Stop Procrastinating! Tax Day Is Coming!

If you tend to procrastinate when it comes to the tax season, it’s time to stop procrastinating and start taking action. Tax Day for the 2018 tax year is right around the corner. For most filers, Monday, April 15, 2019 is the deadline to file your tax returns with the IRS and where applicable, your state tax agency. However, for states observing a holiday, those filers will get additional time.

“For the 2018 tax return, the due date is April 15, 2019 for most filers. For residents of Maine and Massachusetts, the due date is April 17, 2019 because of the Patriot's Day and Emancipation Day holidays in those states.” – IRS Topic No. 301 When, How, and Where To File

Whether you file electronically or by paper, it’s vital that your tax returns are filed on-time. The IRS provides the following guidance:

“Your return is considered filed on time if the envelope is properly addressed, has enough postage, is postmarked, and is deposited in the mail by the due date. If you file electronically, the date and time in your time zone when your return is transmitted controls whether your return is filed timely. You will later receive an electronic acknowledgement that the IRS has accepted your electronically filed return.” – IRS Topic No. 301 When, How, and Where To File

If you have an Accountant or CPA firm handling your tax returns, be sure to return any applicable e-file authorization forms to them in a timely manner so they may electronically file your returns on your behalf. Also, make note of any filings you may be required to submit by mail and get those filings sent out on-time. If you are using a third-party tax preparer to do your taxes, be sure to schedule your appointment as soon as possible to ensure your returns are prepared and transmitted on-time. Appointments can become harder to come by as the tax deadline approaches. For paper filers, be sure to get to the Post Office ahead of the April 15th deadline or risk potentially waiting on long lines to get those returns mailed by the tax deadline.

The IRS and state tax agencies do allow qualified filers to request an extension to file their tax returns. A request for an extension must be filed by the tax deadline. However, an extension only extends the tax deadline for filing your returns. It does not extend the deadline for paying your taxes. If you owe taxes, you are still required to remit payment to the IRS and/or to your state tax agency by the tax deadline.

“If you cannot file by the due date of your return, you should request an extension of time to file. To receive an automatic 6-month extension of time to file your return, you can file Form 4868. File your extension request by the due date of your return. An extension of time to file is not an extension of time to pay so you'll owe interest if the tax you owe isn't paid by the original due date of your return. You may also be subject to a late-payment penalty on any tax not paid by the original due date of your return.” – IRS Topic No. 301 When, How, and Where To File

Filers should check with their individual state tax agency for guidance on their state’s tax filing requirements and deadlines. If you are unsure or unfamiliar with tax preparation and filings, be sure to seek professional counsel from an Accountant, CPA firm and/or certified tax professional.

 

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Getting Ready For The Tax Season

Do Your Own Taxes Or Seek A Professional

A Sub-Chapter S in New York

If you are planning to establish a legal business entity (ex: Limited Liability Company (LLC) or Corporation) or have an existing legal business entity in New York and are considering a sub-chapter S election, there are a few things you’ll want to keep in mind.

First, it’s important to understand that single-member LLCs (defaultly treated as a disregarded entity and taxed like a sole proprietorship for tax purposes), multi-member LLCs (defaultly treated as a Partnership) and Corporations making a sub-chapter S election are all considered pass-through entities for federal tax purposes. This means that the entities themselves are generally not subject to income taxes. Profit/loss from the business is passed through to the individual members (LLCs) or shareholders (S-Corps), generally reported on a Schedule K-1 for Partnerships & S Corps, and each member or shareholder reports and pays their respective share of income taxes on their respective share of profit/loss on their individual tax returns.

Eligible single-member LLCs, multi-member LLCs (Partnerships) and corporations (C-Corps) can elect to be treated as sub-chapter S for federal tax purposes in lieu of their default classification. There are various pros and cons associated with making a S election, so it is best to consult with your Accountant, CPA Firm and/or legal counsel so that you may make a well-informed decision.

