Covid-19 Statement to Our Clients

In these unprecedented times, most, if not all, Americans are feeling the impacts of the coronavirus
(COVID-19) pandemic. Thousands are sick, a large number have died, millions of jobs are being lost amid
quarantine orders and small businesses are facing exceptional challenges to keep their doors open. The
federal government is committed to helping individuals and businesses during these uncertain times. In
addition to pushing back the April 15th tax deadline to July 15th, the government plans to issue stimulus
checks to most taxpayers, increase unemployment and authorize lenders to issue SBA loans with simpler
application processes, which in certain circumstances may not have to be repaid. Many states have also
extended filing deadlines and loosened eligibility requirements for unemployment benefits. As information
from media outlets and federal & state governments roll out in record speeds, we know you have many
questions from a business and personal standpoint, for example:

 How do I know if I’m getting a stimulus check?
 Is it possible to take distributions from my retirement account to pay my monthly expenses
without incurring penalties?
 As a self-employed individual, is it possible to apply for unemployment benefits?
 Am I required to pay my employees if they’re at home with their kids while schools are closed?
 What if I can’t afford to pay my employees sick or family leave?
 Is it better to lay off my workers or put them on temporary leave?
 Is a self-employed individual eligible for sick leave or family leave pay?
 How do the employer credits work if I pay sick or family leave to my employees?
 What are the qualifications for getting an SBA loan to keep my business afloat?
 What type of SBA loan may not require repayment?

Right now, your highest priority is your health and the health of those you love. We are diligently reading
and researching new legislation, proposed and passed, to understand its impact on you. Our main objective
is to support you and your business and to navigate this complicated and everchanging environment
together. Please contact us and let us help you walk through the details of the newly enacted federal tax
legislation and allow us to be the trusted advisors you hired us to be.

The Impact of SECURE Act

Congress recently passed sweeping legislation known as the Setting Up Every Community for Retirement

Enhancement (SECURE) Act. The Act expands opportunities for individuals to increase their savings and modifies many employer requirements as so to incentivize businesses to encourage their employees to save for retirement sooner. Many of the provisions are in effect for 2020, so now is the time to consider how these new rules affect you. Below are some of the more important elements that impact individuals and businesses.

Individuals
 Raises the required minimum distribution age from 70 ½ to 72
 Allows contributions to an IRA after age 70 ½
 Permits tax free distributions from a 529 plan to repay up to $10,000 of student loan debt
 Allows penalty free withdrawals from a 401(k) to help offset costs of having or adopting a child
 Requires distributions from an inherited IRA to most non-spouse beneficiaries be done within 10 years following the IRA owner’s death

Businesses
 Permits unrelated employers to band together to create a single retirement plan
 Increases the credit for small employer pension plan start-up costs
 Creates a new tax credit of up to $500 per year for small employers to offset costs for new 401(k) and SIMPLE IRA plans
 Requires most employers to allow long-term part-time employees to participate in 401(k) plans
 Increases penalties for failure to file retirement plan returns

The government recognizes that most Americans are not prepared for retirement. Thankfully, most of these changes will allow people more time to save for retirement, as well as provide more options for saving.

However, not every provision is favorable to all and some will impact taxpayers more than others. Let us help you identify which parts of the Act can benefit you and assist you in implementing them into your plan for the
future.

Need a Small Business Tax Extension?

Need a Small Business Tax Extension?

With so many other responsibilities and concerns, busy business owners often find it difficult to complete their tax returns on time. Fortunately, if you own a small business, you may be able to qualify for a tax deadline extension. When used properly, this extension will allow you to submit your tax return on a later date without incurring any penalties or interest for late filing from the IRS.

Understanding Tax Return Deadlines. Your business’s tax return filing deadline will depend on the type of business you operate. For the 2019 tax year, S corporations and partnerships must file their tax returns by March 16th, since the 15th falls on a Sunday. C corporations must file their tax returns by the 15th day of the 4th month after the end of their tax year (April 15th for calendar year taxpayers). If you plan to request an extension, the request must be submitted before your designated filing deadline in order to be valid. If you don’t request an extension and you file after the deadline, you’ll owe a penalty. For S corporations and partnerships, the penalty is equal to $195 per month, per partner or shareholder. Even filers who owe no tax are subject to a late file penalty, so assume that you need to request an extension if you plan to miss the deadline.

