Tax Regulations

Causes Of The Bank Reconciliation Issues

• While working on your business accounting in QuickBooks you could have problems with reconciling the bank or credit card account
•  The main causes of the bank reconciliation issues are:
  • Missing checks or transactions
  • Some incorrect adjustments
  • Mistakes when entering the transactions’ data
  • Changes made to past transactions

What Should You Verify When Doing Your Bank Reconciliation?

• In the QuickBooks reconciliation screen, check that you entered the correct ending balance and statement ending date so that they match the information on the bank or credit card statement
• Verify each transaction’s information (vendor name, amount, date, description) you see in the QuickBooks reconciliation module with the information on the bank or credit card statement
• The reconciliation difference should be zero, otherwise look after new, changed or deleted transactions
• After you arrived to zero reconciliation difference, if there are any transactions in the reconciliation module left unmarked, check that these are true outstanding transactions, meaning checks that you have written, but did not clear the bank or amounts that you deposited, but did not clear the bank
• After you finish the reconciliation, check that your register balance on the reconciliation report matches the bank balance shown on the balance sheet report for the respective date

What Can You Do If You Have Issues?

Print Reconciliation Discrepancy Reports

• If you have problems with the beginning balance when trying to reconcile, you can print some reports to help you fix the reconciliation:
  • If you use QuickBooks desktop, you should be able to print a “Reconciliation Discrepancy” report to see what changes were made since your last reconciliation
  • For QuickBooks online you should be able to see the amount or amounts that changed:
    • From the “Accounting” tab:
      • choose Reconciliation
      • then choose the account you want to reconcile
      • go to History by account on the right top corner of the page

Undo Previous Reconciliations

• If you’re unable to find any issues in your accounts, you may need to undo the previous reconciliation until the opening balance is correct
• If someone edited or deleted a transaction from years ago, you may need to undo your reconciliations for the past few years to get to where the opening balance is correct
• To undo the reconciliation:
  • Go to the Accounting menu
  • Select History by account on the top right corner
  • Select the account you want to undo the reconciliation for
  • On the right part of the page, under “Action”, click on the “View Report” arrow and select “Undo”

Change The Transactions’ Status

• Instead of undoing so many reconciliations and create so much work, you can:
  • try to find the problem transactions in your bank register; to do that:
    • go to the Accounting menu
    • select Chart of Accounts
    • find the account you want and select View register
  • once you identified the problem transactions, verify that their status is correct (R = reconciled, C = cleared, Blank = outstanding/uncleared); if it is not, you can change their status by double clicking on the status box until you obtain the desired status, so that you can fix your beginning bank balance in the reconciliation module

In some cases, users make journal entries to force their QuickBooks balance to match the bank statement ending balance, but we recommend you ask an accountant for guidance in this case, because an adjustment may create other problems.

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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Automobiles

• In the previous blog we talked about the standard mileage rate method, in this blog we will discuss the actual expense method
• Instead of using the standard mileage rate method for computing business automobile expenses, you can use the actual expense method
• If you choose the actual expense method you should know that this method is based on calculating all the money that you actually spent operating your vehicle multiplied by the business use percentage
• If you chose the actual expense method for the first year the vehicle is used, you must use the actual expense method for all subsequent years

Records you should keep

• In addition to mileage records, which should include the business purpose and destination of the trips, you should also keep records showing the exact amounts paid, as well as the dates of the expenses for:
  • the automobile (the purchasing documents)
  • any improvements and repairs
  • gasoline, insurance, registration fees, maintenance, and any other vehicle related expenses

Costs included in the actual expenses

• The costs included in the actual expenses are:
  • Depreciation
  • Licenses
  • Gas
  • Oil
  • Lease payment
  • Insurance
  • Garage rent
  • Registration fees
  • Repairs
  • Tires
  • Interest on loan
• You can also claim tolls and parking fees, in addition to the above expenses; these expenses can be claimed regardless if you use the standard mileage rate method or the actual expense method

Business percentage

• If you use the actual expense method, you should:
  • calculate the business use percentage of the vehicle
  • keep records of the total miles driven and the business miles driven to determine the business use percentage

Five or more cars

• If you own or lease five or more cars that are used for business at the same time, you can’t use the standard mileage rate for the business use of any car
• However, you may be able to deduct your actual expenses for operating each of the cars in your business
• You aren’t using five or more cars for business at the same time if you alternate using (use at different times) the cars for business
• For example:
  • You own a car and four vans that are used in your housecleaning business
  • Your employees use the vans, and you use the car to travel to various customers
  • You can’t use the standard mileage rate for the car or the vans
  • This is because all five vehicles are used in your business at the same time
  • You must use the actual expense method for all vehicles

You must select the option to use either the standard mileage rate method or the actual expense method considering all the conditions and choosing the most advantageous method for you.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Automobiles

• If you use your vehicle for business purposes, you may generally use one of the two following methods to compute deductible expenses:
  • Standard mileage rate
  • Actual car expenses
• In this blog we are going to talk about the standard mileage rate

