Doing business

If you missed a tax deadline or simply couldn’t afford your small business tax bill and got behind, you could face penalties and other issues. This article provides vital information to help you get your financials back on track.

What can happen to your small business if you owe back taxes?

Depending on your business type, any small business taxes you owe are due by the standard tax deadlines of either March 15 or April 15 each year. Failure to pay your tax liability by the appropriate deadline results in owing back taxes.

Many issues can arise if you fail to pay. Here are five of the most common consequences:

1. Penalties and Interest Rack Up

The longer you owe back taxes, the greater the tax debt will become. The IRS compounds most tax debts at 14% interest, so the fees add up fast! There are penalties for late filing and additional penalty fees for late payment. Those fees can be as much as 25% of your debt.

2. Levies, Seizures, and Liens, Oh my!

The Federal Payment Levy Program (FPLP), started in 2000, gives the IRS the right to collect back taxes from a variety of sources such as federal employee retirement annuities, federal payments such as defense contracts, federal employee travel advances or reimbursements, certain social security benefits, some federal salaries, and more. The IRS can also seize property, equipment, and cars or levy business assets. The federal government could also place a lien against your business. If you attempt to sell assets, the IRS can collect those funds before they get to you.

3. Foreclosure

If you do not pay your tax notice within 10 days of receiving it from the IRS, they can place a lien against your business or personal property (if you are an unincorporated business).

4. Revoked Passport

Seriously delinquent tax debt is certified to the State Department by the IRS. The IRS considers “seriously delinquent” tax debt as unpaid legally enforceable debt totaling more than $55,000, including penalties and fees after filing a lien. All administrative remedies under that law are exhausted, and a levy has been issued.

5. Jail Time

In extreme situations, criminal action could ensue if the IRS determines that your business purposely avoided filing or paying taxes. Willful failure to pay taxes is considered tax evasion or fraud. It is a felony punishable by a $10,000 fine, up to five years in prison, or both.

What to Do if Your Business Owes Back Taxes

Suppose your business is behind on paying back taxes. In that case, you must take immediate action to attempt to mitigate the damages. Here are our top tips for what to do when you owe back taxes:

1. File an extension

If you need more time, have your tax preparer file for an extension. That will allow you to file later in the year instead of in the spring. While this will not reduce the amount you owe or stop the compounded interest and hefty penalties from accruing, it will give you more time to prepare and meet the deadline.

2. Payment Plan

If you know you cannot pay your tax debt in full immediately, set up a short- or long-term payment plan with the IRS. Some businesses can set up a payment plan online.

3. Offer in Compromise

An offer in compromise is a negotiation with the IRS where the agency settles your tax debt for less than what you owe. For consideration, taxpayers must present a valid offer based on their ability to pay.

4. Request Currently Not Collectible Status

Suppose the taxes you owe cause significant hardship. In that case, the IRS may grant a temporary hold on your account and place it in “currently not collectible” status. While the tax is still owed and penalties and interest continue to pile up, collection efforts from the IRS are temporarily suspended. Your tax situation will be reviewed annually, and the IRS will determine when you can pay.

5. Contact a Professional

The best defense when dealing with the IRS is to have a qualified CPA or accountant on your side. These professionals can deal directly with the IRS on your behalf, which is a huge bonus since they are up to date on tax laws and regulations regarding back taxes. It can be money well spent to relieve the anxiety and stress that accompanies paying back taxes.

And, of course, you want to be sure to respond to all IRS notices. Communication is essential when dealing with a back tax situation. As soon as you receive any notifications, turn them over to your tax professional and let them advise you on how to proceed. Even when you can’t pay, it is critical to communicate that so that the IRS knows you are willing and making an honest attempt to remedy your tax situation to get back in good standing.

 When running a small business, it is essential to understand the difference between tax fraud and tax negligence. In this article, we clarify these terms so that you can avoid unsavory business practices and stay on the right side of the law.

Let’s start with some basic definitions to understand the difference between tax fraud and negligence.

Fraud is wrongful or criminal deception that results in financial or personal gain.

Negligence is failure to take proper care in doing something.

Tax Fraud

The IRS defines tax fraud as “the willful and material submission of false statements or documents in connection with an application and/or return.” From this and the above definition, the key terms are “intended” and “willful.” Tax fraud is intentional. In other words, someone who commits tax fraud is willfully doing so.

