many people as this extra amount is taxable, and 2020 tax returns will reflect that.

Student Loans

The burgeoning impact of student loan debt is a concern to those in full-time education as well as employers and their employees. Until recently, it was not possible for employers to contribute to student loan repayments without incurring a tax. 

But that, along with some other benefits to students, has changed under the CARES Act. Employers wishing to contribute to student loan repayment can now provide up to $5,520 to students, interns, or employees for educational expenses. An expert in business accounting can provide further information on this aspect.

The pandemic continues. Until there is a vaccine, and possibly beyond, without doubt, the effects of the pandemic will be felt for years economically. The CARES Act, introduced in March, is likely to ease some the difficulties caused by the pandemic and stimulate the economy. It’s a necessary act, but while it does much, it may need to be adapted as circumstances change. 

In relation to taxes, the CARES Act is proving beneficial to those in need who qualify. If you are unsure whether a CARES Act policy affects your tax, contact the IRS or a qualified accountant for further details. 

Contact us at Insogna CPA for help navigating the upcoming tax season.