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July 2019

Feature Articles

Tax Tips

QuickBooks Tips

 

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Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

What to Do if You Receive an IRS CP2000 Notice

An IRS CP2000 notice is mailed to a taxpayer when income reported from third-party sources such as an employer, bank, or mortgage company does not match the income reported on the tax return.

It is not a tax bill or a formal audit notification; it merely informs you about the information the IRS has received and how it affects your tax. It is, however, important to pay attention to what your CP2000 notice states because interest accrues on your unpaid balance until you pay it in full.

If you receive a CP2000 notice in the mail complete the response form. If your notice doesn’t have a response form, then follow the notice instructions. Generally, you must respond within 30 days of the date printed on the notice. You may request additional time to respond, and if you cannot pay the full amount that you owe, you can set up a payment plan with the IRS.

If the information on the CP2000 notice is not correct, then check the notice response form for instructions on what to do next. You also may want to contact whoever reported the information and ask them to correct it.

If the information is wrong because someone else is using your name and social security number please contact the IRS and let them know. You can also use the link on the IRS Identity theft information web page to find out more about what you can do.

If you do not respond, the IRS will send another notice. If the IRS does not accept the information provided, it will send IRS Notice CP3219A, Statutory Notice of Deficiency, and information about how to challenge the decision in Tax Court.

Do I Need to Amend my Return?

If the information displayed in the CP2000 notice is correct, you don’t need to amend your return unless you have additional income, credits or expenses to report. If you agree with the IRS notice, follow the instructions to sign the response page and return it to the IRS in the envelope provided.

If you have additional income, credits or expenses to report, complete and submit a Form 1040-X, Amended U.S. Individual Income Tax Return. If you need assistance with this, please call the office.

 

How to Avoid Receiving an IRS CP2000 notice:

  • Keep accurate and detailed records.
  • Wait until you receive all of your income statements before filing your tax return.
  • Check the records you receive from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they are correct.
  • Include all your income on your tax return including that from a second job or fees derived from the sharing economy (e.g. renting a spare room out on Airbnb).
  • Follow the instructions on how to report income, expenses and deductions.
  • File an amended tax return for any information you receive after you’ve filed your return.
  • Use a professional tax preparer who will help you avoid mistakes and find credits and deductions you may qualify for.

If you have any questions about IRS notices, help is just a phone call away.

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Deducting Business-Related Car Expenses

If you’re self-employed and use your car for business, you can deduct certain business-related car expenses.

There are two options for claiming deductions:

Actual Expenses. To use the actual expense method, you need to figure out the actual costs of operating the car for business use. You are allowed to deduct the business-related portion of costs related to gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments).

Standard Mileage Rate. To use the standard mileage deduction, multiply 58 cents (in 2019) by the number of business miles traveled during the year.

class=”tip”>Car expenses such as parking fees and tolls attributable to business use are deducted separately no matter which method you choose.

Which Method Is Better?

For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses. You may use either of these methods whether you own or lease your car.

To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. In subsequent years, you can choose to use the standard mileage rate or actual expenses. If you choose the standard mileage rate and lease a car for business use, you must use the standard mileage rate method for the entire lease period – including renewals.

Opting for the standard mileage rate method allows you to bypass certain limits and restrictions and is simpler; however, it’s often less advantageous in dollar terms. Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

The standard mileage rate may understate your costs, especially if you use the car 100 percent (or close to it) for business.

Documentation

Tax law requires that you keep travel expense records and that you show business versus personal use on your tax return. Furthermore, if you don’t keep track of the number of miles driven and the total amount you spent on the car, your tax advisor won’t be able to determine which of the two options is more advantageous for you at tax time. It is essential to keep careful records of your travel expenses (if you use the actual expenses method you must keep receipts) and record your mileage.

You can use a mileage logbook or if you’re tech-savvy, an app on your phone or tablet. A number of phone applications (apps) are available to help you track your business expenses, including mileage and billable time. These apps also allow you to create formatted reports that are easy to share with your CPA, EA, or tax preparer.

To simplify your recordkeeping, consider using a separate credit card for business.

Questions?

Don’t hesitate to call and find out which deduction method is best for your particular tax situation.

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Your Canceled Debt Could Be Taxable

Generally, debt that is forgiven or canceled by a lender is considered taxable income by the IRS and must be included as income on your tax return. When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive a Form 1099-C, Cancellation of Debt, from your financial institution or credit union. Form 1099-C shows the amount of canceled or forgiven debt that was reported to the IRS. Creditors who forgive $600 or more of debt are required to issue this form.

If you receive a Form 1099-C and the information is incorrect, contact the lender to make corrections. If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Please call if you have questions regarding joint liability of canceled debt.