At the federal level, to make a sub-chapter S election, eligible LLCs will need to file both Form 8832 – Entity Classification Election and Form 2553 – Election By A Small Business Corporation. Eligible corporations (C-Corps) will need to file Form 2553 – Election By A Small Business Corporation. When filing Form 8832, keep in mind that the election may take effect no more than 75 days prior to the date the election is filed or no later than 12 months after the election is filed. When filing Form 2553, keep in mind that the form must be filed no more than 2 months and 15 days after the beginning of the tax year for which the election shall take effect or any time during the tax year preceding the tax year for which the election shall take effect. Both forms do allow “Relief for Late Elections.” Eligibility information is available in the instructions for each form. Your Accountant or CPA Firm should be able to help prepare the necessary forms for you to sign and send to the IRS. The IRS should provide written notice as to the acceptance or rejection of the filing(s) within 60 days of receipt.

At the state level, things start to get complicated. While many states recognize the federal S election at the state level, New York State does not. By default, New York State will treat your entity as a C Corporation for tax purposes even if you have made a federal S election. In order for your entity to be recognized and taxed as a S Corporation at the state level, you must file New York State’s Form CT-6 – Election by a Federal S Corporation to be Treated As a New York S Corporation. Again, your Accountant or CPA Firm should be able to help prepare the necessary form for you to sign and send to the New York State Department of Taxation & Finance (NYS DTF). The NYS DTF should provide written notice as to the acceptance or rejection of the filing within 60 days of receipt. While filing Form CT-6 will allow your entity to be treated as a New York S Corporation for tax purposes, New York State requires most general business corporations to pay a franchise tax at the entity level under Article 9-A of New York law.

One last complication is at the city level. New York City does not recognize the federal S or New York State S elections. Therefore, S Corporations are subject to New York City’s General Corporation Tax (GCT) and will be required to pay this tax at the entity level.

If you are planning to make a S election for your business, be sure to seek and consult with professional counsel (ex: Accountant, CPA Firm) to understand the pros and cons as well as the administrative requirements and tax implications at the federal, state and local levels. As you can see in the case of New York, there are a couple of added complexities at the state and local level that you’ll want to be aware of. A good Accountant or CPA Firm should stay ahead of the game and keep you well-informed but don’t hesitate to ask your Accountant or CPA Firm directly about how the S election works within your state and local levels.

Do Your Own Taxes or Seek A Professional?

As the tax season kicks off, a fundamental question comes to mind – Should you do your own taxes or seek a professional?

Well, the answer depends on a variety of factors including:

  • How comfortable you are preparing your own tax returns?

  • How familiar you are with your tax situation and history?

  • How complex your tax situation is?

Generally, if you are comfortable preparing your own tax returns, are familiar with your tax situation and you don’t have a complex tax situation (ex: you only have income from W-2 wages, interest income from interest-bearing accounts, you don’t itemize your deductions or only itemize state & local taxes & charitable contributions), you should be able to prepare your own tax returns using either an online or desktop version of tax preparation software from companies like Intuit (TurboTax), H&R Block and TaxAct, just to name a few.

These companies have been developing tax preparation software for many years and have many customers who successfully use these products to prepare and file their tax returns annually. That said, you do need to have patience, be organized and dedicate a reasonable amount of time to go through the process. While the software will walk you through the process step-by-step, you do need to understand what information the tax preparation software is asking for then input the proper and correct information for your tax returns to be accurate. Keep in mind . . . Garbage in, Garbage out!

Even though these companies work to ensure their tax preparation software is accurate and apply computations and calculations based on the applicable tax laws, having a general understanding of your tax situation and history is extremely helpful so that you can raise a red flag if you notice that the tax preparation software is showing you too high of a tax refund or too much in taxes owed. Errors can occur due to incorrect user input or a software glitch.

If you are not at all comfortable preparing your own tax returns or have a more complex tax situation, consider seeking a professional tax preparer, Accountant or CPA firm. They should have a thorough understanding of the applicable tax laws and, provided you bring them all the necessary paperwork and documentation required, they should be able to properly and correctly prepare your tax returns, as well as identify and apply all applicable and available tax deductions to get you the optimal refund or try to minimize your tax bill/taxes owed. When looking for a professional tax preparer, Accountant or CPA firm, be sure to do your research, read reviews, get recommendations and compare service fees/rates.

In the case where you run/own a business, the tax situation can get even more complicated. There are different requirements on the federal, state and local level depending on the type of legal business entity you have created (ex: LLC: Single-member LLC, Partnership, LLC taxed as a sub-chapter S, Corporation: C-Corp or S-Corp) and the state in which your entity was established.

