Shutting Down a Business? File Your Final Taxes On Time and Avoid the Short Year Trap.
Filing a late partnership or S corporation tax return has gotten increasingly expensive over the last 10 years. In 2006, the penalty per month, per partner/shareholder was $50. For 2018 that penalty is $195 per month, per partner/shareholder. This means that if a partnership with two partners who fail to file an extension for their tax return, but still file by September 15th would face $1,950 in penalties from the IRS. The maximum months that penalties can be assessed are 12, but consider the client who may be a few years behind in filings and has multiple shareholders. These penalties can quickly reach the $10,000 plus mark.
If you are a business owner the above situation may not apply to you. You always file timely or get an extension and feel confident your tax professional filed your income tax returns when they said they did. Yes, we have seen cases where the client believed the tax returns were filed when in fact they were not. Relying on a professional alone is not sufficient cause for the IRS to provide penalty relief. If you are someone out there dealing with penalty issues from the IRS there can be relief and we can help you reduce or alleviate those penalties. For the purposes of this blog, let’s assume all returns have been filed timely.
Where business owners can fall into what I will call the “short year trap” is when a change in ownership of the business occurs or the business is sold. The requirement to file a tax return is by the 15th of the 3rd month following the date the entity’s tax year ended for S Corporations and the 15th of the 4th month following the date the entity’s tax year ended for partnership. Notice that these instructions say the entity’s tax year ended – not the end of the calendar year. If you are a sole owner of a S corporation, sell your business, and shut down all entity operations on 7/15/2018 there is a tax return filing requirement before 3/15/2019. The same requirements apply with a technical termination of a partnership. If a sale of exchange of 50% or more of the ownership occurs in a 12 month period, that is a technical termination and a final tax return must be filed.
Contact Adam Shay CPA Firm in Wilmington NC for Help
Like with most tax returns, extensions are available, but you need to notify your CPA in Wilmington NC, at a minimum, when these events occur to help make sure you are in compliance and avoid late filing penalties. We want to be involved with and notified by our clients before these transactions happen to help walk them through the tax implications of selling a business, ending a partnership, or changing ownership. Even if the business no longer exists, the IRS may have the ability to reach individual assets to collect these penalties. Avoid falling into the short year trap by keeping communication open with your tax professional, Adam Shay CPA Wilmington NC.
Workers Compensation Insurance and North Carolina (NC)
Health insurance may be the hot topic right now, but employers should not forget about workers’ compensation insurance. The beginning of the year is a good time to get on track if your business has not been compliant in the past. From the NC Department of Commerce website, “The North Carolina Workers’ Compensation Act requires businesses which employ three or more employees, including those operating as corporations, sole proprietorships, limited liability companies and partnerships, obtain workers’ compensation insurance or qualify as self-insured employers for purposes of paying workers’ compensation benefits to their employees.”
A Chairman at the NC Department of Commerce has put in place an initiative to make sure NC employers carry workers’ compensation insurance. Over the last 18 months many businesses may have been confronted with an investigator inquiring about their insurance. These investigators are not only enforcing compliance, but they are imposing fines and misdemeanor charges for employers willingly not having coverage. Per the Raleigh News and Observer the NC Department of Commerce has collected “nearly $1 million in civil fines.”
They are able to detect these companies by state agencies starting to work together. We have seen increased examples of this in the tax world as well. The Secretary of State and counties are utilizing each other’s data to see if registered businesses with the Secretary of State have filed their county property tax listings. If not, the county is sending out notices to these businesses. The NC Department of Commerce is working to increase the data mining capabilities as soon as possible. The increased ability to collect data from various state agencies will result in more company visits in the upcoming years. Letting a worker’s compensation policy lapse is a good way to increase chances of those visits.