Filing for an Extension. To request an extension, most businesses can complete and submit Form 7004: Application for Automatic Extension of Time to File. In general, the deadline for filing your tax return will be extended to September 15th or October 15th if your request is approved. However, if your business does not operate on the calendar year, your new due date may be different. Please note that an extension only affects your deadline for filing your tax return, not paying what you owe. When you request your extension, you must also pay at least 90 percent of your tax liability for the year. If you underestimate your tax liability, the IRS may not allow your extension. Likewise, if you don’t pay your tax liability when you request your extension, the IRS may impose penalties and interest, which will significantly increase the amount you owe. Keep in mind that the IRS is no longer sending notifications to taxpayers whose requests for deadline extension are approved. You will hear from the IRS only if your request is denied.

Personal Filing Extensions. As with business filing extensions, a personal filing extension allows you to extend your deadline for filing your tax return, but not paying. To request an extension, simply file Form 4868. Remember to pay at least 90 percent of the tax you will owe by the standard deadline to avoid paying penalties. Keep in mind that, if you purchase health insurance through the federal exchange, requesting an extension may cause problems when it comes time to renew your health insurance. This process typically begins prior to the October 15th deadline, so file your tax return for the previous year as soon as possible.

About State Extensions. If you need a federal extension, you may need an extension on the deadline for your state income taxes as well. In many cases, your federal extension request can be used to extend the deadline for your state taxes as well. However, this may not be possible if you owe state taxes or if your state’s laws differ.

If you need to request an extension and you want to make sure that you don’t owe any additional interest or penalties because of the request, please contact us for assistance. Even if you have already missed the March 15 deadline, we may still be able to help waive the associated penalties or lessen the damage. We can also help you avoid extensions in subsequent years by ensuring that your tax returns are always prepared and submitted on time.

Common Tax Questions Answered

Tax questions answered when filing taxes:

How do I know if I have to file a tax return?

Whether you’re required to file a tax return will depend on several factors, including your gross income, filing status, age, and whether you’re a dependent on someone else’s federal income tax return. And you may have to file even if you don’t owe any tax.

To get more specific information on who must file, check out IRS Publication 501. For most people, gross income is the main trigger for filing requirements. For example, in 2019, the filing threshold for single people younger than 65 was $12,200. For married couples filing jointly, it was $24,400 if both spouses were younger than 65.

If you were named as a dependent on someone else’s return and had income, you might also have to file, even if your income was much lower than the general threshold. Publication 501 has more detailed information on when dependents must file.

You’ll also need to file a return if you had at least $400 in self-employment earnings or meet other specific requirements, such as earning untaxed tips, receiving money from tax-exempt churches, or owing alternative minimum tax. IRS Publication 501 goes into details about these and other special situations.

What income do I have to pay taxes on?

According to the IRS, income includes money, property or services. Any income is taxable unless the law specifically exempts it, and all taxable income must be reported on your tax return. Some nontaxable income must be reported, too, even though you won’t pay taxes on it.

IRS Publication 525 has details on what counts as taxable income and what doesn’t, and it’s a lengthy list. Not all taxable income is treated the same. Earned income, like your wages, is taxed differently because you pay Social Security tax, Medicare tax, and state and federal income taxes on it.

Unearned income, like child support or Social Security benefits, isn’t subject to payroll taxes, but you do pay federal and sometimes state income tax on it. And some types of unearned income are taxed at a lower capital gains rate, rather than your normal tax rate

What filing status should I choose?

Tax filers are treated differently based on household status. To inform the IRS of which rules apply to you, you’ll have to choose a filing status. There are five: single, married filing jointly, married filing separately, head of household and qualifying widow(er) with dependent child.

Your filing status affects your tax rate, standard deduction, and eligibility for certain deductions and credits. The IRS provides an interactive tool to help taxpayers choose a filing status.

Do I have any dependents?

dependent is a person you’re responsible for supporting. If you can claim a dependent, you can become eligible for certain tax breaks, including the child tax credit. You may also qualify for head-of-household status.

