Tax Regulations

Old Rule: Tax-Exempt Organizations Reported Contributors’ Information on Schedule B, Form 990, 990-EZ, 990-PF

Until now, the regulations for tax-exempt organizations under 501(a) required filling of  schedule B. The non-profits organizations reported on schedule B  the names, addresses and other information of their contributors that contributed more than a certain limit, in general over $5000, during the filing tax year. Contributions could be either in the form of cash, securities, or other type of property.

The reporting organizations had to complete and attach Schedule B to their Form 990, 990-EZ or 990-PF, unless the organization certified that it didn’t meet the filing requirements of this schedule.

Revenue Procedure 2018-38 Eliminates Reporting Contributors’ Information for Certain Organizations

Recently IRS announced that organizations exempt from tax under 501(a) of the Internal Revenue Code, other than organizations described in 501(c)(3), are no longer required report the names and addresses of their contributors on the Schedule B.
The IRS can still require that this information is made available to them. That is why you should  still collect and keep this information in your records.

Please observe that the IRS still requires some 501(c)3 organizations to report their contributors’ information by filing Schedule B.

Here is a link to Revenue Procedure 2018-38. The IRS published it in  IRB 2018-31 dated July 30, 2018.

Give us a call today, to find out how we can assist you and your non-profit organization.

A few dollars here, a few dollars there. What do you do when the money from a hobby starts to add up?

Maybe you didn’t consider it a real business when you first started working on friends’ computers or building birdhouses or designing logos and other graphics for people. At first, you just charged for materials. But eventually, you started charging more for your time, and then you realized that you were making a profit from your work.

That’s when the Internal Revenue Service gets interested. If you’ve turned a profit for three of the last five years (including the current one), the IRS considers your hobby to be a business, complete with the obligation to pay income taxes.

The good news is, of course, that you can start writing off some expenses. And there’s something to be said for building something from nothing on your own. But you need to consider whether it’s time to formalize your venture by filing a Schedule C.

When it’s time to stop calling it a hobby and call it a business, you’ll be filing a Schedule C with your Form 1040.

9 Questions For Your Hobby Activity

There is some gray area in determining the difference between being a hobby or a business in the eyes of the IRS. If you think you’re a business and you’re happily doing what you’re doing to make a profit, you’re a business.

Maybe, though, you’d rather your efforts remained a hobby. There’s no absolute, cut-and-dried test to determine your status. But there are nine issues that the IRS would like you to consider. The agency wants you to “…take into account all facts and circumstances with respect to the activity. No one factor alone is decisive.”

Here, then, is what you’ll need to ask yourself.

• Whether you’re carving little wooden figures, creating your own jewelry, or writing online content for people, are you doing it in a “businesslike manner?”
• Think of the time and effort you put into your work. Are they enough that it seems you’re clearly trying to make your venture profitable?
• Do you need the money you’re making? Does it represent at least a part of your livelihood?
• What about the losses you’ve taken? Are they caused by “circumstances beyond your control?” Or do you consider them normal for a fledgling small business?
• Have you ever changed the way you do things to turn a higher profit?
• Are you going it alone, or are people advising you? Do you–or they–know enough about what’s required to turn your hobby into a successful business?
• Did you make a profit in previous years from doing the same activity?
• Do you make a profit some years? How much?
• Are you anticipating making a profit in future years from the “appreciation of the assets used in the activity?”

Claiming Expenses

You’ll claim business expenses on the Schedule C.

The IRS does have rules about what you may and may not claim on the Schedule C as business expenses. You’ll learn all about them the first time you file taxes as a business.

The agency’s general rule of thumb is that you can deduct “ordinary and necessary expenses” required by the work that you do. Other words it uses to define the allowable expenses are:

• Common
• Accepted, and,
• Appropriate.

Here’s where you may need our help. You can, of course, call us if you want to talk about whether you are indeed a business. You may also want to explore your options for your business structure. Many one-person ventures are sole proprietors, but there are alternatives.

Determining what you can and cannot claim as legitimate business expenses may be challenging for you the first time or two around. We can help you in three ways here. First, we’ll get you set up with good cloud-based applications or mobile apps that can help you with your ongoing record-keeping. Attempting to run a business on paper is very difficult, and things can slip through the cracks.

We’re also available to work with you on your income tax return. Finally, once we’ve learned about your business, we can get you started on a year-round tax planning strategy. No one likes surprises at tax filing time, and we’d be happy to help you avoid them.

Call us today.

New Form 1040

IRS is working on replacing the current Form 1040 as well as Forms 1040A and 1040EZ for tax year 2019. The IRS is trying to finalize the new form 1040 over the summer, but they did release an early draft this last Friday. This is good news for taxpayers that have simpler financial situations.

Early Draft For New Form 1040 Released

The new draft, which has a “building block” approach, is the size of a postcard:

You can find out more information about the new draft on the IRS website.

If you need help with your taxes, we are here to help. Give us a call.

Are your social security payments taxable? They may be. The IRS’s rules for taxing Social Security benefits could require some studying on your part.

If you’ve received Social Security benefits for more than a year, you probably already know the answer to this question. But if you started receiving those government-issued checks or direct deposits in the last year, now’s the time to find out.

As you know, many IRS rules are absolutely cut-and-dried. But there are many others with exceptions, and this is one of them. You have to consider numerous factors in determining whether your Social Security benefits are taxable.

