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Steps to Take if You are Audited

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You thought you were done when you filed your tax return in April. But then the letter from the IRS arrived. Confusing tax notices and long waits on hold with the IRS can make it seem like you’ll never find a way to find a resolution.

Here’s how you can avoid common audit mistakes and keep your tax pain to a minimum.

Read and follow the notice.

It will tell you which year’s tax return the IRS is questioning and the items that are being examined. The audit notice also will give you a timeframe for responding, generally 30 days. If you don’t respond, the IRS can take action, such as readjusting your tax liability and assessing interest and a possible additional tax penalty.

Contact your tax professional.

If your return was professionally prepared, you should contact your preparer for assistance in handling the audit process. If you prepared your own return, you may want to consult a tax professional. At our Cleveland Accounting firm we can assist with not only tax preparation but also IRS problem resolution. Learn more about our tax services.

Review and organize your records.

The information in the notice should help you determine which documents you need to support the information reported on your return. Replace or reconstruct any missing records. If you can’t produce supporting documents, a questioned deduction may be denied. Also, don’t give the IRS your original documents to keep. Send copies instead.

Be brief.

If you’re called for an in-person audit, always take your tax professional with you and answer as many questions as you can with a simple “yes” or “no.” That way, you’ll avoid inadvertently furnishing any information that could prompt the auditor to expand the audit.

Don’t be too quick to pay up.

It may seem easier to simply respond to an IRS notice by sending a check to the IRS for the assessed additional liability. But the IRS has been known to be wrong, and you shouldn’t pay tax you may not actually owe. Even if the IRS is correct, you may be able to negotiate a lower payment than the amount specified in the audit notice.

Give us a call today at 440-471-0184, so we can help you determine the right course of action for you. Our IRS Tax Problem Resolutions services are designed to help you tackle any tax problems head on.

Know the Tax Regulations for Reimbursing Employee Business Expenses

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Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an “accountable plan.”

Having an accountable plan that meets tax law requirements can provide tax advantages.

Business Connection

Each expense reimbursed under an accountable plan must have a “business connection.” This means that the expense must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.

Other Requirements

Employees must adequately account for their expenses and return any excess reimbursements or allowances within a “reasonable period of time.” The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.

Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.

Tax Effects

Expense reimbursements made under an accountable plan that meets the requirements are not included in an employee’s wages and are not subject to federal income or employment taxes. This can be a tax saver for both the employer and the employee.

If no accountable plan is in place, amounts paid to the employee count as taxable wages. The employee can potentially deduct the expenses, but only if the employee itemizes deductions rather than claims the standard deduction. The employee’s deduction for employee business expenses and other miscellaneous expenses is limited to the amount that exceeds 2% of adjusted gross income.

Connect with our Cleveland Accounting Firm, right now, for tax advice and business planning. Call us at 440-471-0184 or request a free consultation.

What Start-up Costs can You Deduct?

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Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount. When starting a new business that is designed to succeed, it requires the counsel and guidance of a financial professional to help you make the right decisions from the beginning. Pinnacle Accounting, a Cleveland accountant, offers the new business advisory services you need.

At tax time, you might be wondering which start-up costs from your new business you can deduct.

  • The tax law places certain limitations on tax deductions for start-up expenses.
  • No deduction is available until the business becomes active.
  • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
  • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

Whether you need individual or business tax advice, give us a call at 440-471-0184. We’ve got the new business advisory answers you’re looking for, so don’t wait. Request a consultation today.

Understanding the Home Office Deduction

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Business owners know that the right accounting firm will be a strong financial partner who contributes to their success. If you use a home office, then you want a tax advisor who can help to form a strategy to reduce tax exposure so you retain more of your profits. Pinnacle Accounting, a Cleveland accountant for businesses, can help you with your business accounting and tax needs.

The IRS has made available a simpler method for calculating the home office deduction. At their option, taxpayers may claim a standard rate of $5 per square foot for the qualified business use of their home instead of using a prorated portion of their actual home-related expenses. The maximum square footage that can be considered in the calculation is 300.

Employees who receive advances, allowances, or reimbursements from their employers for their home office expenses may not use the simplified method.

A few details. Taxpayers using the simplified method may separately deduct qualified home mortgage interest and property taxes. Because these expenses must be claimed as itemized deductions, they won’t reduce business income for purposes of self-employment tax.