You may have a dependent if …

  • You have a qualifying child younger than 19, or under 24 if they’re attending school full time. Your child must either live with you for more than half the year — or qualify for an exception — and must not provide more than half their own support. Your child also can’t file a joint tax return, except to claim a refund.
  • You have a qualifying relative. Your qualifying relative either has to share a specific family relationship with you or must live with you all year long. You must provide more than half their support, they must earn very little, and they can’t be claimed as a dependent by anyone else.

The IRS provides an Interactive Tax Assistant Tool to help you determine if you have a dependent.

How do I know my tax bracket and tax rate?

The U.S. has a progressive tax system, so not all your income is necessarily taxed at the same rate.
Tax brackets refer to the range of incomes taxed at specific rates, while your marginal tax rate is the highest tax bracket applicable to your income.

There are seven tax brackets under current tax law. To find out which one you fall into — and what your tax rate is — you’ll need to know your income. You can then use IRS Tax Rate Schedules for the taxable year to determine your bracket, what your marginal tax rate is, and how much tax you might owe.

tax forms

What tax form should I use?

Beginning with the 2018 tax year, a single Form 1040 has replaced the previous three versions — Forms 1040, 1040EZ and 1040A.

The simplified 1040 form is half the size of recent forms and uses a “building block” approach to simplify the filing process. Taxpayers with more-complex tax situations may need to submit additional forms (called “schedules”), but all 150 million individual U.S. taxpayers start with the same basic form.

Should I take the standard deduction or itemize?

Deductions reduce taxable income. You have a choice between taking a standard deduction or itemizing your deductions. When you itemize, you reduce taxable income by the value of certain expenses deductible under U.S. tax law. For example, if you pay mortgage interest, you can deduct the interest paid — but only if you itemize.

To decide which deductions to take, compare the value of the standard deduction versus the total value of your itemized deductions. The standard deduction was raised for tax years 2018 to 2025. For 2019, the standard deduction amounts are:

  • $12,200 if you file as single or married filing separately
  • $18,350 if you file as head of household
  • $24,400 if you file as married filing jointly

Because tax reform significantly increased the standard deduction, you may find your itemized deductions don’t exceed the standard deduction amount for your filing status.

What’s the difference between a tax credit and a tax deduction?

Both tax credits and tax deductions can reduce the amount of tax you must pay. Deductions reduce the amount of income you pay taxes on, which in turn can reduce your tax. Credits are a dollar-for-dollar reduction in the amount of tax you owe.

If you had an income of $30,000 and took a $1,000 deduction, you don’t have to pay tax on that $1,000 of income. The deduction could save you $200 (assuming a 20% tax rate on that $1,000).

By contrast, a $1,000 credit would reduce the actual amount of tax you owe by that $1,000. So if you owed $3,000 in taxes, you’d now owe $2,000 and save $1,000.

What are some deductions and credits I can claim?

The deductions and credits you’re eligible to claim vary depending upon your situation. Here are some deductions that you can claim even if you don’t itemize.

  • Contributions to individual retirement arrangements, including IRAs, SEP-IRAs, Simple IRAs and solo 401(k)s (these phase out at higher incomes)
  • 50% of self-employment taxes
  • Student loan interest up to $2,500
  • Tuition and fees for higher education up to $4,000 if you fall within income limits
  • Health savings account contributions made with personal funds

Deductions you may be eligible to claim only if you itemize:

  • $10,000 maximum for the aggregate of state and local taxes paid (SALT taxes)
  • Interest on up to $1 million of eligible home mortgage debt for loans taken out before Dec. 15, 2017, and up to $750,000 of eligible home mortgage debt for loans taken out after that
  • A deduction for medical expenses, but only if they cost at least 7.5% of your income
  • A deduction for charitable contributions that don’t exceed a set percentage of income

And finally, here are credits you may be eligible to claim.

