It is no surprise that criminals are taking advantage of Hurricane Harvey and those generous people that are trying to to help the victims. These scammers often impersonate charities to collect cash directly or use the fraudulent identities to collect personal information from those attempting to donate.
These schemes may involve contact by telephone, social media, e-mail or even face to face.
You might see emails attempting to steer you to bogus websites that mimic the names or websites of legitimate charities or infer that they are associated with legitimate charities. They are attempting to persuade people to send money or provide personal financial information so that identities or other personal assets can be stolen.
The IRS has a tool to check charities to make sure they are valid. That can be found at https://apps.irs.gov/app/eos/. Charities listed on this website are registered with the IRS and donations to them are tax-deductible. Note that many scammers have similar sounding names to legitimate charities.
Of course, you should never give out personal financial information to anyone soliciting a contribution. That should go without saying but there are still thousands of people every day that are fooled by these attempts.
If you suspect an attempt at fraud via email or the internet, you can report it to the IRS by visiting https://www.irs.gov/privacy-disclosure/report-phishing. They have a number of articles posted on their website regarding fraud and phishing attempts and many other scams that are common.
We here at AFS do not want to discourage you from donating whatever you can but we do want to help and make sure your donations go where intended and you are not hurt in the process. If you have a question regarding this subject matter, don’t be afraid to give us a call.
Volunteering at local charities, such as your PTA, may give you some valuable tax breaks, such as deductions for mileage, travel expenses and out-of-pocket expenses. There are rules of course, that you must adhere to.
The IRS allows you to deduct expenses associated with the use of your car, either actual expenses or a flat mileage deduction (17 cents per mile in 2017). This includes the mileage that you drove to and from the charity or the place where the charitable services were rendered.
Other travel expenses may also be deductible, including air, rail or bus, lodging, meals, as well as taxi fares between your temporary lodging and place of charitable work.
There are 3 requirements for a volunteer travel expense to be deductible; a) you must volunteer to work for a qualified 501(c)(3) organization (The IRS maintains lists of eligible charities on its website, www.irs.gov), b) there must be no significant element of personal pleasure, recreation or vacation in the travel (which doesn’t mean you can’t enjoy the trip), and c) the work performed is ‘real and substantial’ throughout the trip.
What is and isn’t deductible is often subject to an interpretation as to what the IRS guidelines mean. For instance, let’s look at what ‘real and substantial’ expenses throughout the trip might mean. Let’s say you are a Marlins fan and you travel to FL to see a game. You are there for 3 days and while there, you spend 4 hours donating time to a charity. Traveling to the charity from your hotel and back would be deductible but not the expenses of traveling to FL and back. But, if you traveled to FL to participate in a charitable event over 3 days, and while there you went to a Marlins game, travel to and from FL would be deductible.
Finally, some out-of-pocket expenses could be deductible. Some examples of that might be advertising expenses you incurred to promote a charitable event, food expenses incurred while hosting a fundraiser, postage expenses or other items purchased for the charity.
So, besides making you feel good, that charitable work could put a few bucks in your pocket. Remember though, the IRS doesn’t care how nice you are. If you don’t have receipts for those expenses, you will never win the audit.
It’s not too late to record your year end mileage to get that tax deduction for 2016 and start your mileage record for 2017. Either estimate the Dec 31 mileage or use today’s mileage as your 2016 and and 2017 beginning. What is important is you write it down!!
Even if you are not a business owner but are an employee who doesn’t get reimbursed for mileage, this needs to be done.
When you file your taxes to claim this deduction, you will need to know both business mileage and personal mileage. Make sure you keep a log of your business mileage. (Total mileage is needed because we usually have to report percentage of miles driven that are business.) We offer pocket calendars which you can keep in your car for this purpose or there are a number of phone apps to help you keep these records.
If you claim a mileage deduction, you will certify on your tax return that you have records and they are written. (You may not be aware of this if your tax preparer just checks the certification boxes without comment). If you are audited and don’t have records, or your records are insufficient, you will lose the deduction. IRS wins most of these audits because of poor documentation on the taxpayer’s part.
So, right now, go check your mileage and write it down. If you are an AFS client, email it to us, we will put it in your file.
Use more than one car for business? Make sure you get mileage on both!