Multiple automobiles

• If you have more than one automobile, you should pay 100% of the costs for the primary business vehicle that is titled to your Corporation/LLC directly from your business bank account or using business funds and use the actual car expense method
• On the other hand, for the second automobile, if it is titled to you personally and not to your Corporation/LLC:
  • probably you will need to have in place an employer reimbursement accountable plan for your Corporation or LLC (see Publication 463 for requirements)
  • track miles and submit mileage reimbursement to the Corporation/LLC by December 31st
  • you should pay the expenses from your personal bank account

Standard mileage rate method

• Instead of deducting the actual vehicle expenses, a taxpayer can use the standard mileage rate method
• You can use this method as a substitute for the following actual expenses:
  • Depreciation
  • Lease payments
  • Maintenance and repairs
  • Gas and oil
  • Insurance
  • Vehicle registration fees
• You must have records showing the below information, and actually these records must be kept regardless if you use the standard mileage rate method or the actual car expense method:
  • total miles driven throughout the year, regardless if the miles were for business purposes or not
  • the number of miles driven for business purposes
  • the business purpose of the business trip
• The mere existence of a mileage log is not sufficient if the entries are too generalized or not supported by other corroborating evidence
• In addition to the mileage records, you should keep substantiation for other deductible expenses, such as auto loan interest, personal property taxes, parking fees, and tolls, which are deductible based on the business use percentage along with the standard mileage rate
• You can see here the rates for 2023: IRS issues standard mileage rates for 2023; business use increases 3 cents per mile | Internal Revenue Service

Standard mileage rate not allowed

• You can not use the standard mileage rate method if you:
  • Use five or more automobiles at the same time for business, such as in a fleet operation
  • Claimed:
    • a depreciation deduction for the automobile using any method other than straight-line depreciation over its estimated useful life
    • a Section 179 deduction on the vehicle
    • a special depreciation allowance on the vehicle
    • actual expenses for an automobile that is leased
  • Have an employer-provided business auto and unreimbursed auto expenses

You must choose the option to use the standard deduction by the tax return due date, including extensions, but you can switch in later years to the actual car expense method. If instead you choose the actual expense method for the first year the vehicle is used for business, then you must use the actual expense method in all subsequent years.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Before filing your taxes, consider whether you should itemize your deductions or take the standard deduction.

The standard deduction reduces your income by a certain amount, while itemized deductions consist of a list of permissible charges. You can claim whichever is the most advantageous.

Standard Deduction

If you make the standard deduction claim, the IRS bases the standard deduction on your filing status and assigns a fixed amount to it. The standard deduction amounts for 2022 tax returns (filed in 2023) are:

• $12,950 for single taxpayers and married individuals filing separate returns
• $19,400 for heads of household
• $25,900 for married couples filing jointly or qualifying surviving spouse

Itemized Deductions

If you itemize your deductions, you can claim amounts you actually spend on certain deductible expenses such as:

• unreimbursed medical and dental expenses that exceed 7.5% of Adjusted Gross Income
• allowable taxes up to $10,000, for example:
  • property and some personal taxes
  • state and local income taxes
  • foreign income tax
• mortgage interest (reported by bank to you on form 1098):
  • has to be for main or second home
  • the taxpayer main or second home must secure the debt generating the interest
  • the debt proceeds must be used to buy, build, or substantially improve main home or second home
  • the accumulated debt is limited to $750,000
• personal casualty and theft losses from a federally declared disaster area
• donations to a qualified charity (up to 60% of Adjusted Gross Income)

 If you choose to itemize, you must include Schedule A with your tax return and list all of these expenses on it.

Advantages on choosing the standard deduction

• IRS does not require to keep records of your expenses or keep track of supporting documents such as bank statements, medical bills, tax forms, etc.
• The standard deduction has increased significantly compared to a few years ago and the IRS updates this amount for inflation every year
• Taxpayers aged 65 or older or blind can claim higher standard deductions:
  • the deduction is increased by $1,750 for single taxpayer or head of household
  • $1,400 for married filing jointly
  • if you are both 65 and blind, the additional deduction is doubled

Disadvantages on choosing the standard deduction

• The IRS does not allow you to use the standard deduction if you are married filing separately and your spouse uses the itemized deductions because you and your spouse must be on the same page when choosing the deductions
• In addition, if someone can claim you as a dependent, your standard deduction will be lower
• You could pay more in taxes when you choose to take the standard deduction instead of the itemized deductions, if your itemized deductions amount exceeds the standard deduction amount

Advantages on choosing the itemized deductions

• You could save some money: if your itemized deductions are higher than the standard deduction, your tax bill will be lower
• Your tax bill will change if you itemize even slightly more deductions than the standard deduction:
  • let’s suppose you are filling single, and you have $14,450 in itemized deductions
  • although it is $1,500 more than the standard deduction, which is $12,950 for single taxpayers, you won’t actually pay $1,500 les in taxes
  • always keep in mind that the deductions are deducted from your taxable income
  • and, in this case, itemizing deductions resulted in a $1,500 reduction in your taxable income, not in your tax due

