tax preparation – Page 7 – Your #1 source for tax reduction strategies.

When it comes to tax advice, be careful whom you trust. In our south loop of Chicago tax preparation office, we hear a number of tax tips for small business owners that aren’t based in tax law.

There is some remarkably bad and wrong and hazardous-to-your-health information out there that—despite being repeatedly debunked—just will not go away. Some of those ideas are clearly erroneous, but others can snag even very bright people.

Consider the case of Carter White Rae, a dentist in Michigan. He followed some bad advice and ended up with a bill from the government for over half a million dollars—plus a 45-month jail sentence.

Remember: You may be a logical person, but tax law is not always logical. Even if something makes sense to you—or sounds like it’s the way the law should work—it may still be completely wrong.

That’s why you have me in your corner. And that’s why you should ask me before you take an action that seems too good to be true.

The most dangerous tax strategies are the ones that lead you to believe you do not have to pay any tax at all. Known in IRS lingo as “tax protestor” arguments, they claim that by virtue of little-known quirks in the law or because of never-correctly-ratified amendments, you can somehow sidestep all U.S. tax requirements.

No matter how intricate those arguments can be, they all suffer from the same problem: The IRS and courts reject them. The government has already ruled against them, and if you use one of those arguments, the government will eventually catch up with you and demand its money. It’s a question of when, not if.

Take It from the IRS

The IRS was nice enough to compile a list of arguments that it has heard before and will categorically reject:

The filing of a tax return or the payment of federal income tax is voluntary.
Taxpayers can reduce their federal tax liability by filing a “zero return” that reports zero income and zero 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 U.S. 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’s instructions and regulations don’t have an OMB control number as required by the federal Paperwork Reduction Act.

Penalties and Prison

The IRS believes that tax protestor claims are “frivolous” and will have no mercy on you if you rely on one to avoid paying taxes. The courts tend to agree and uphold those penalties—and sometimes impose prison time as well.

Whenever you “willfully attempt to evade or defeat” your taxes, you’re looking at fines of up to $100,000 ($500,000 for corporations) and prison time of up to five years. That’s on top of having to pay the taxes due, the prosecution’s costs, and any other penalties.

How to Spot Bad Strategies

With tax law as complicated as it is, how are you supposed to tell the difference between a legitimate tax reduction strategy and a baseless idea that will get you in trouble?

The main problem with tax protestor arguments is that they claim to let you ignore the plain language of the law—simply by saying that the IRS isn’t legitimate or that you aren’t subject to the rules.

Real tax strategies work within the law, finding deductions or ways to reduce your income that the tax code or IRS have explicitly blessed—rather than going around the law or ignoring it.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Business Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Deductions, Uncategorized

How the 90-Day Mileage Log Rule Works for You

February 18, 2019 Howard Tax Prep LLC

Often in an IRS audit, the examiner will ask for your mileage log at the beginning of the audit. If you do not have a mileage log, then you are in danger of losing more than just vehicle deductions. Think about it. If you don’t have a log for mileage, what is the IRS examiner going to think about your other records? Right—he or she is going to think you are a bad taxpayer with bad tax records who needs extra scrutiny.

The IRS says that you may keep an adequate record for part of a tax year and use that part-year record to substantiate your vehicle’s business use for the entire year. To use a sample record, you need to prove that your sample is representative of your use for the year.

By using your appointment book as the basis for your mileage, you not only build great business-use proof, but you also do a great job of showing that your sample vehicle record mirrors your general appointments during the year. (If you are using a mileage app, synchronize the app results with the appointment book.)

The IRS illustrates two possible sampling methods:

One identical week each month (for example, the third week of each month)
Three consecutive months

We don’t recommend the one-same-week-each-month method because it is difficult to start and stop a record-keeping process. (Think about how hard it would be to create a habit, undo it, and then create it again—every month.)

For this reason, the three-month log is the superior alternative. Before getting into the three-month method, we should note that once you have done three months, you are in the habit. You might find it easier to continue all year, rather than stop this year and then have to start again next year.

Here are the basics of how the IRS describes the three-month test:

The taxpayer uses her vehicle for business use.
She and other members of her family use the vehicle for personal use.
The taxpayer keeps a mileage log for the first three months of the taxable year, and that log shows that 75 percent of the vehicle’s use is for her business.
Invoices and paid bills show that her vehicle use is about the same throughout the year.

According to this IRS regulation, this three-month sample is adequate to prove 75 percent business use.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Fact check me with IRS Regulation 1.274-5T(c)(3)(ii)(A).

Business Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Debt, Tax Deductions, Tax Reduction, Uncategorized

TCJA Tax Reform Sticks It to Business Start-Ups That Lose Money

February 11, 2019 Howard Tax Prep LLC

The Tax Cuts and Jobs Act (TCJA) tax reform added an amazing limit on larger business losses that can attack you where it hurts—right in your cash flow.