On the business side, you’ll probably want to have a tax professional, Accountant or CPA firm that you use on an ongoing basis. Except for the single-member LLC, all other entities are required to file a business tax return (separate from the personal return) even if the entities themselves do not pay income taxes (ex: pass-through entities). You also don’t want to reinvent the wheel dealing with a different tax professional, Accountant or CPA firm every year.

On the personal side, again, it depends on your comfort level and the complexity of the situation. For an individual with a single-member LLC, MAYBE you’ll consider doing your own tax return; but generally, it’s not a bad idea to consider hiring a tax professional, Accountant or CPA firm if you run/own a business especially as a member of a LLC Partnership, LLC taxed as a sub-chapter S, or you’re a shareholder of a corporation (C-Corp or S-Corp). There are a lot of requirements (not only income tax returns) that you may or may not be aware of at the federal, state and local level (ex: estimated quarterly tax payments) so having access to a good tax professional, Accountant or CPA firm can save you major headaches down the road. Yes, a good tax professional, Accountant or CPA firm will cost a bit more, but in the end, it will be well worth it!

Getting Ready for the Tax Season

With the holidays passed and the New Year upon us, it’s time to take some proactive steps in preparing for the upcoming tax season. That’s right! Now is a good time to start gathering and organizing all your 2018 financial/tax documents in preparation for the tax season. Don’t wait until it’s time to have your tax returns prepared to start hunting for all the crucial documents. Get a head start now by putting together a checklist of all the applicable documents you’ll need and start building a file if you haven’t already begun to do so.

Everyone has their own tax situation so first and foremost, if you have an Accountant, CPA Firm or Certified Tax Professional, get in touch with them to review 2018 and go over the documents that you’ll need to have ready to provide to them to prepare your tax returns. Due to changes in the tax law last year, you hopefully have been actively communicating with your Accountant, CPA Firm or Certified Tax Professional to discuss any applicable tax changes that could potentially affect you in the upcoming tax season. It’s also a good practice to reach out to your Accountant, CPA Firm or Certified Tax Professional in the fourth quarter of the year (if your Accountant, CPA Firm or Certified Tax Professional has not already done so), to discuss any applicable year-end tax matters and/or appropriate actions that need to be taken prior to year-end.

If you are a business owner, you’ll want to get in touch with your personal Accountant, CPA Firm or Certified Tax Professional to discuss any tax matters, issues or concerns applicable to your personal tax situation while also getting in touch with the company’s Accountant or CPA Firm to make sure the company is on the right track for year-end.

On a personal level, some of the financial/tax documents you should gather include:

  • Form W-2s from all employers that you worked for in 2018. Employers are required to furnish Form W-2s to their employees by January 31, 2019. A Form W-2 is considered “furnished” if it is postmarked by January 31, 2019. Most payroll companies also provide employee access to electronic copies of Form W-2s.

  • Form 1099-MISC from all companies/businesses for which you performed work or services as a non-employee/independent contractor in 2018. Companies/businesses must issue Form 1099-MISC if you were paid $600 or more during the year for work or services performed. Form 1099-MISC must be furnished by January 31, 2019. You are still required to report all applicable income even if you do not receive a Form 1099-MISC.

  • Form 1099-INT from all banks/financial institutions for which you earned interest income in 2018. Banks/financial institutions must issue a Form 1099-INT if you earned $10 or more in interest income during the tax year. You are still required to report all applicable interest income even if you do not receive a Form 1099-INT.

  • If you maintained health coverage through a Health Insurance Marketplace, you should receive a Form 1095-A. If you maintained health coverage through a health insurance provider or non-Applicable Large Employer (non-ALE), you should receive a Form 1095-B. If you maintained health coverage through an Applicable Large Employer (ALE), you should receive a Form 1095-C. These forms provide information regarding the health insurance coverage provided, to whom coverage was provided and when coverage was provided. Except for recipients of Form 1095-A, recipients of Form 1095-B and Form 1095-C generally do not need to wait for these forms to arrive to prepare their tax returns provided you have the information readily available including, who was covered and when, for tax preparation purposes. Keep in mind that for 2018, the Affordable Care Act’s Individual Mandate remains in full force. Individuals who fail to maintain proper health insurance coverage for all of 2018 may be subject to a penalty. You can get more information about these Health Insurance Information/Tax forms on the IRS website.