Disadvantages on choosing the itemized deductions

• You have to keep receipts, bank statements and other documentation
  • for example, for cash charitable contributions IRS requires you to have:
  • if the contribution is less than $250:
    • bank records such as: 
      • canceled check
      • bank statement
      • credit card statement
    • a document showing: date, amount of the contribution, and the organization name
    • receipt with date, contribution amount, and organization name
    • payroll record, if made by payroll deduction
  • if the contribution is $250 or more:
    • same as above, plus either payroll record or a written acknowledgement from the organization showing:
      • date and amount of contribution
      • if any goods or services, other than intangible religious benefits were provided by the organization and a good faith estimate of their value
      • a statement that the only benefit the taxpayer received was an intangible religious benefit (if applicable)
• The filing is more challenging because you will have to file a Schedule A and possibly other tax form

The tax filing deadline of April 18, 2023, is quickly coming during tax season 2023. The sooner you begin to prepare for the tax season, the better.

We recommend you keep your documents, such as interest statements, bank statements, receipts, 1099 forms, W-2 forms, and other documents in a secure location and properly organized, preferably in electronic format. For example, if you scan a receipt you can save the pdf file with a name such as
year/month/date/, vendor name and the amount. And you can create separate folders for each year.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

• Sole proprietorships have one owner. The IRS taxes the sole proprietors on all profits as personal income. The owner is personally liable for any business debts.
• Partnerships are similar with sole proprietorships but can have an unlimited number of owners. Partnerships are flow through entities. This means the owners report their share of profits as personal income on their tax returns.
• C corporations have unlimited shareholders who each own part of the company. C Corporations distribute profits to owners as dividends. Owners are not personally liable for business debts.
• S corporations are flow through entities that can have up to 100 owners. Owners are taxed on their share of profits. Owners are not personally liable for business debts.

In addition to affecting how a business operates and who is responsible for business debts, the business structure impacts how much a company and/or its owners pay in taxes. The U.S. tax code is complex and includes four main tax categories:

• Income tax – paid on profits
• Employment tax – employee Social Security and Medicare contributions
• Self-employment tax – Social Security and Medicare contributions for self-employed individuals
• Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

The state(s) in which the company operates might also impose taxes, such as: sales tax, franchise tax, state income tax, property tax on the business personal assets, real estate tax. The business structure impacts some of these taxes.

That is why it is important to choose the most beneficial business structure from the beginning. Unfavorable business structures can be very costly.

Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received from customers) and allowable expenses are deducted to arrive at net income. How you calculate this figure dependents upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Certain business structures are not required to pay Social Security and Medicare taxes on a child’s wages, if child is under 18 years old. They can also avoid Federal Unemployment Tax Act (FUTA) tax.

Retirement contributions

Retirement plans can be a very good tool to reduce taxes, as well as saving for retirement. As a small business owner, you should look at options such as SEP IRA, solo 401(k), SIMPLE plan, or even more complex plans, depending on the business structure, what other employees the business has, the cash flow and plans for the future.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

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When it comes to retirement, we all think of contributions to 401K plans. Many employers offer 401K plans to their employees for retirement savings. Contributions towards these plans are automatically withdrawn from your salary and invested in the funds you choose.

Many times, employers offer to match a portion of what you save, usually between 4% and 6% of your pay. This offer makes it an attractive retirement savings avenue.

Traditional 401K

In case of a traditional 401K plan, the employer takes out the contributions pre-tax, which means the amount of contribution reduces your taxable income, thereby reducing the tax amount you’ll owe at the end of the year. Just a side note here: you will still pay payroll taxes on your 401K contributions. Conversely, when you take out distributions from your 401K plan, you will have to pay income tax on the distributions at the tax rate that applies when you take the money out. The advantage is that if your current tax rate is high compared to the estimated tax rate when you retire, then you will pay less tax on the contributed amount. The disadvantage is that you will pay tax on the earnings accumulated in your traditional 401K as you take them out.

Roth 401K

However, in the case of a Roth 401K though, the contributions are not pretax, so they do not reduce your taxable income. But conversely, when you take the money out of your Roth 401K you will not pay tax on the amount contributed and you will not pay tax on any earnings in your Roth 401K. But you will pay tax on any employer matching contributions, which will go into a separate traditional 401K account.

401K Contribution Limits

It is important to note that these contributions do have limits. There is a limit on how much you, as an employee can contribute and there is an overall limit on contributions towards your account that includes contribution by you, your employer matching and elective deferrals. The IRS taxes any excess contributions not withdrawn by April 15th at a rate of 6% per year for each year the excess contribution amount remains in the account.

 In a recent news release, IRS announced an increase to these limits. For 2022 you, as an employee can contribute up to $20,500 while keeping the combined contribution limit towards your 401K plan to the lesser of 100% of your compensation or $61,000. It is important to note that the IRS has not announced any change in the catchup contribution amount available to you if you are 50 years and above. It remains at $6,500 for 2022.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.