AFS – USE THE BEST FOR LESS
The IRS was nice enough to compile a list of arguments that will never work. They are considered “frivolous”. The courts tend to agree and both tend to look at these strategies as willful attempts to evade or defeat taxes, often leading to increased penalties and even jail time.
Here are 10 of the most common frivolous arguments:
- The filing of a tax return or payment of federal tax is voluntary
- Taxpayers can reduce their federal tax by filing a “zero” return that reports no income and no tax liability
- Compensation received for personal services isn’t income
- Military retirement pay isn’t income
- Only foreign source income is taxable
- The IRS isn’t a US agency
- The taxpayer isn’t a citizen and therefore isn’t subject to federal income taxes
- The taxpayer isn’t a “person” under the tax law and therefore isn’t subject to federal income taxes
- Various constitutional amendments permit the taxpayer to avoid taxes
- Form 1040 instructions and regulations don’t have an OMB control number as required by the Federal Paperwork Reduction Act
Normally, if you don’t file and don’t pay your taxes, the IRS eventually catches up to you and you will pay failure to file and failure to pay penalties plus interest. The penalties at worst could be up to 47.5% of your unpaid taxes and the interest charged right now is less than 4%.
However, as stated above, the IRS considers the use of a frivolous argument, and the list here is a partial one, and frivolous arguments are frequently viewed as fraudulent.
The worst case is fines up to $100,000 and jail time of 5 years.
Short of that, there are other penalties that can be assessed.
- An ‘accuracy-related’ penalty equal to 20% of your underpayment if your underpayment is due to negligence or disregard of the tax rules.
- Penalties of up to 75% of the tax due for fraudulent failure to file an income tax return
- Penalties of up to 75% for underpayment due to fraud
- A $5000 penalty for frivolous returns or other submissions (for example, requests for hearings)
- A penalty of 20% of the excessive amount in an erroneous claim for a refund or credit
- A $25000 penalty for making frivolous arguments in tax court
Tax protestor arguments usually claim that you can ignore the plain language of the law. They will say the IRS isn’t legitimate or you are somehow not subject to the rules.
Real tax strategies work within the law. Deductions or strategies are used that the tax code or the IRS itself has blessed.
If you are faced with someone promising what seems too good to be true, ask for tax law citations that back up their case.
You know how it works. If it is too good to be true, it isn’t.
AFS – USE THE BEST FOR LESS
2 of the most valuable deductions for home businesses are the mileage deduction and the home office expense deduction. Both of these can be lost by not understanding one simple rule, and that is your home office must be used exclusively for your business. That means no personal use of that space.
A recent ruling (Haag, T. C. Summary Opinion 2013-29-you can Google it) agreed with the IRS that the taxpayers were not eligible to claim the home office deduction because they admitted in court that the 60 sq ft office space claimed on their tax return had personal information in the file cabinets and that there was personal use of the computer. (The fact that two businesses claimed the same office space is not addressed in the opinion. I believe that alone could have disqualified the use of that space as a home office).
A home office of 60 sq ft is pretty small. Losing that deduction alone would not have resulted in much in the way of lost deductions but does mean that their home doesn’t qualify as a principal place of business, In turn, this results in their deductions for traveling from home to several work locations being disallowed as they were considered to be commuting expenses.
This lesson cost the taxpayers nearly $7500 in lost deductions and accuracy related penalties. I don’t know what the court costs were but I would suspect that the total cost of this mistake was far in excess of $10,000 with interest and penalties and court costs considered.
I am surprised this went to court. After reading the summary, it appears that the deductions claimed were mostly unsubstantiated and/or not actually deductible. It was a self-prepared return so I can understand that they didn’t know what was or was not deductible and did not understand what records were required but the taxpayers were represented in court and should have been told that they had a very weak case prior to filing.
Don’t let this happen to you. I believe that the taxpayers in this case probably had good reason to claim a large part of what they claimed. With good advice tax advice, recordkeeping, and proper return preparation, this return would have never been flagged for audit. They probably saved $40-$70 for tax preparation when compared to what AFS would have likely charged for a married couple with 2 Schedule C businesses (our fees are pretty low). But you can see what it cost them.
AFS – Use the Best for Less
This time of year, we often get questions on the tax consequences of cash gifts to kids.
We can illustrate how this works with a very simple example. Let’s say Bob is a single parent and wants to give his son $20,000 for Christmas this year.