  • Form 1099-DIV from all financial institutions/brokerages for which you earned dividend income.

  • Form 1099-G if you itemized your deductions in the prior tax year and took advantage of the state/local tax deduction and received a state/local tax refund.

  • Form 1099-R if you received a distribution from a retirement plan, pension plan, profit sharing plan, etc.

  • Form 5498 if you made contributions to an Individual Retirement Account (IRA).

  • Schedule K-1 if you are a member of a multi-member LLC, LLC taxed as a sub-chapter S or a shareholder of a sub-chapter S.

  • Copies of donation confirmation/acknowledgment letters for tax-deductible donations made to qualified charitable organizations.

The list above is not intended to be a complete list of the financial/tax documents that you may need for the preparation of your tax returns nor does it necessarily reflect all the financial/tax documents that are applicable to your specific tax situation. Again, speak with your Accountant, CPA Firm or Certified Tax Professional to review the financial/tax documents that you should gather in preparation for the current tax season. If you prepare your own tax returns, look through the financial/tax documents you received last year while accounting for any applicable changes made in 2018 (ex: opening a new savings or brokerage account, working for more than one employer within the same tax year) as you put together your checklist and gather your financial/tax documents.

A little early preparation and staying proactive can go a long way in helping to make this tax season go smoother and be less stressful!

Making Investments in Your Business in the New Year

As we prepare to close out the year, business owners should take the time to evaluate their current business operations to determine what investments they need to make in their business heading into the New Year and begin planning & budgeting for those investments. This includes investing in staff (ex: hiring additional employees, employee training & education, health & wellness programs, incentives & retention programs), investing in technology (ex: computers, servers, software, storage, network equipment) and investing in infrastructure (ex: office/office space, furniture, fixtures) just to name a few.

While planning and budgeting for potential investments does not guarantee that business owners will be able make those investments into their business at any specific time (ex: due to financial constraints, weak business performance, unforeseen circumstances), business owners should still be proactive rather than reactive. Perhaps the investments may not occur in the first or second quarter of the year but may be possible in the third quarter.

In some situations, business owners may need to front-load the investments to achieve future business performance gains. For instance, if your business is a design firm relying heavily on up-to-date technology, but you are running outdated computers and software, you’ll need to make investments in technology to get updated computers and software NOW, so you can get the work done. If you can’t get the work done, your business will be unable to stay afloat. Likewise, business owners may need to hire an additional employee to help in critical areas to get work done and meet timetables. The successful completion of a client project can result in future projects (and additional income) but failure could mean the loss of the client (and loss of significant income). In these situations, business owners MUST make the investments immediately rather than postpone or delay them to a later date.

To help manage the business, business owners should utilize financial projections. Income projections (and if needed, cash flow projections) can be an extremely useful tool in helping to manage the business but keep in mind that projections are exactly that – A PROJECTION. The more reliable financial information that you have available, the better your projections will be; however, projections are NOT SET IN STONE!

Business owners who are unfamiliar with financial projections should work with their lead or senior Accounting/Finance person (ex: CFO, Director of Finance, Accounting Manager, Head of Accounting/Finance) to create/prepare financial projections for the business for the upcoming year. If you don’t have a lead or senior Accounting/Finance person, consult with your Accountant or CPA Firm for guidance. While preparing financial projections is not overly difficult, it does require a level of experience.

Employee Bonuses Are Taxable Income

Now that the holidays have arrived and with year-end fast approaching, as a business owner, you may be considering distributing year-end bonuses to employees as a show of appreciation for their passion and dedication to the business this past year. It’s important to remember that bonuses are treated as taxable income and should be processed and reported accordingly.

You should process your year-end bonuses through payroll and follow standard payroll practices to ensure the proper tax withholding for federal income tax, state & local income tax and FICA (Medicare & Social Security Tax). Generally, bonuses can either be run as an additional payroll outside of your normal payroll cycle or added to one of your normal year-end payrolls.

If you plan on running an additional payroll, check with your payroll company on how to submit the additional bonus payroll. Your payroll company will usually require bonus payrolls (or additional payrolls outside of your normal payroll cycle) to be submitted several days in advance of your regularly scheduled payroll. Pay close attention to the payroll submission due dates to ensure your bonus and year-end payrolls are submitted on a timely basis. Also, make sure your business bank account is adequately funded to cover your added year-end business expenditures.