Complex Calculations

In most cases, the maximum taxable portion of your Social Security benefit distributions is 50 percent. You could, though, pay tax on up to 85 percent in one of two scenarios:

• • If you add one half of your benefits to the total of all your other income and come up with more than $34,000 or $44,000 if married filing jointly.
  • You file married filing separately and you lived with your spouse for any length of time during the year.

Now comes the tricky part: calculating exactly what percentage of your Social Security benefits is taxable. Your 1040 or 1040A instructions should contain a very complex worksheet that can help you. But this, like any other element of your income tax return, must be absolutely correct, or you’ll be receiving post-filing correspondence from the IRS.

It’s no small task to do the calculations and reporting required to find out what–if any–percentage of your Social Security benefits are taxable.

There are many exceptions to the rules and formulas we’ve discussed here. And you must fully understand them to come up with the right answer. This will involve poring over IRS instructions that may be difficult for you to decipher. You can find more information in IRS Publication 915.

Start Now

If you know that you’ll start receiving Social Security benefits in 2018, it would be a good idea to start thinking soon about how this will affect your overall income tax obligation. We always advise year-round tax planning. Such an approach not only helps you avoid unpleasant surprises at filing time – it may also help you take action before the end of the year to minimize what you owe. We’d be happy to meet with you and get you started on better, smarter preparation for taxes.

Call us today.

Businesses often set up websites to sell their products and attract new customers. The proper method for deducting website development costs depends on several factors. Such factors are how the website was created and whether the website was part of the company’s “start-up” costs.

Software costs.

Website designs produced with sophisticated programming languages generally can qualify as software. The IRS has safe harbor rules for deducting software costs. These rules distinguish between software produced by independent contractors and software produced by in-house employees.

Generally, if the design was “purchased” from an outside contractor who remains at economic risk for the performance of the software, the deduction for the design costs must be spread over a three-year period. It may also qualify for the section 179 deduction and the special depreciation allowance. However, if the website design is “developed” in-house — or by an independent contractor who does not remain at risk for performance — the company has several options. One option available in this situation is to deduct the costs in the year they are either paid or accrued (depending on the company’s accounting method).

Other costs.

Website development costs that don’t qualify as software are deducted over their expected useful life. The costs of producing website content that is “advertising” are generally deductible in the year paid or accrued.

Start-up costs.

Website development costs you incurred before your business begins may be considered start-up costs. A business may elect to deduct up to $5,000 of start-up costs in the year the business begins operations and deduct the remaining costs over 180 months. (The $5,000 deduction is reduced where total start-up expenses exceed $50,000.) Alternatively, a business may capitalize its start-up costs.

You can find additional information on the IRS website.

Take charge of your financial future. Give us a call, today, to find out how we can assist you and your business.

Do you need to worry about being audited?

The question has probably crossed your mind. What’s the reality? Unless you filed an extension, it’s likely that your annual tax preparation marathon is over. Whether you did your taxes yourself or had a professional complete your return, you probably breathed a sigh of relief as they were filed.

At the same time, you may have been thinking about some tax-related issues that weren’t so pleasant. Did I declare all my income? Was I entitled to the deductions I claimed? What about credits? Should I really have taken them?

Multiple Reasons

Even if you’re certain you completed your forms and schedules with absolute accuracy, here’s some bad news: You can be audited if your return is chosen at random, or as the result of the IRS’s computer screening. The latter looks at your numbers and compares them to what is considered the “norm” for returns similar to yours.

Hopefully, you won’t have to revisit last year’s tax return. A random audit is possible, though.

You can be audited if you have investors or business partners who’ve been selected for audits. The IRS also looks for specific red flags, such as unusually high or low numbers in certain areas, as well as other situations.

Communicating with the IRS

If you’re selected for an audit, how will you find out? The answer to that question is very important. The IRS will only notify you via a letter that arrives in the U.S. Mail. The IRS will not email you nor call you on the phone.

Imposters claiming to represent the IRS have scammed hundreds if not thousands of people via phone or email contact. These scammers often insist that you owe money (even if you don’t believe you do) and that you must settle your debt immediately or face dire penalties.

In the case of email, scammers may not even ask for money. They want any personal information they can get from you, especially your Social Security number. For example, they may ask you to validate your personal information. Never click on any links or open any attachments in such messages. If you’d like, you can report it to phishing@irs.gov. You can also read more about tax scams on the IRS website.

How Audits Work

You won’t necessarily be sitting across a desk from an IRS agent for an audit, though you may be. Some audits are conducted in person, at places like:

• An IRS field office
• An accountant’s office
• Your home, or
• Your place of business

Sometimes, audits are even conducted long distance through the mail.

What You’ll Need

Obviously, the IRS is going to want to see the documentation for the information you provided on your tax return, records of income, expenses, itemized deductions, etc. This is why you’re urged to take such care with your historical tax returns. The IRS recommends that you keep copies of everything for at least three years from the date of filing. This includes things like receipts and bills, canceled checks, medical and dental records, and legal papers.

The IRS can require a six-year history for audits if it finds what it calls a “substantial error.” But if you’re going to be audited, it’s more likely to be within two years.

Three Possible Conclusions

What happens when the audit is complete?

• No Change. The IRS determines that there were no errors or misstatements in your return.
• Agreed. The IRS finds reason to make changes to your return, and you agree that they’re warranted.
• Disagreed. The IRS finds reason to make changes to your return, but you don’t agree with their findings.

With the third situation, you have three options. You can go through the IRS’s Alternative Dispute Resolution (ADR) program, which provides mediation services. Or you can file an appeal. You can also simply request a conference with an IRS manager.

Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.