Bob is the one responsible for reporting the gift in 2016. Bob’s son has no taxable consequence and no filing requirement for the gift.
Bob will have to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, no later than April 17, 2017. This form is required because the gift exceeded the annual gift exclusion of $14,000 for 2016. Bob will show the $20,000 gift amount on the return as well as the name and social security number of the recipient. The return will reflect the gift exclusion of $14,000 and show the remaining $6000 as a taxable gift, but no gift tax is due as long as Bob has not used his allowable lifetime exclusion of $5,450,000 for 2016.
The Form 709 is informational return for the IRS and is only required when gifts exceed the annual excluded gift amount or if a taxpayer has already used his allowable lifetime exclusion.
AFS – Use the Best for Less
Congress eliminated an IRS penalty on small businesses that was devastating to those that incurred it. On their own volition, the IRS decreed that any small business that reimbursed their employees for health care premiums could face a $100 per day per employee, up to $36500 a year.
There are few small businesses that could take a hit like that. Note that the penalty wasn’t part of the Affordable Care Act (ACA). This was a fine the IRS wizards took upon themselves to initiate with no regard to consequences. Their rationale was that such reimbursement plans couldn’t be integrated with individual policies to meet market reforms required by the ACA. So, a business tries to help their employees and gets a huge fine, or even forced out of business, for doing so.
As always happens with tax law, there was relief for a few through the use of medical reimbursement plans and we helped some of our clients navigate that bureaucracy so that they could continue to offer this benefit to employees.
Finally, this last Wednesday, Congress eliminated that penalty. The legislation can be seen in Section 18001 of the 21st Century Cures Act.
Let’s hope for more good news for small business and their employees. Maybe more people can get back to work.
AFS – use the best for less
We are sorry for any loss you have had. Having gone through the loss of parents recently, we understand what you are experiencing. This will seem hard but hopefully this overview will get you through the process.
When any taxpayer dies, a final tax return should be filed to claim income earned in the year of death up to the date of death. This is usually done by the executor or administrator of the estate or a survivor if no executor is named. The filing deadline is the normal April deadline in the year following the date of death.
In general, you would file the final return in the same manner as when they were alive, but “deceased” is written after the name. Claim all the income, deductions and credits they were entitled to up to the date of death.
If your parent is due a tax refund, you can claim it using IRS Form 1310, entitled Statement of a Person Claiming a Refund Due a Deceased Taxpayer. If money is owed, you can submit what is owed with the tax return.
That is all there is to the final tax return. If there are assets to be distributed to beneficiaries, an estate tax return is likely needed. That is more complicated and beyond the scope of this article.
Should you have any questions, please email me at email@example.com.
We do tax returns for a lot of child care businesses and many are not aware of this strategy to increase their tax refund.
The IRS rules regarding depreciation of personal property are very lenient, with the proper documentation. Many of our clients don’t depreciate all of the personal items used in their business.
Most people know that they can depreciate their home, usually using the time-space percentage. And they are pretty good about claiming depreciation on the refrigerator, washer and dryer, TV’s, etc. But there is a great deal more that can be depreciated and all those little things add up. Things like a new chandelier, weatherstripping, that programmable thermostat, a new bathtub, a sandbox, patio, fencing, the pictures on the walls and all the other items that give your home that warm and fuzzy feeling important to children, etc., etc. (we show you how to procure a more exhaustive list below.)
And, if you have been in business for a couple of years and have not depreciated these items, you can still do so by claiming that past depreciation on your next tax return or even amending a prior year return.
So, how much can you gain? It’s different for everyone. You would walk through your house, room by room and determine items that are used in your business or that have value in your business and assign a fair market value (FMV) and a purchase date to each item. The FMV is the tricky part. If the item is new, you can use the receipt. If you don’t have receipts or the item has been in use a while, you can find a value by looking up the items on a charity website, like Salvation Army or Goodwill. The FMV is the price others would pay for that item if sold right now.
If you provide that list to your tax preparer, they can determine the depreciation schedule (how many years you need to fully depreciate) for each item. With that and the FMV, each year’s depreciation can be determined. Let’s say you came up with a list of items that had a total value of $12000 and the average depreciable life was 5 years and you are using straight line depreciation. Further, your time space percentage is 65%. A much simplified calculation would result in $1170 in depreciation ($12000 divided by 5 years times 0.65 = $1560). If you are in the 25% tax bracket, that would give you an extra $390 in your Federal refund plus another $78 for CO (this year and for 4 more years). If you could have depreciated these items for the last 2 years and hadn’t, we could claim that depreciation as well, for the last 2 years plus the current year plus the next 2 years.