Exceptions and Exclusions

If you have debt forgiven or canceled and receive a Form 1099-C, you might qualify for an exception or exclusion. If your canceled debt meets the requirements for an exception or exclusion, then you don’t need to report your canceled debt on your tax return. Under the federal tax code, there are seven exceptions and five exclusions. Here are the five most commonly used:

1. Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances

In most cases, you do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance. For example, if an acquaintance or family member loaned you money (and for whom you signed a promissory note) died and relieved you of the obligation to pay back the loan in his or her will, this exception would apply.

2. Cancellation of certain qualified student loans

Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as a result of this type of provision, the cancellation of this debt is not included in your gross income. You may also qualify for this exception if you receive student loan repayment assistance or you become permanently and totally disabled.

3. Canceled debt paid by a cash basis taxpayer (most taxpayers) would be deductible

If you use the cash method of accounting, then you do not realize income from the cancellation of debt if the payment of the debt would have been a deductible expense.

For example, in 2018, you own a farm and hire an accounting firm, paying for their services with credit. In 2019, due to financial troubles, you are not able to pay off your farm debts and your accountant forgives a portion of the amount you owe for their services. If you use the cash method of accounting you do not include the canceled debt as income on your tax return because payment of the debt would have been deductible as a business expense.

4. Debt canceled in a Title 11 bankruptcy case

Debt canceled in a Title 11 bankruptcy case is not included in your income.

5. Debt canceled during insolvency

Do not include a canceled debt as income if you were insolvent immediately before the cancellation. In the eyes of the IRS, you would be considered insolvent if the total of all of your liabilities was more than the Fair Market Value (FMV) of all of your assets immediately before the cancellation.

For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account).

Here’s an example: Let’s say you owe $25,000 in credit card debt, which you are able to negotiate down to $5,000. You have no other debts and your assets are worth $15,000. Your canceled debt is $20,000. Your insolvency amount is $10,000. Because you are insolvent at the time of cancellation, you are only required to report the $10,000 on your tax return.

Reporting Canceled Debt

If you receive a Form 1099-C, don’t ignore it. Although you may not have to report the entire amount shown on Form 1099-C as income unless you meet one of the exceptions or exclusions discussed above, you must report any taxable canceled debt reported on Form 1099-C as ordinary income on one of the following:

  • Schedule 1 (Form 1040 or Form 1040NR), if the debt is a nonbusiness debt;
  • Schedule C or Schedule C-EZ (Form 1040), if the debt is related to a nonfarm sole proprietorship;
  • Schedule E (Form 1040), if the debt is related to non-farm rental of real property;
  • Form 4835, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or
  • Schedule F (Form 1040), if the debt is farm debt and you are a farmer.

If you exclude canceled debt from income under one of the form 1099-C exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. If this is the case, then you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes.

Exceptions do not require you to reduce your tax attributes.

Please call if you have any questions about whether you qualify for debt cancellation relief.

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Special Tax Breaks for Members of the Armed Forces

Active members of the U.S. Armed Forces should be aware that there are special tax benefits available to them such as not having to pay taxes on some types of income or more time to file and pay their federal taxes. If you’re an active member of the armed forces, here’s what you should know about these important tax benefits.

1. Moving Expenses. If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you may be able to deduct some of your unreimbursed moving expenses.

2. Combat Pay Exclusion. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, military pay you received for military service during that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

3. Earned Income Tax Credit (EITC). You can also elect to include your nontaxable combat pay in your “earned income” when claiming the Earned Income Tax Credit. In 2019, this credit is worth up to $6,557 for low-and-moderate-income service members. A special computation method is available for those who receive nontaxable combat pay. Choosing to include it in taxable income may boost the EITC, meaning that you owe less tax or get a larger refund.

4. Extension of Deadline to File a Tax Return. An automatic extension to file a federal income tax return is available to U.S. service members stationed abroad. Also, those serving in a combat zone typically have until 180 days after they leave the combat zone to file and to pay any tax due.

5. Joint Returns. Both spouses normally must sign a joint income tax return, but if one spouse is absent due to certain military duty or conditions, the other spouse may be able to sign for him or her. A power of attorney is required in other instances. A military installation’s legal office may be able to help with this.

6. ROTC Students. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as pay received during summer advanced camp, is taxable.

If you have any questions about this topic, don’t hesitate to call.

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10 Facts about the Adoption Tax Credit

If you adopt a child in 2019, you may qualify for a tax credit, and if your employer helped pay for the costs of an adoption, you may be able to exclude some of your income from tax. Here are ten facts you should know about the Adoption Tax Credit.

1. Credit or Exclusion. The credit is nonrefundable. This means that the credit may reduce your tax to zero. If the credit is more than your tax, you can’t get any additional amount as a refund. If your employer helped pay for the adoption through a written qualified adoption assistance program, you may qualify to exclude that amount from tax.