  • The earned income tax credit provides a credit for lower-income Americans. The IRS EITC Assistant can help you determine if you qualify.
  • The child tax credit provides a credit of up to $2,000 per qualifying child for tax years 2018 to 2024. As much as $1,400 of this credit is refundable. Eligibility begins phasing out at $200,000 in income for single filers and $400,000 in income for married couples filing jointly.
  • The child and dependent care tax credit is valued at 20%–35% of the costs of allowable care expenses, up to $3,000 in expenses for the care of one qualifying person. A taxpayer caring for two or more dependents could claim a maximum credit of $6,000.
  • The American opportunity tax credit provides a maximum credit of $2,500 for qualifying educational expenses paid for eligible students. The credit is available only for tuition paid for the first four years of post-secondary education and there are income limits.
  • The lifetime learning credit provides a maximum credit of $2,000 per year for postsecondary educational costs. There are also income limits, and the credit is worth only 20% of qualifying expenses, up to a $10,000 maximum.

When are taxes due?

Each year, you’re required to file your federal income tax return for the previous calendar year by Tax Day. Usually, the filing deadline is on or around April 15, though if the 15th falls on a weekend or holiday the deadline can be bumped to the next business day.

How do I file a tax return?

You have multiple options to file your return.

  • Mail: The address to mail in your return will depend on the state you live in (the IRS offers a list of addresses)
  • IRS e-file: The e-file system is free if your income is $69,000 or less
  • Free online tax filing: Like with a service such as Credit Karma Tax®
  • DIY: With fee-based tax-preparation software
  • Paid tax professional: If your situation is more complex

However you choose to file, be aware that submitting your return electronically has several advantages. If you’re owed a refund, you could get it sooner via e-file, since the IRS processes e-filed returns more quickly than paper returns.

When will I get my refund?

According to the IRS, most refunds are issued within 21 days for taxpayers who e-filed and who are having their refund directly deposited. Refunds take up to six weeks if you submitted paper returns. Claiming certain credits or deductions might delay your refund. You can check the status of your refund on the IRS “Where’s My Refund” website.

What if I can’t afford to pay the tax I owe?

If you can’t afford to pay your taxes, it’s imperative you still file tax a return and make arrangements to pay what you owe. Failing to file and/or pay your taxes on time will result in interest and penalties.

If you can’t afford to pay the full amount you owe by the deadline, the IRS has multiple payment options that could help, including installment agreements. Keep in mind that you’ll still owe interest, and possibly penalties, even if you enter into a payment arrangement.

Costs and fees of payment plans vary depending upon the duration of your plan and whether you apply by mail or online.

Bottom line

While these answers to top tax questions might help you get started in fulfilling your tax obligations, you may still have questions as you go through the process of filing a return. You can find more answers from Credit Karma Tax® about a wide array of issues, from how a car lease affects your taxes to forms you may need to use if you suspect a fraudulent tax return has been filed in your name.

Rental Property Held as Tenant-in-Common

rental

You don't have to form a corporation, partnership or other entity to own a rental property with a friend, relative, or business associate. You can own the property as tenants-in-common. And interests don't have to be on a 50-50 (or other amount based on solely on the number of tenants) basis.

For example, Sandy can put up 70% of the capital and Jack 30%. If that's the case, Sandy is entitled to 70% of the income and is responsible for 70% of the expenses. And that's how each should report the income and expenses on their respective tax returns. If Sandy doesn't pay her full 70% share of the expenses, the additional amount paid by Jack is considered a loan to Sandy. Jack can't deduct the amount he paid for Sandy. Talk to your attorney about the best way to handle the agreement. In most cases the split should be spelled out in the deed. You may want to have a side agreement as to the responsibilities of each tenant.

Common Business Management Mistakes

direct deposit

As a small business owner, managing the day-to-day operations of a company can be challenging. Below are a few common business mistakes that are often overlooked but can be easily avoided:

  • Thinking “I can do it all myself” – You should use your skills to manage and grow the business, not to perform daily tasks that can be delegated.
  • Ignoring your professionals – Stay in contact with each of them throughout the year. The best time to solve or prevent problems is before they become larger. Remember, once the tax year is over, it is difficult for tax professionals to provide tax planning!
  • Relying too much on professionals – It is your duty to evaluate their performance. Remember, as the business owner, you know the business BEST!
  • Falling behind in record-keeping – Procrastination is the enemy. When data is current, you will receive better advice from professionals and make more reliable decisions. Establish and implement policies and procedures from the beginning for proper record-keeping.
  • Not using “reality checks” regularly – All bank accounts, customer receivables, inventories, and vendor payables should be regularly reconciled.