If you have questions or concerns regarding the proper handling of bonus income, check with your payroll representative and/or your business tax professional (Accountant/CPA firm).

Considerations When Starting A Business: Seeking Professional Counsel

As you get started with your new business, there may come a time when you will need to seek professional counsel from a good business law firm and/or CPA firm. Even if your circumstances may not warrant professional counsel at the onset of your new business, you may eventually need to seek counsel as your business grows. Speaking with a good business law firm and/or CPA firm can help you stay on the straight and narrow and in compliance of the constantly changing local, state and federal regulations, requirements and laws.

Legal Counsel

A good business law firm can provide an array of vital services to your business. They can provide key legal counsel during the initial setup and establishment of your new business, helping you to better understand what the legal implications of your new business venture will be. They can offer important insight to help you operate your business legally and avoid unnecessary risks. They can also serve as a critical line of defense between you, your business and potential third-party litigation.

Business law firms can help you figure out the best legal entity for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), assist with filing the necessary paperwork with the appropriate federal, state and local agencies (ex: Department of State, IRS) to setup the legal entity, prepare Operating or Shareholder agreements specifically customized for your business and act as a designated agent for legal notices. They can help prepare and review contracts/agreements (ex: client contracts, NDAs, merger agreements, employment contracts) and they can step in to provide legal aid/counsel in the event of legal action for or against your business.

CPA Firms

A good CPA firm can provide your business with an array of vital Accounting services. They can provide guidance on the different types of legal entities best suited for your business (ex: LLC, Corporation - C-Corp or sub-chapter S). They can provide insight on the potential tax liabilities and obligations you, as a business owner, should be aware of and can expect. CPA firms can handle a variety of required tax reporting and filings for federal, state and local jurisdictions. They should stay current on all the latest changes to the tax laws and requirements to keep you (and the rest of their clients) compliant and up-to-date on the potential impacts those changes will have on you and your business.

For instance, if your business is a single-member LLC treated as a disregarded entity for tax purposes or a multi-member LLC taxed as a Partnership, the owners or LLC members typically do not take a salary through payroll. An owner of a single-member LLC will take a draw and members of a multi-member LLC taxed as a Partnership will receive what are called Guaranteed Payments in lieu of salary via payroll. In either case, unlike salaries via payroll, payroll taxes are not withheld on the income. As such, owners/LLC members are responsible for making quarterly tax payments to the appropriate federal, state and local tax agencies on the applicable earnings. Failure to make the appropriate payments may result in a huge tax bill and tax penalty at tax time.

In addition, single-member LLCs, multi-member LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are treated as pass through entities for tax purposes whereby the business entities themselves are not taxed. Taxes on income/profit are passed down to the individual owners (usually reported on a Schedule K-1) and reported on their individual tax returns. While LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are not taxed at the entity level, they are still required to file the proper annual Partnership or Corporation tax returns for the applicable tax year.

This is just a scratch on the surface, but you can see how complex the tax obligations and implications can be if you don’t understand how the tax laws affect you and your business and/or have appropriate guidance from a tax professional like a good CPA firm. You and your business can easily fall into a tax maze. A good CPA firm should be an active partner in helping you and your business remain compliant with all applicable tax laws and requirements.

There will be times where it may be necessary for your business law firm and CPA firm to collaborate and work together. For instance, when deciding what type of business entity to form for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), it’s a good idea to get insight from both a legal and an Accounting perspective as different types of business entities will have different requirements and implications. While your law firm and CPA firm won’t necessarily tell you which type of entity to form, they should advise you, make recommendations and offer pros and cons. You’ll want to gain as much insight from their counsel to make a well-informed decision.

It should go without saying that both business law firms and CPA firms can be quite expensive so it’s important to know how and when to properly use these professional resources to avoid unnecessary costs. Far too often, business owners use professional counsel prematurely, fail to use counsel until situations get out of hand, don’t know the right questions to ask and/or how to lead, manage and streamline the conversations. Before you speak with a business law firm or CPA firm, take some time to gather your thoughts and put together an overview of what you want to discuss and the questions you want to ask. Try to keep the conversations on point and focused. Don’t be afraid to ask questions if you are unsure about something being discussed. At the end of any conversation with a business law firm or CPA firm, you should feel comfortable that you have gotten the answers that you needed to get from the conversation.