Lack of insurance not only can result in fines and charges for the employer, but it can be devastation for the employee as well. If employees are not properly insured they can face significant health costs when they go to get their medical bills paid while trying to recover from an injury. Typically their only recourse is to file a claim with the Industrial Commission or worse, go after their employer. This issue is perpetuated if the employee is misclassified as an independent contractor. The employee believes they are covered, but the independent contractor designation excludes the employer from providing coverage. We have been working to educate our clients on the need to properly classify their workers as employees or independent contractors. We should see misclassification of workers become a point of investigation in conjunction with the workers’ compensation investigations.
If you believe you may have a misclassification issue or need assistance finding a representative to provide workers’ compensation insurance, let us know.
IRS IP PIN (Identity Protection Pins)
What is an IP PIN?
IP PINs are designed to prevent an individual from filing a fraudulent tax return by using someone else’s social security number. It is a six digit number that is entered with the tax return and is required for filing for eligible individuals. If the IP PIN is not entered and the return is electronically filed, it will be automatically rejected by the IRS. Paper filed returns are manually checked for this IP PIN and will be returned if the submission does not include it.
Why Would I Receive an IP PIN?
• Individuals that were a victim of identity theft and the IRS has resolved the case.
• Individuals that receive an IRS letter inviting you to “opt-in” to get an IP PIN.
• Individuals that file a federal tax return last year as a resident of Florida, Georgia, or the District of Columbia. These individuals would have to apply for an IP PIN and would not receive a letter automatically.
IP PINs letter were mailed this week for 2015 individual tax returns. We were notified that these IRS letters included an error that says the IP PINs are for the 2014 tax return when in fact, they are to be used for the 2015 tax returns. The most important thing to do is to provide these to your tax professional when received. Please contact us with any questions you have regarding your IP PIN.
Passport and Taxes
The Internal Revenue Code has a new addition that provides additional repercussions for not paying your taxes. There is a new section called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies”. While it is still uncertain on how aggressively they will enforce this, the new section of the code allows the IRS to rescind existing passports, not issue new passports, or deny renewal if certain tax delinquencies exist. Our Wilmington NC CPA explains more.
Who Does This Apply To?
For those who already have an existing installment agreement or other payment plan with the IRS, this does not apply. However, for those with a $50,000 or more debt to the IRS that has not been resolved, this could affect your travel plans in the future. The $50,000 threshold includes not only taxes, but penalties and interest as well. With late tax payment penalties plus interest being able to exceed over 25% of the tax owed, $50,000 in debt to the IRS is not as large a figure as taxpayers may think.
This Code Affects Domestics Travelers Too
This section of the Internal Revenue Code comes after a new law that may require passports for domestic travel as well. It is related to the Real ID Act that wants to create a national standard for state-issues IDs. The TSA could require passports instead of driver’s licenses to get on a flight in 2016. While this will not apply to all states, travelers from Minnesota were recommended to get passports by January 2016 to fly. North Carolina IDs meet the national standard, but it may be “better safe than sorry” to start carrying them.
The best thing to do to avoid these issues is resolve any outstanding tax debt issues with the IRS. At a minimum, Adam Shay Wilmington NC CPA can help ensure you are set up on a payment arrangement to avoid revocation of your passport or any future issues obtaining one for travel. We also provide tax resolution services to help reduce or eliminate late payment penalties and interest.
NC Unemployment Rate Reduction and Tax Savings
A recent release by the NC Department of Employment Security Commission (NCESC) reports that our state’s unemployment trust fund reserve has reached $1 billion. This is the first time this has happened in over a decade! In fact, up until May of this year our state was in debt to the Federal government. From 2011–2014 North Carolina business paid $1 billion in penalties and interest due to that debt. Is there any good news? It is estimated since this debt is paid off and the unemployment reserve mark has been hit that employers will save more than $600 million in taxes during 2015-2016. Below is how this will be accomplished:
(1) Federal Unemployment Taxes – Up until 2015, NC employers did not receive the full Federal Unemployment Tax Act (FUTA) credit due to being in debt to the Federal government. On Federal Form 940, NC employers paid an additional 1.2% in unemployment tax on the Federal unemployment wage base. After reviewing several of our client’s Forms 940, this easily can equate to a $1,000+ per year tax savings for small to medium sized businesses. The change can be seen on the 2015 Form 940 draft forms showing NC as now a 0% payer for the credit reduction: https://www.irs.gov/pub/irs-dft/f940sa–dft.pdf
(2) State Unemployment Taxes – For 10 years employers have been paying a 20% state unemployment insurance tax surcharge. Per information reported by North Carolina News Network, this is set to be discontinued. Employers should review their 2016 unemployment tax rates for this change.