Two primary examples of tax fraud are failing to file a tax return or filing a false return. If the IRS suspects tax fraud, they look for key factors:

• Underreported income
• Use of a false social security number
• Falsified documents
• Intentional failure to file or pay taxes

Of course, not everyone fails to pay taxes if committing intentional fraud. That’s where negligence comes into play.

Tax Negligence

The key point to focus on with negligence is that it is unintentional. For example, let’s say you’re completing your business taxes and accidentally typing in an incorrect amount by mistake. You weren’t intentionally or purposefully entering the wrong amount; you simply made a human error. While you were negligent in that act, you were not behaving fraudulently.

You can think of negligence as a careless error.

If the IRS suspects tax negligence, they will definitely let you know. A penalty will be added to the unpaid or misreported tax up to about 20% of the tax due, so you do not get off easy. In fact, tax negligence is more common than you think. The IRS estimates that about 17% of all taxpayers in the U.S. are non-compliant when filing taxes. In other words, it’s easy to make a mistake.

It’s easy to avoid tax fraud – pay your taxes promptly, honestly. Avoiding tax negligence may be more complicated since it can result from human error. To ensure that you’re not negligent when it comes to filing your small business taxes, employ the services of a qualified tax accountant or CPA. They are trained to find issues that could get you into trouble with the IRS and are up to date on the latest tax laws and regulations. A skilled accountant can save you time, stress, and money in the long run!

Everyone knows about income taxes and sales taxes, but we tend to forget about excise taxes, because they’re not obvious. Click through for an introduction to this important class of taxes, and see what’s changed.

Excise taxes are paid when purchases are made on specific goods or activities, such as wagering or highway usage by trucks. The producers or merchants pay the tax and typically include the additional tax in the price to the end consumer. Governments levy excise taxes on goods and services that have a high social cost, such as cigarettes, alcohol and gambling. Excise taxes are also referred to as selective sales or differential commodity taxes.

Here are six key facts regarding common, little-known excise taxes —

• The tax reform bill exempted certain payments made by an aircraft owner or sometimes a lessee, related to the management of private aircraft, from excise taxes imposed on taxable transportation by air.
• To support the use of alternative fuels, fuel tax credits are allowed on certain types of fuel including the following: biodiesel, including renewable diesel and mixture; alternative fuel credit and mixture; and second-generation biofuel producer.
• Indoor tanning service providers may need to file a federal excise tax return. These services are subject to a 10 percent excise tax under the Affordable Care Act. This is an example of how excise taxes are often levied on goods and services that are considered unnecessary.
• Taxpayers who engage in certain specified activities related to excise tax must be registered by the IRS before engaging in the activity. This is known as the 637 registration program. The taxpayer can go online to confirm whether they or a specific company has a valid IRS registration.
• You may be surprised to know that there is an archery federal excise tax, including the importation and manufacture of archery and fishing products. These, of course, affect relatively few people, but are good examples of how a product or service may be subject to a particular excise tax that is not necessarily obvious.
• The Environmental Protection Agency’s list of devices to reduce high tractor idling may be exempt from the 12 percent retail excise tax. This shows that a major component of the excise program is motor fuel, and different rates may apply to different types of fuel — gasoline, diesel and gasohol.

The idea is to limit the use of certain products, such as alcohol and tobacco. States also levy excise taxes. Some people say that excise taxes are stopgap measures to solve short-term problems. In fact, some note that discriminatory excises on the consumption of specified products is a step back in development of fiscal systems, postponing a more proper reform for the country or state.

Are you unsure how excise taxes may affect you? Call us at 704-609-1119 now or request a consultation online to learn more.

Giving your taxes your full attention just once a year isn’t the best business strategy. Experts suggest that a year-round approach is better for your finances. Click through to learn the best ways to evaluate the impact of taxes throughout the year.

Numerous tax experts agree that addressing your tax liability effectively requires planning throughout the year. Those business owners who reap the most benefits consider their taxes year-round, rather than waiting to focus on tax payments just a few weeks before the filing date.

A typical small business qualifies for roughly a dozen tax deductions. For example, you may be able to claim deductions on the following:

• Cars operated for business purposes
• Business-related travel and entertainment expenses
• Purchases of office supplies, furniture, equipment, and software programs
• Telephone expenses
• Contributions toward insurance policies, retirement plans, and pension funds

It’s surprising how many small businesses never take advantage of these deductions, mainly because they suffer from the “tax-planning-happens-but-once-a-year” syndrome. To fully benefit from these deductions, it’s important to maintain your expense records throughout the year.