2. Maximum Benefit. The maximum adoption tax credit and exclusion for 2019 is $14,080 per child.

3. Credit Carryover. If your credit is more than your tax, you can carry any unused credit forward. This means that if you have an unused credit in 2019, you can use it to reduce your taxes for 2020. You can do this for up to five years, or until you fully use the credit, whichever comes first.

4. Eligible Child. An eligible child is under age 18. This rule does not apply to persons who are physically or mentally unable to care for themselves.

5. Qualified Expenses. Adoption expenses must be directly related to the adoption of the child and be reasonable and necessary. Types of expenses that can qualify include adoption fees, court costs, attorney fees, and travel.

6. Domestic Adoptions. For domestic adoptions (adoption of a U.S. child), qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment even if the adoption is never finalized.

7. Foreign Adoptions. For foreign adoptions (adoption of an eligible child who is not yet a citizen or resident of the U.S.), qualified adoption expenses paid before and during the year are allowable as a credit for the year when it becomes final.

8. Special Needs Child. If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you didn’t pay any qualified adoption expenses.

9. No Double Benefit. Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you can’t claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.

10. Income Limits. The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount you can claim depending on the amount of your income.

Please contact the office if you have any questions or would like additional information about this tax credit.

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IRS Ends Tax Transcript Fax and Third-Party Services

Due to ongoing efforts to protect taxpayers from identity thieves, the Internal Revenue Service no longer offers tax transcript faxing service and third-party mailing of tax returns and certain transcripts. These measures are effective June 28 and July 1, 2019 respectively, and affect individual and business transcripts.

Background

Tax transcripts are summaries of tax return information and have increasingly become a target of criminal activity. Identity thieves impersonate taxpayers or authorized third parties and use tax transcripts to file fraudulent returns for refunds. These fraudulent returns are difficult to detect because they mirror a legitimate tax return.

In September 2018, the IRS began to mask personally identifiable information for every individual and entity listed on the transcript and works with tax professionals like me to make sure that we have what we need for tax preparation and representation for our clients.

Here is what is visible on the new tax transcript:

  • Last four digits of any SSN listed on the transcript: XXX-XX-1234
  • Last four digits of any EIN listed on the transcript: XX-XXX1234
  • Last four digits of any account or telephone number.
  • First four characters of the last name for any individual (first three characters if the last name has only four letters).
  • First four characters of a business name.
  • First six characters of the street address, including spaces.
  • All money amounts, including wage and income, balance due, interest and penalties.

Faxing Service Ends June 28

Starting June 28, 2019, the IRS will stop faxing tax transcripts to both taxpayers and third parties, including tax professionals. This action affects individual and business transcripts. Several options remain, however, for obtaining a tax transcript, including using the IRS2Go app to get transcripts online or by mail. Taxpayers can also call 800-908-9946 to access an automated Get Transcript by Mail feature, or submit Form 4506-T or 4506T-EZ, Request for Transcript of Tax Return, to have a transcript mailed to the address of record.

Certain Third-party Mailings Stop July 1

Effective July 1, 2019, the IRS will no longer provide transcripts requested on Form 4506, Form 4506-T and Form 4506T-EZ to third parties. These forms are often used by lenders and others to verify income for non-tax purposes and have been amended to remove the option for mailing to a third-party. Taxpayers may continue to use these forms to obtain a copy of their tax return or a copy of their tax transcripts.

Among the largest users are colleges and universities verifying income for financial aid purposes. This change will NOT affect use of the IRS Data Retrieval Tool through the Free Application for Federal Student Aid (FAFSA) process.

Third parties who use these forms for income verification have other alternatives such as Income Verification Express Service (IVES). Taxpayers may choose to provide transcripts to requestors instead of authorizing the third party to request these transcripts from the IRS on their behalf.

Because the taxpayer’s name and Social Security number are now partially masked, the IRS also created a Customer File Number space that can be used to help third parties match transcripts to taxpayers. Third parties can assign a Customer File Number, such as a loan application number or a student identification number. The number will populate on the transcript and help match it to the client/student.

If you have any questions about tax transcripts, don’t hesitate to call.

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Tax Reform Reminder: Changes to Itemized Deductions

Under tax reform, many tax laws changed, including those affecting itemized deductions. While many people no longer need to itemize due to the nearly doubling of the standard deduction, certain taxpayers whose total deductions exceed the standard deduction may still want to consider itemizing. As a reminder, here is quick summary of how tax reform affected four itemized deductions used by many taxpayers in prior years:

1. Medical and Dental Expenses. Taxpayers can deduct the part of their medical and dental expenses that are more than 7.5 percent of their adjusted gross income.