We recommend contacting your payroll provider for additional information on the above changes. This may be a tax savings that business owners were not aware of, but it is hopefully a permanent change that will produce yearly payroll tax savings.
Start Ups and Stock Opportunities
The official closing of the 2015 tax season passed over a month ago. Its passing provides a lot of items to reflect on. This tax season taught me more than any, that our proactive approach is essential to client tax optimization. As CPAs we serve our clients the best when we know about business or personal financial decisions before they happen. A big part of the strategy is why we recommend having a strong team. This can include an attorney, insurance agent, loan officer, financial planner, and of course the CPA. The focus on this team is to promote collaboration between all the members. Collaboration allows us to plan and optimize our clients’ tax situations. Recently, collaboration with a financial planner reminded me of how important the team is and I wanted to share the experience.
Imagine a business owner in the start up phase of a business. They are spending a lot of money to make their business grow and not seeing a lot of return. Like most owners in the start up phase, they want to maximize the tax benefit of the money they funded the business with. Assume this business owner is married and they are a dual income household. Prior to starting the business they are in the 25-28% Federal tax bracket. Due to the start up and opening of their business, they generated losses that drove their taxable income into the 15% tax bracket. In addition to taxable compensation the couple also has a brokerage account with various stock investments.
Why is this important?
At the 15% tax bracket, qualified dividends and long term capital gains (for Federal tax purposes) are taxed at 0%. That’s right, 0%! The business owner has stock that they have held for a significant period of time (long term treatment is a year or more). Their financial planner has wanted to get them into another strategy, but did want them to take the significant tax hit. These initial years of the business, until it turns profitable, are ideal times to make those strategy changes. The financial planner can sell the investments and the taxpayer reports the long term capital gain and pays 0% tax at the Federal level. Everyone is happy. While state taxes will still be due; with NC taxes being reduced to 5.75% for 2015 I believe this is a good trade off. If those same stocks were sold when the couple was in the 25-28% bracket they would have paid the additional 15% for Federal taxes.
While not every client is starting a business, or has significant capital gains they would like to capitalize on, or could benefit from this strategy, this is a good example of why it is important to have a strong team that collaborates to get you the best results possible. We recommend you consult all members of your team about any strategy that you take.
Accounting and Football
Accounting related products and services is not something I typically associate with the National Football League. However, during Monday Night Football there was quite a few commercials that related to the accounting field. It may be indicative of advertisers believing in a growing population of self-employed individuals and the desire to “be your own boss”. Monday night there were several commercials for new products that could benefit our business owners worth sharing.
A common struggle for business owners is capturing all the travel on either their personal or business vehicles. MileIQ is striving to ease that burden by providing “complete, accurate, and IRS-compliant documentation to back up the mileage deduction”. The application is available via the Apple App Store and has been live since late 2013. With the application, business owners can classify travel as personal or business with a single swipe when they get in the car. The data is secure with syncing to the cloud and can also integrate with accounting software. If you are or know a business owner that struggles with accounting for your mileage at tax time, go to MileIQ’s website and check out this practical solution that can mean significant tax savings.
As a technology forward firm we focus on keeping up-to-date on the latest companies in accounting markets that drive efficiency. Namely seeks to merge human resources (HR), payroll, benefits, and talent management into one system. Outsourcing HR and talent management can be attractive to a lot of our small business owners who want those services, but are not large enough to require a separate employee or department. Namely was founding in 2012 and the commercial caught my attention by highlighting one of their goals “client centric”. They advertise to respond quickly to “client needs and challenges” which is extremely important for our entrepreneurs and their busy schedules. Their blog also contains some informative articles that business owners could benefit from.