And this new law works in some unusual ways that can tax you even when you have no real income for the year. When you know how this ugly new rule works, you have some planning opportunities to dodge the problem.

Over the years, lawmakers have implemented rules that limit your ability to use your business or rental losses against other income sources. The big three are:

The “at risk” limitation, which limits your losses to amounts that you have at risk in the activity
The partnership and S corporation basis limitations, which limit your losses to the extent of your basis in your partnership interest or S corporation stock
The passive loss limitation, which limits your passive losses to the extent of your passive income unless an exception applies

The TCJA tax reform added Section 461(l) to the tax code, and it applies to individuals (not corporations) for tax years 2018 through 2025.

The big picture under this new provision: You can’t use the portion of your business losses deemed by the new law to be an “excess business loss” in the current year. Instead, you’ll treat the excess business loss as if it were a net operating loss (NOL) carryover to the next taxable year.

To determine your excess business loss, follow these three steps:

Add the net income or loss from all your trade or business activities.
If step 1 is an overall loss, then compare it to the maximum allowed loss amount: $250,000 (or $500,000 on a joint return).
The amount by which your overall loss exceeds the maximum allowed loss amount is your new tax law–defined “excess business loss.”

Example. Paul invested $850,000 in a start-up business in 2018, and the business passed through a $750,000 loss to Paul. He has sufficient basis to use the entire loss, and it is not a passive activity. Paul’s wife had 2018 wages of $50,000, and they had other 2018 non-business income of $600,000.

Under prior law, Paul’s loss would offset all other income on the tax return and they’d owe no federal income tax. Under the TCJA tax reform that applies to years 2018 through 2025 (assuming the wages are trade or business income):

Their overall business loss is $700,000 ($750,000 – $50,000).
The excess business loss is $200,000 ($700,000 overall loss less $500,000).
$150,000 of income ($600,000 + $50,000 – $500,000) flows through the rest of their tax return.
They’ll have a $200,000 NOL to carry forward to 2019.

To avoid this ugly rule, you’ll need to keep your overall business loss to no more than $250,000 (or $500,000 joint). Your two big-picture strategies to make this happen are

accelerating business income, and
delaying business deductions.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Business Taxes, Family Taxes, Tax Debt, Tax Deductions, Tax Reduction, Uncategorized

CAN I FILE BANKRUPTCY FOR TAX DEBT?

January 30, 2019January 30, 2019 Howard Tax Prep LLC

Once the IRS assesses a tax bill, it generally has 10 years to collect that amount before the statute of limitations expires. Holy smokes! That’s a long time to have a creditor chasing you! And this isn’t any ordinary creditor. The IRS has a lot of power that it can use to collect your late payments. The IRS can garnish wages, file a notice of federal tax lien, and empty your bank account.

If your tax bill has exploded beyond what you can pay, you’re probably already feeling the hot breath of the IRS. At this point, you need to consider your options for how to reduce or eliminate your tax bill.

If you have thought about bankruptcy, you need to be aware of its limitations. Tax debts are particularly sticky—many of them stay with you even after the bankruptcy process is complete. And it’s important to know that bankruptcy is not your only recourse. The IRS gives you four avenues of relief to help you get out of tax debt that you can read about here. Depending on your circumstances, one or more of those IRS methods could entirely eliminate that horrible tax cloud hanging over your head, or you can look into filing bankruptcy.

It is important to note that bankruptcy is not a simple process and has many lingering effects, such as the potentially decade-long hit to your credit. However, bankruptcy can be the perfect tool in the right situation—and it can permanently eliminate some of your income tax liabilities, including penalties and interest.

The following rules determine whether you can discharge your income tax debt in bankruptcy. You have to meet all three rules to qualify:

RULE #1: Debts must be more than three years old. You have to wait at least three years after the filing deadline for the tax years at issue (normally April 15 for calendar year taxpayers) before you file your bankruptcy petition. In other words, if you file your petition on April 15, 2016, you can discharge tax debts for tax years 2013 and earlier. But note that an extension pushes your filing deadline to October 15. So if you got an extension in 2013, you must wait until October 15, 2016, to file your bankruptcy petition before you can discharge tax debts from 2013.

RULE #2: You must file all tax returns. You have to wait at least two years after you filed your tax return before you file your bankruptcy petition. So what happens if you didn’t file a return for a year? To discharge that debt, you must file that return now and then wait for two years before you file for bankruptcy.

RULE #3: Wait eight months after IRS assessment. You must wait at least 240 days after the IRS assessed your taxes before you file the bankruptcy petition.

As you can see, timing is important. If you want to ensure that the bankruptcy proceeding will clear your tax debts, you must:

Make sure you have filed all of your returns.
Wait until enough time has passed so that you qualify for relief.
Commit No fraud. Bankruptcy will not discharge your debt if you committed fraud or willfully evaded taxes.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Business Taxes, General Information, Self Employed, Small Business, Uncategorized

Do You Make This Big Mistake with Your Independent Contractors?

