Advising small business owners during tax time
While tax professionals generally find the filing process for small business clients uncomplicated, clients often feel differently. New filers can be overwhelmed with the idea of preparing their business tax returns and find the path to a complete return daunting, even when working with a tax professional. For seasoned business owners, the tax filing process can be so cumbersome that it’s difficult to complete.
To avoid stress for tax professionals and clients, preparation is essential. Preparing clients for new laws and forms or adapting to changes in business structure requires effective and ongoing communication. Interaction throughout the year not only allows greater possibilities for planning, but also the design and implementation of strategies that ensure that the next production season will be less “challenging”.
Organize and track documents
Advise clients to keep financial records intact at all times. This is crucial for substantiating deductions and credits claimed on a tax return and also relevant for a possible IRS audit. Generally, the limitation period for audits is three years. However, if the IRS suspects and can prove fraud, there is no limit to the number of tax years that can be audited. Advising clients early and often and helping them develop a records retention system will not only support already filed tax returns, but also the preparation of future ones.
Declare all income
Many taxpayers know that they must include income reported on Forms 1099 on their tax return. However, they often forget to include income not reported on 1099 forms. This includes both cash receipts and in-kind receipts. Taxpayers are usually very surprised that their barter transactions (i.e. goods/services exchanged with another party for goods/services) are subject to income tax. For this reason, it’s important to educate customers accordingly and ask probing questions that ensure all revenue is included.
Properly track expenses
Are Refundable Employee Retention Credit (ERC) benefits tracked appropriately? Are fixed assets tracked? Were business meals provided by a restaurant? Are business and personal expenses confused?
Small business owners often underestimate what is expected of their record keeping, so customers need to be educated on what to track. For 2021 tax returns, small business employers should be aware that ERC benefits will reduce corresponding payroll deductions on the tax return. When it comes to fixed assets, it’s easy to focus on available §179 and bonus depreciation deductions and not think about the relevance of a client’s fixed asset records. About 38 states have these business personal property taxes, subjecting the property to annual state tax, regardless of immediate deductions received on the federal income tax return. Thus, it is important for clients to have a fixed asset register to support all business personal property tax returns filed. In addition, for 2021, customers should be advised to track meal expenses based on whether the expense was incurred at a restaurant, as restaurant-provided business meal expenses are temporarily 100% deductible on the tax return. 2021 revenues as a COVID-19 relief measure. See IRS Notice 2021-25 for more details and what is considered a restaurant.
Customers also tend to combine business and personal expenses. This is often the result of not having separate bank accounts for business and personal use, not using the correct account/card when making purchases, or even “accidentally” using the company account to deduct a personal expense as business expense. Small business owners who do not adequately consider business and personal expenses may face greater scrutiny when audited and could even run the risk of their part-time work being seen as a pastime. time rather than a business. Tax practitioners know that the “hobby” classification can have extremely adverse consequences for a taxpayer.
Understanding Multi-State Tax Issues
With the growth of digital marketing and the increased ease of online retail, it is becoming much easier for small businesses to interact and provide goods and services to customers outside of their home state.
For small businesses with retail operations, it is important to understand the income tax, franchise tax, and sales tax implications. For income tax purposes, Public Law 86-272 (PL 86-272) provides relief to many taxpayers. Essentially, PL 86-272 limits a state’s ability to impose income taxes on the sale of tangible personal property. Thus, income tax can be avoided. This law, however, does not extend to franchise tax or sales tax. Although the franchise tax only brings in a small amount of money, there are still returns to be filed and taxpayers should be aware of these filing requirements.
With respect to sales tax requirements and online retail activities, many states imposed economic nexus standards following the 2018 Wayfair ruling. This ruling allows states to require generally an out-of-state seller will collect and remit sales tax on sales to out-of-state customers when the out-of-state seller has no physical presence in the consumer’s state. For this reason, tax professionals and small retailers should work together to determine which states the business interacts with and what the sales tax obligations are in each. Steps can then be taken to file the appropriate registrations and returns with those states. The process can be tedious, but it’s an important step in ensuring retailers stay compliant. Sales tax issues can quickly spiral out of control and become catastrophic for a small business.
PL 86-272 provides no protection for multi-state service operations, and tax reporting obligations are entirely dependent on whether the state the customer is in uses a performance or supply cost approach. market based. States using a performance cost approach generate service sales in the state where the service is provided, while states using a market-based approach generate service sales in the state where the customer receives the benefit. Again, as with retail operations, it is important to work proactively with customers to understand where their customers are located and what sales sourcing approach the customer state is taking.
While these points are especially helpful for those starting new business ventures, it’s never a bad idea to check in with existing customers to better understand how their processes have worked for them and what can be done to improve their experience. in the maintenance of their individual files. . Preparing your clients for success is the best way to prepare yourself and your business for success. As clients become more satisfied with their partnership with their tax professional, loyalty will keep them coming back year after year to support your firm’s growth.