Your goal should be to reduce your tax liabilities by retaining records of your purchases and determining the proportion of business costs in combined expenses. By monitoring your expenses closely all year, you can analyze each expense for its tax impact as it’s made. Additionally, smart business owners should contemplate three key steps to tax planning:

1. Invest in the most effective tax record tools for your business. Whether it’s spending roughly $30 on journals and tax books with a set of refill sheets costing less than $10 to do manual bookkeeping or investing up to $2,000 on the latest online software tax-filing applications, you will benefit from more rigorous and accurate recordkeeping. Sure, the initial investment could be significant, but regular monitoring should facilitate tracking expenses and making advance payments, which will save you money in the long run.

2. Determine when you need professional tax tips and planning advice. At times you will be able to justify paying for professional tax services, particularly if you need advice on unclear requirements in tax laws that could be in your favor. To prevent unnecessary complications and aggravations, you must avoid violating tax laws that may be applicable to your small business. If you are unsure of these laws, using the tools at your disposal, such as current software and online recordkeeping, and complementing those capabilities with professional advice when needed, can help you keep your taxes under control.

3. Establish year-round tax planning goals. A good tax-planning strategy will help you accomplish some of these goals:

• Reduce the amount of taxable income
• Claim any available tax credits
• Lower your tax rate
• Control the time when taxes must be paid
• Avoid the most common tax-planning mistakes

Plus, a year-end review at the end of your fiscal year or “busy season” can be most effective if you’ve maintained clear records and an understanding of your financial position throughout the year.

Of course, this is just a general list. Not all deductions are available in all situations, and rules change frequently. Give us a call to discuss which deductions apply to your company.

Matthew J. Rice CPA offers reliable and comprehensive tax planning and preparation services to help ensure that you take advantage of current tax laws, submit accurate and on-time tax returns, and put together a plan that may significantly reduce your tax liability. Call us at 704-609-1119 now or request a consultation online to learn more.

Do you have a client or customer who won’t pay? Even when all attempts to collect a bad debt have failed, the IRS may give you a break at filing time. Click through to see how to take that bad debt off your taxes.

When can you use bad debt to reduce business income? Even when you take the customer to court and you still don’t get your money, there’s a way to make lemonade from this lemon of a customer.

If your business has already shown this amount as income for tax purposes, you may be able to reduce your business income by the amount of the bad debt. Look at bad debt as an uncollectible account—a receivable owed by a customer, client or patient that you are not able to collect.

Bad debt may be written off at the end of the year if it is determined that the debt is in fact uncollectible.

According to the IRS, bad debt includes:

• Loans to clients and suppliers.
• Credit sales to customers.
• Business loan guarantees.

How do you write off bad debt?

Your business uses the accrual accounting method, showing income when you have billed it, not when you collect it.

If your business operates on a cash accounting basis, you can’t deduct bad debt because you don’t record income until you’ve received the payment. If you don’t get the money, there’s no tax benefit to recording bad debt. You only record the sale when you receive the money from the customer.

Under accrual accounting, manually take the bad debt out of your sales records before you prepare your business tax return.

You must wait until the end of the year, just in case someone pays.

• Prepare an accounts receivable aging report, which shows all the money owed to you by all your customers, how much is owed and how long the amount has been outstanding.
• Total all bad debt for the year, listing all customers who have not paid during the year. Only make this determination at the end of the year and only if you’ve made every effort to collect the money owed to your business.
• Include the bad debt total on your business tax return. If you file business taxes on Schedule C, you can deduct the amount of all bad debt. Each type of business tax return has a place to enter bad debt expenses.

It makes sense in any kind of business—no income recorded, no bad debt.

A business bad debt often originates as a result of credit sales to customers for goods sold or services provided. The best documentation is likely to be a detailed record of collection efforts, indicating you made every effort a reasonable person would in order to collect a debt.

Take some solace by claiming a bad business debt deduction on your tax return. Not exactly a guarantee because you need to show that the debt is worthless, but it’s good to know there may be some relief.

We offer a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call us at 704-609-1119 and request a free initial consultation to learn more.