2. State and Local Taxes (SALT). The law limits the deduction of state and local income, sales, and property taxes to a combined total deduction of $10,000. The amount is $5,000 for married taxpayers filing separate returns. Taxpayers cannot deduct any state and local taxes paid above this amount.

3. Home Equity Loan Interest. Taxpayers can no longer deduct interest paid on most home equity loans unless they used the loan proceeds to buy, build or substantially improve their main home or second home.

4. Miscellaneous Deductions. The new law suspends the deduction for job-related expenses or other miscellaneous itemized deductions that exceed two percent of adjusted gross income. This includes, among other things, unreimbursed employee expenses such as uniforms, and union dues.

If you have any questions or would like more information about itemized deductions after tax reform, don’t hesitate to call.

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Issuing Credit Memos and Refunds in QuickBooks

QuickBooks is very good at helping you get paid by your customers. It comes equipped with customizable invoice templates for billing customers and sales receipts for recording instant sales. It supports online payments, so you can accept debit or credit cards and electronic checks. It simplifies the process of recording payments and it offers reports that let you keep track of it all.

There are times, though, when you have to issue a payment to a customer. QuickBooks provides forms that allow that transfer of funds: credit memos and refunds. Do you know when and how they should be used? Here are the basics:

Credit Memos

A credit memo is just what it sounds like. A customer returns an item for which they’ve already paid, and you have to credit him or her for its cost. This is the more complicated of the two and requires more bookkeeping since you’re tracking the sale, its payment, and the returned item. You can deal with the amount of the credit by:

  • Retaining the funds in the customer account.
  • Issuing a refund.
  • Applying it to the next open invoice.

 
Figure 1: When you issue a credit memo to a customer, you have three options for returning the money they paid.

To create a credit memo, click Refunds & Credits on QuickBooks’ home page or open the Customers menu and select Create Credit Memos/Refunds. The Credit Memo window opens. Select the correct Customer:Job. In the line item section of the form, choose the merchandise returned in the Item column and enter a quantity. Repeat the process if more than one item was returned, then click Save & Close. The Available Credit window, pictured above, will open. Click the button in front of the option you want.

Select the first option if that’s what you want and click OK. The window will close, and the customer will have had that credit amount applied to his or her own account. You can see this in the Customer Center if you click on Customers in the navigation toolbar (or Customers | Customer Center). You can then either click on the Customers & Jobs tab and scroll down until you can highlight your customer’s record or click on Transactions | Credit Memos.

Click on Give a Refund to open the Issue a Refund window. Everything should be filled in here except for the payment method. If you select Cash from the Issue this refund via drop-down list and then pick the correct account from the list that opens, the refund amount will be subtracted from the account. Select Check and then the Account, and check the box in front of To be printed. That refund will be in the list the next time you open the File menu, then Print Forms | Checks. Choose a credit card and check the box in front of Process credit card refund when saving box to issue a credit card refund automatically.

Tip: If you can’t work with credit cards because you don’t have a merchant account, please call and have a QuickBooks professional help you set this up.

 
Figure 2: The Issue a Refund window.

If there is an open invoice, the Apply Credit to Invoices window will open, containing a list of unpaid bills. If there isn’t already a checkmark in front of the invoice you want to apply it too, click in the first column to create one. QuickBooks will tell you how much credit was applied and whether any remains. When you’ve checked the screen for accuracy, click Done.

Dealing with Overpayments

Let’s say a customer is catching up on multiple outstanding invoices and he or she sends you a check for the total but overpays you. Open the Receive Payments window by going to Customers | Receive Payments or clicking Receive Payments on the home page. Select the customer and enter the Payment Amount and Check #. QuickBooks will have put a checkmark in front of all the outstanding invoices listed to indicate they’ve been paid.

In the lower left corner, you’ll see a section titled Overpayment. The extra amount and your two options for dealing with it appear here. You can either credit the customer or issue a refund. Click the action you want to take, then save the transaction.

 
Figure 3: If a customer overpays you, you can use QuickBooks’ built-in tools to credit him or her.

You can also issue refunds through the Write Checks window, but this is a more complicated procedure. It’s easier to process a credit memo.

If you’re at all unclear about what is described here, please contact the office for assistance. Refunds or credits that come through incorrectly (or not at all) can make customers very unhappy and may affect future sales. Why not let a QuickBooks professional help you get it right the first time?

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Tax Due Dates for July 2019

July 10

Employees Who Work for Tips – If you received $20 or more in tips during June, report them to your employer. You can use Form 4070.

July 15

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in June.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in June.

July 31

Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2019. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 12 to file the return.

Employers – Federal unemployment tax. Deposit the tax owed through June if more than $500.

Employers – If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar-year 2018. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.

Certain Small Employers – Deposit any undeposited tax if your tax liability is $2,500 or more for 2019 but less than $2,500 for the second quarter.


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