No depreciation and/or Section 179 expensing deductions are available for a home office in years the taxpayer chooses to use the simplified method. However, deductions for other trade or business expenses unrelated to the use of the home for business purposes — advertising, supplies, wages paid, etc. — are still deductible.

A good choice? Because this method does not require taxpayers to keep records of amounts paid for utilities, trash and snow removal, and other “indirect” home-related expenses, it eliminates much of the recordkeeping associated with claiming the home office deduction. However, all of the tax law’s other strict requirements for the deduction must continue to be met.

Taxpayers interested in maximizing their deductions may want to continue tracking their actual expenses. That way, the deduction can be figured both ways to see which method is most beneficial in their specific circumstances.

Give us a call today, so we can help you determine the right course of action for you. Our Cleveland Tax Accountants can be reached at 440-471-0184, or request a free consultation online.

Preparing for Upcoming Taxes: 5 Things You Can Do Now

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Pinnacle Accounting offers strategic tax planning and preparation services for businesses and individuals in the Cleveland area. Your income tax obligation needs to be on your mind year-round. Here are some ways you can get a jump on your taxes now so you’re ready when the time comes to file.

Summer’s over. The kids are back in school. And soon, there’ll be only three months left. If you haven’t started thinking about how to minimize your income tax obligation for this year, there’s still time.

Whether you’re a small business or an individual taxpayer, year-round tax planning is more than just a way to make tax preparation an easier, faster process. By keeping taxes in mind as you go through every 12-month period, you’ll be able to see where you might take specific actions early that will have an impact on what you end up owing. Make it a habit, and you’ll find that it just comes naturally to consider the tax implications of purchase and sales decisions.

Create a System

Effective tax planning requires more than just saving receipts and organizing tax-related documents in physical or digital file folders – though that’s a good start. Create a system in early January that you can maintain throughout the year (of course, a lot of your information will be stored in your accounting or personal finance application, if you use one). But you should be saving statements, receipts, sales forms – anything related to your income and expenses that will eventually feed into IRS forms or schedules.

Evaluate Your Expense-Tracking

Businesses: How do you—and your employees, if you have them—keep track of daily expenses? You may have forms like purchase orders and bills for the big ones, but you probably buy things on occasion that are just documented by paper receipts. How do you categorize and organize these so you won’t miss any when it’s time to complete a Schedule C? Is there a better way?

Do any of your employees make trips on behalf of your business? You really should consider subscribing to an online service that automates the process of creating and approving expense reports. If you’re not aware of these options, ask us.

Know Your Tax Forms

Individuals and businesses file some of the same forms and schedules, but some, of course, are different. Your previous years’ tax returns can be good resources for you. Refer to them occasionally as you go through the year and do some comparing, especially if you must pay quarterly estimated taxes. You may not remember from year to year what’s deductible and what’s not. Revisiting your returns will jog your memory and remind you.

Consider Generosity

Are you having a good year? You’ll have an idea of how your financial health is if you’re keeping up with income and expenses. You don’t have to wait until the end of the year to do any charitable giving that you’re going to do (although it’s usually best to hold off until the fourth quarter).

Learn How Changes Will Affect Your Taxes

This is so important for individual taxpayers. Did you get married or divorced, or have a child? Did you move? Buy or sell a home? Get a raise or, conversely, lose regular income for some reason? Did you have educational expenses? All these life events—and more—can change your income tax obligation.

Businesses often experience major changes, too, and your financial state at the end of the year is way harder to predict than it is for an individual with W-2 income. Stay on top of the impact of deviations in income and expenses created by events like the introduction of new products (or the loss of existing ones), personnel fluctuations, and major acquisitions.

Comprehensive Planning

Tax planning should be an element of your overall financial planning. If you have a business or household budget, you’re way ahead of the game. You can compare your actual income and expenses every month to those you built into your budget. A budget can be a tremendous tool as you plan for the current year’s taxes. If you’ve never created one, or if you’ve never stuck to one successfully, we can help you with this.

We’d also be happy to work with you periodically throughout the year on taxes. We can get you set up with financial software if you’re not already using it and advise you on ways to work toward minimizing your 2018 obligation now. To learn more about our tax planning services, visit us online or give us a call at 440-471-0184 today.