Avoiding Direct Deposit Woes

direct deposit

Direct deposit of your income tax refund makes a lot of sense – you’ll get it quicker and it’s often safer. There are several options for obtaining your refund, including splitting it via direct deposit into up to three checking or savings accounts, as well as Individual Retirement Arrangements, Health Savings Accounts, and Coverdell Education Savings Accounts. But take caution and verify routing and account numbers carefully! Although you can usually pick up the routing number for your checking account from the face of your checks, routing numbers for other types of accounts are not always apparent. The IRS assumes no responsibility for taxpayer or preparer error, so you should make sure your account and routing information is accurately entered. If you make a mistake and the financial institution rejects the deposit, the IRS will send you a check for that portion of the refund. But if you incorrectly enter an account or routing number belonging to others and the designated financial institutions accepts the deposits, your only option is to work directly with the financial institution to recover the funds.

New Due Date for Filing Forms W-2/W-3 and Form 1099-MISC.

accountantNow is a great time to verify that you have the correct information for your employees and contractors, so that processing W-2s and 1099-MISCs will flow smoothly in January. The new due date for remitting your W-2s and W-3s to the Social Security Administration is January 31st. An extension for filing W-2s is no longer automatic, but extensions can be requested with Form 8809, Application for Extension of Time To File Information Returns.

Government copies of Form 1099-MISC will also be due on January 31st if you’re reporting nonemployee compensation payments in Box 7 (this applies to both paper and electronic filing). If there isn’t an amount for nonemployee compensation, then Form 1099-MISC will be due on February 28th when filed by paper, or on March 31st if filed electronically. The deadline for issuing copies to the recipient is still January 31st.

There are penalties for failure to file the W-2 or 1099-MISC by their due date, so gather your required information as soon as possible!

Are You Paying Yourself Enough?

pay checkAs the owner of an S corporation, you’re probably aware that there’s a tax advantage to drawing money out of the corporation as a distribution rather than as wages. The reason is simple. Unlike wages, distributions you take out to the extent of basis in your corporate stock aren’t taxable.

Although you, as a shareholder-employee of an S corporation, have flexibility in choosing whether to receive salary payments or cash distributions, the discretion is not unlimited. The lRS can recharacterize distributions as wages if compensation isn’t reasonable. How much compensation is “reasonable”? There’s no simple formula, but in Publication 535, Business Expenses, the IRS lists several factors in determining reasonable compensation.

There are a number of concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable” and minimize the potential for IRS reclassification of distributions. As in most tax situations, planning ahead avoids problems later. Contact us if you’d like to discuss this or any other aspect of your compensation strategy.

How You Can Achieve Success Starting a Small Business

are you readyStarting a new business is a daunting task. Various studies have cited a failure rate of 50% for new businesses within their first year. With such a high-risk factor, prospective business owners need to do their research before launching their enterprise. Here are some helpful tips for those considering a new business.

Play to your strengths. Focus on what you do best and use other resources to cover areas you’re lacking in. For example, if you’re strong in marketing, but lack financial knowledge, don’t try to do both – both are likely to suffer. Instead, concentrate your efforts on marketing and outsource your finances to another employee or a professional service, such as Padgett.

This piece of advice applies not only to your role in the business, but also to the business itself. Focus on what your business does best and focus on attracting customers who need that specific service.

Have a marketing plan. You may have the best product or service out there, but if no one knows what you’re offering or why they should choose your business over your competitors, it may be difficult for your business to be profitable. Marketing plans can sound intimidating, but they’re simply the documentation and planning of your goals to help advertise your company.

Spend your money carefully. For business success, your funds need to go towards either creating profits or decreasing costs. Carefully consider every purchase before committing, and assess what it’ll bring to the company now. For example, while you may have plans that’ll eventually require the best graphics program, the middle-range product will do just fine in the meantime. Keep in mind that technology is constantly changing, so it’s probably best to save the money on the graphics package for now until you absolutely need a better program.

Contact your local Padgett Office today so that we can help your small business succeed!

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