Keeping new and useful services in front of our clients is important to us. If there are products services that have contributed to your business’ success, please let us know!
If you have yet to hear about tekMountain, then you are in for a treat. Several of our business owners operate out of their coworking space and they are truly a force pushing for entrepreneurship growth in our area. From their website:
“tekMountain is a privately owned, community driven incubator/accelerator dedicated to growing the technology culture in Wilmington, North Carolina—one of the nation’s top locations for tech professionals to live, work and thrive. tekMountain is a truly unique, versatile space that offers unparalleled access to entrepreneurial mentors, venture capital offerings and professional services. Our expansive services range from expert business plan guidance and development through complex services such as Intellectual Property advising and consulting. We offer regulatory consulting services in education technology, including compliance with FERPA.
We offer both dedicated offices and coworking space to accommodate companies in various stages of growth. While we are focused on education and healthcare technology we would love to have a conversation about how we could work together. It is also a place where the entire Wilmington community can take advantage of unique programming and business development workshops. It is a place where you’re sure to feel right at home.”
More information on this event can be found here: http://www.tekmountain.com/events/. We hope to see you there!
Market Volatility and Taxes
The stock market has had a second positive day being up around 2% after the past several dismal weeks. Per CNBC, the S&P 500 has lost almost $2 trillion in market capitalization in the last week and a half alone. The 2008 stock market crash appears to still be fresh in investors’ minds with all the buying and selling. If you choose to make stock market moves, keep in mind this can have several impacts on your tax return:
If panic set in and you sold off your stock portfolio (hopefully before it dropped significantly) you will have short and long term losses. Short term classification is for investments held less than a year and long term is for all investments held a year or more. These losses are limited to $3,000 a year after they are used to offset current year gains.
Harvesting losses mentioned above is not necessarily a bad thing if you sold stocks at a large gain earlier in the year. These losses could be used to offset past and future gains in the market.
If cash flow is there, there is the temptation to get into the market while it is low. While we are not advising on investment strategy, if you do buy consider how long you hold the stock before selling. Selling appreciated stock before a year is over will result in short term capital gains. Short term capital gains are taxed at ordinary income tax rates like interest income and wages. Long term capital gains receive a preferential rate of 15% (this can fluctuate depending on income tax bracket).
Purchasing Growth versus Income
Buying stocks in the “growth” category typically will not have current tax implications since they are raising capital and not paying large dividends. Income stocks could pay quarterly dividends that will impact your taxes. Be sure to research which stocks you are getting into to determine their growth versus income nature. Buying qualified investments will result in dividends being treated like long term capital gains mentioned earlier at a 15% rate. In general, most regular dividends from US companies with normal company structures (corporations) are qualified.
Work with your investment advisor to pick the stock market strategy that works best for you both financially and from a tax perspective.
Where’s My Refund?
In case you missed it, a postal worker was charged with obstruction for not delivering mail to customers between May 2014 and January 2015. He must have had a sizable garage because the package total came in around 22,000 that were stored and undelivered (he must have watched the Seinfeld episode way back when). It is unlikely this affected anyone here in North Carolina, but included in that mail were 5 US Treasury refund checks. With the refund process already painfully slow for many of our clients, we can only imagine those five household’s frustration.
With the understaffing situation at the Internal Revenue Service (IRS) and typical delays with the state Department of Revenue, now more than ever we are setting client expectation on when they can expect their refunds. Returns filed electronically with direct deposit are the best option, but sometimes with amendments or other special circumstances that is just not possible. Fortunately there are convenient places to look up the status of a refund for those that are anticipating its arrival:
Federal Tax Returns
Federal Amended Tax Returns
North Carolina Tax Returns
Depending on the time of year (March and April being peak delay times) refunds can take anywhere from 2 to 6 weeks. This is why we recommend getting information in as soon as possible. However, if it has been over 6 weeks and you have not received a refund those websites are great resources to check. Refund checks are typically valid up to one year from issue cashing them upon receipt is important.