Our most recent use of this strategy helped one of our clients gain nearly $800 additional refund this last year.
Want more details on how this could help you? Send an email to firstname.lastname@example.org and just put HELP ME INCREASE MY CHILD CARE BUSINESS TAX REFUND in the memo line. I will send you some info on how to start this process. No charge and no obligation.
Of course, we are hoping that you will allow us to prepare your tax returns. That would save you even more money, this year and every year.
AFS – USE THE BEST FOR LESS
For all you small business owners, it is time to start gathering the paperwork so that you don’t miss any tax deductions for 2016. Here are some of the most common deductions available:
- Home office – a great way to move some personal expenses under the business deduction umbrella, even if you rent. I know that many think this increases your audit likelihood (though I have never seen any evidence of that) but if you are entitled to it, and have good records, you should claim it. If you want more info on this deduction, send an email to email@example.com and I will send you a brochure describing this deduction.
- Office supplies-even if you don’t claim the home office, you must have bought paper, toner, pens, etc. If you used it for your business, deduct it. Just make sure you keep the receipts.
- Furniture-buy a new desk? Chair? Filing cabinets? Deduct them. Either all at once with a 179 deduction or depreciate over several years to give you deductions in future years when income might be higher.
- Other equipment – computers, copiers, scanners, tools, etc. are also deductible and you also have a choice on whether to take full deduction this year or spread it out over several years.
- Software, subscriptions, trade journals, webinars, reference books, etc. Keep track of these as well.
- Mileage or auto expenses- mileage is an item that is often audited but I think the reason is because it is low hanging fruit for the IRS. People are lousy at keeping mileage records. We provide free pocket notebooks for our clients to record daily trips. There is also a number of apps you can use for your cell phone to keep track of this. Mileage quickly adds up and can result in a very nice deduction. The highest I have seen is about $18,000 for a salesman that had a 5 state territory. OR Sometimes, vehicle expenses provide a better deduction. We usually look at both if we have the data. This includes gas, maintenance, vehicle depreciation, insurance, leases,etc. (multiplied by business use percentage). You are allowed to choose the method (mileage or expenses) that provides the most tax benefit for you.
- Travel, meals, entertainment and gifts – when you are out-of-town for business, the hotel is fully deductible. Likewise, travel by air, car, train or bus is deductible. Note that only 50% of your meals and your clients meals are deductible and you should write client name and business meeting purpose on your receipt. Gifts to clients or employees are deductible up to $25 per person per year.
- Self-employed people can deduct their health insurance premiums. If their spouse or children worked for them they can deduct those as well. Note that the deduction can’t exceed your profit (can’t create a loss). If you are incorporated, premiums may also be deductible but that is much more complicated and beyond the scope of this article.
- Retirement contributions are of course deductible. Anyone can deduct an IRA but business owners have options available to them that allow much higher deductible contributions than wage earners.
- This is not a deduction but it is important. Make sure you are paying self-employment taxes on your business income. Half of this payment is deductible on your 1040 (this is how you fund your social security account for eventual retirement). As your business grows and these taxes become a thorn, there are options available to help reduce the tax burden.
- Pay your kids. You are probably giving them money anyway. If you have something they can do in your Schedule C business that is age appropriate, pay them from your company and deduct it. You must have good documentation for this including pay sheets and a job description. Have them put some of their earnings in a Roth IRA or Education IRA to help show them how to save.
Remember that any unsubstantiated deductions in an audit will be automatically tossed by the IRS. KEEP THOSE RECEIPTS. Some receipts are still printed on thermal paper which fades over time. If necessary, copy onto something more permanent.
I know this work is a pain but think of what you gain. Let’s say you are in the 25% tax bracket. Add in 5% for CO taxes and you will cut 30% of documented expenditures from your tax bill. If it takes you 8 hours to put together $3000 in expenses, you will save nearly $900 in taxes. Calculate the hourly rate. You’ll like it!!!
AFS- your small business tax specialist. USE THE BEST FOR LESS
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