January 22, 2019 Howard Tax Prep LLC

I often deal with Chicago small business owner taxes, and the one thing that I see often is a big mistake being made with independent contractors. Do you hire 1099 contractors? Are they really 1099 contractors? If so, have you done the one thing you need to do to protect their 1099 status so you don’t get hit with payroll taxes and penalties?

If you failed this one thing, the IRS can reclassify your 1099 contractors as W-2 employees even when you have a good case for their 1099 contractor status. This should scare you. Let’s review the Kurek tax court case (UNITED STATES TAX COURT MIECZYSLAW KUREK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE)to see why.

Mieczyslaw Kurek operated a construction business that made improvements to the interiors of homes, including kitchens, bathrooms, and floors, where he and his workers installed tile, sheetrock, doors, and windows and did carpentry and painting. During the year before the court, Mr. Kurek had 29 contractors, of which only seven did some work in all four quarters of the calendar year.

Relationship with Workers

Mr. Kurek had the following relationships with the workers:

He told the workers what work needed to be done and set deadlines for the jobs.
The workers worked on projects. No one worked full time for Mr. Kurek.
Mr. Kurek negotiated a flat fee and timeline with each worker for the work to be done on the project.
He paid each worker every week according to the percentage of the work the worker completed.
He paid the workers by checks made out to them personally.

How the Work Was Done

The workers set their own hours and work schedules.
Mr. Kurek came to the worksite every day or two.
Mr. Kurek did not tell the workers how to do their jobs, but he replaced workers who missed deadlines.
If he thought a worker was doing the work improperly, he would order the worker to repair the problem or redo the work.
Mr. Kurek allowed the workers to work simultaneously on other projects with him or with other independent construction groups.
The workers brought their own sets of small tools to the work-sites, worth around $1,000.
Mr. Kurek bought or rented the larger tools and he left them at the work sites for use by the workers.

No Office or Benefits

Mr. Kurek did not provide an office or any other facility for the workers. He did not:

Train the workers.
Offer them any employee benefits such as sick or vacation pay, medical insurance, or pension plans.
Carry unemployment insurance, severance pay, or workers’ compensation insurance on the workers.
Require the workers to have any type of insurance or license.

Your Opinion

Based on what you know from what you have read above, are the workers 1099 independent contractors or W-2 employees?

What Did You Pick: Employee or Contractor?

Interestingly, you could be right with either choice. Because Mr. Kurek failed the one test that could have saved independent contractor status for his workers, the court used the seven common-law factors to evaluate employee status and it ruled that the workers were W-2 employees.

The IRS has a 20-factor test to determine if a worker is a 1099 independent contractor or a W-2 employee. But if Mr. Kurek does this one thing, he does not have to face the 20 factors, just as he doesn’t have to suffer the court’s seven-factor test.

Escape
IRS Publication 1976, Do You Qualify for Relief under Section 530, says that Mr. Kurek could have treated his workers as 1099 independent contractors if he had:

A reasonable basis for treating the workers as independent contractors, such as showing that a significant segment of home improvement businesses treated their workers as independent contractors or relying on the advice of a lawyer or accountant who knew the facts about his business.
Consistently treated the workers and all similar workers as independent contractors.
Filed the 1099s for those independent contractor workers to whom he had paid $600 or more.

Failure
Mr. Kurek failed to file the 1099s. With this failure, he simply said

Hello IRS,
Goodbye Section 530 statutory relief,
Goodbye 1099 worker status, and
Hello payroll taxes and penalties.

Because Mr. Kurek failed to file the required 1099s, the court could not grant relief under Section 530 and had no choice but to examine the seven common-law factors. Sadly, the court’s application of the seven factors to Mr. Kurek’s workers caused the court to reclassify the workers from independent contractor status to W-2 employees.

What You Need to Do
Make your life easy. Avoid the big hurdles of the tax court’s seven-factor common-law tests or the IRS’s 20-factor common-law tests. You want to qualify for Section 530 relief. To ensure that relief: File the 1099s—period.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Fact check me: T.C. Memo. 2013-64 UNITED STATES TAX COURT MIECZYSLAW KUREK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5459-11. Filed February 28, 2013.

Section 530 Tax Relief: IRS publication 1976 Section 530.

Tag: tax preparation

If You Hear This Advice on How to Cut Your Taxes, Stay Away

How the 90-Day Mileage Log Rule Works for You

TCJA Tax Reform Sticks It to Business Start-Ups That Lose Money

CAN I FILE BANKRUPTCY FOR TAX DEBT?

Do You Make This Big Mistake with Your Independent Contractors?

Share this:

Share this:

Share this:

Share this:

Share this: