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Tag: tax tips

New final rule on independent contractors takes effect in March

Posted on February 22, 2024 - 8:55 pm by

It’s safe to say that independent contractors or “gig workers” are firmly ensconced in the U.S. economy — especially in certain industries. And we don’t mean only those helpful folks who drop off dinner at the front door or give you a ride home from the restaurant.

Nay, many kinds of independent contractors are available to serve employers, too. They can provide expertise for special projects or fill short-term positions to get your organization through busy times without having to incur hiring costs. Moreover, you don’t need to remit payroll taxes on independent contractors’ compensation, nor must you provide gig workers with fringe benefits. What’s not to like, right?

A moving target

Enter the U.S. Department of Labor (DOL). It has long been on the lookout for employers that, in the agency’s view, misclassify employees as independent contractors. If the DOL successfully makes a case for employee misclassification, the employer in question may be on the hook for substantial back wages, penalties and interest. There can be other legal repercussions as well.

To enforce employee classification, the DOL relies on a final rule that determines whether a worker should be classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA). In recent years, however, the final rule has been a moving target pushed one way or the other by whichever presidential administration is in power.

For example, the final rule set forth during the Obama administration was considered relatively tough on employers. Under what was referred to as the “totality-of-the-circumstances” test, the DOL and courts applied at least five factors to making the employee vs. independent contractor determination, with no single factor controlling.

The Trump administration then revised the final rule to look more broadly at whether, as an “economic reality,” workers are:

  • Dependent on their employer for work, which would generally make them employees, or
  • In business for themselves, which would generally make them independent contractors.

This was regarded as a more employer-friendly version.

6 critical factors

Now, during the Biden administration, the final rule has changed yet again. In October 2022, the DOL proposed regulations that would bring back the totality-of-the-circumstances test with its multiple factors. On January 9, the DOL announced issuance of final regs that rescind and replace the previous regs. The final regs also make some adjustments and clarifications to the proposed regs but still focus on multiple factors — six, to be exact — to determine whether a worker is an employee or independent contractor:

  1. The worker’s opportunity for profit or loss,
  2. Investments by the worker and employer,
  3. The degree of permanence of the work relationship,
  4. The nature and degree of control of work performance,
  5. The extent to which the work is an integral part of the employer’s business, and
  6. The skill and initiative required for the work.

The final rule officially takes effect on March 11, 2024.

Legal challenges possible

The DOL contends that the new final rule protects vulnerable workers who may be misclassified as independent contractors by employers looking to dodge the rules regarding minimum wages and overtime as well as the protections of the FLSA, all of which are applicable to employees. However, many industry groups believe it’s too restrictive, so legal challenges are possible.

As an employer, you may want to review the independent contractor agreements you have in place, along with any prospective ones, in consultation with your attorney. Padgett can help you identify and analyze all the costs and tax implications associated with hiring employees vs. engaging gig workers. Get in touch with us today to get started.

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Filing jointly or separately as a married couple: What’s the difference?

Posted on February 19, 2024 - 2:52 pm by

When you file your tax return, a tax filing status must be chosen. This status is used to determine your standard deduction, tax rates, eligibility for certain tax breaks and your correct tax.

The five filing statuses are:

  • Single
  • Married filing jointly,
  • Married filing separately,
  • Head of household, and
  • Qualifying surviving spouse.

If you’re married, you may wonder if you should file joint or separate tax returns. It depends on your individual tax situation.

In general, you should choose the filing status that results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. That means the IRS can come after either of you to collect the full amount.

Although there are “innocent spouse” provisions in the law that may offer relief, they have limitations. Therefore, even if a joint return results in less tax, some people may still choose to file separately if they want to only be responsible for their own tax. This might occur when a couple is separated.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some money out of a higher tax bracket. Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when married couples may save tax by filing separately — for example, when one spouse has significant medical expenses. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in a larger total deduction.

Only on a joint return

Keep in mind that some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. And you can’t exclude adoption assistance payments or interest income from Series EE or Series I savings bonds used for higher education expenses.

Social Security benefits

Social Security benefits may be taxed more when married couples file separately. Benefits are tax-free if your “provisional income” (AGI with certain modifications, plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).

Circumstances matter

The filing status decision you make when filing your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There may not be a simple answer as to whether a couple should file jointly or separately. Various factors must be examined. We can help you make the most advantageous choice. Contact your local Padgett advisor to prepare your return or if you have any questions!

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9 tax considerations if you’re starting a business as a sole proprietor

Posted on February 13, 2024 - 10:01 pm by

When launching a small business, many entrepreneurs start out as sole proprietors. If you’re launching a venture as a sole proprietorship, you need to understand the tax issues involved. Here are nine considerations:

1. You may qualify for the pass-through deduction:

To the extent your business generates qualified business income, you’re currently eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction. Be aware that this deduction is only available through 2025, unless Congress acts to extend it.

2. You report income and expenses on Schedule C of Form 1040.

The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses from activities in which you weren’t “at risk.”

3. You must pay self-employment taxes.

For 2024, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $168,600, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate returns and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

4. You generally must make quarterly estimated tax payments.

For 2024, these are due April 15, June 17, September 16 and January 15, 2025.

5. You can deduct 100% of your health insurance costs as a business expense.

This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

6. You may be able to deduct home office expenses.

If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable part of certain expenses, including mortgage interest or rent, insurance, utilities, repairs, maintenance and depreciation. You may also be able to deduct travel expenses from a home office to another work location.

7. You should keep complete records of your income and expenses.

Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.

8. You have more responsibilities if you hire employees.

For example, you need to get a taxpayer identification number and withhold and pay over payroll taxes.

9. You should consider establishing a qualified retirement plan.

The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t taken into income until they’re withdrawn. You might consider a SEP plan, which requires minimal paperwork. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

Turn to us

Contact your local Padgett office if you want additional information regarding the tax aspects of your business, or if you have questions about reporting or recordkeeping requirements. We’re here to help!

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The kiddie tax could affect your children until they’re young adults

Posted on January 24, 2024 - 5:18 pm by

The so-called “kiddie tax” can cause some of a child’s unearned income to be taxed at the parent’s higher marginal federal income tax rates instead of at the usually much lower rates that a child would otherwise pay. For purposes of this federal income tax provision, a “child” can be up to 23 years old. So, the kiddie tax can potentially affect young adults as well as kids.

Kiddie tax basics

Perhaps the most important thing to know about this poorly understood provision is that, for a student, the kiddie tax can be an issue until the year that he or she turns age 24. For that year and future years, your child is finally kiddie-tax-exempt.

The kiddie tax is only assessed on a child’s (or young adult’s) unearned income. That usually means interest, dividends and capital gains. These types of income often come from custodial accounts that parents and grandparents set up and fund for younger children.

Earned income from a job or self-employment is never subject to the kiddie tax.

Calculating the tax

To determine the kiddie tax, first add up the child’s (or young adult’s) net earned income and net unearned income. Then subtract the allowable standard deduction to arrive at the child’s taxable income.

The portion of taxable income that consists of net earned income is taxed at the regular federal income tax rates for single taxpayers.

The portion of taxable income that consists of net unearned income that exceeds the standard deduction ($2,600 for 2024 or $2,500 for 2023) is subject to the kiddie tax and is taxed at the parent’s higher marginal federal income tax rates.

The tax is calculated by completing an IRS form, which is then filed with the child’s Form 1040.

Is calculating and reporting the kiddie tax complicated? It certainly can be. We can handle the task when we prepare your tax return.

Is your child exposed?

Maybe. For 2023, the relevant IRS form must be filed for any child or young adult who:

  • Has more than $2,500 of unearned income;
  • Is required to file a Form 1040;
  • Is under age 18 as of December 31, 2023, or is age 18 and didn’t have earned income in excess of half of his or her support, or is between ages 19 and 23 and a full-time student and didn’t have earned income in excess of half of his or her support;
  • Has at least one living parent; and
  • Didn’t file a joint return for the year.

For 2024, the same rules apply except the unearned income threshold is raised to $2,600.

Don’t let the tax sneak up on you

The kiddie tax rules are pretty complicated, and the tax can sneak up on the unwary. We can determine if your child is affected and suggest strategies to minimize or avoid the tax. For example, your child could invest in growth stocks that pay no or minimal dividends and hold on to them until a year when the kiddie tax no longer applies. Contact Padgett if you have questions or want more information!

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Giving gifts can help show gratitude and provide tax breaks

Posted on December 11, 2023 - 4:58 pm by

The holiday season is here. During this festive season, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good time to review the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?

Employee gifts

Many businesses want to show their employees appreciation during the holiday time. In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business.

But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit. These are items small in value and given so infrequently that they are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits aren’t included in your employees’ taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Key point: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small they are and infrequently they’re given.

Customer gifts

If you make gifts to customers or clients, they’re only deductible up to $25 per recipient, per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4 each.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all of a customer’s team members to share) as long as the cost is “reasonable.”

A holiday party

Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of employees who aren’t highly compensated and their families. If customers, and others also attend, a holiday party may be partially deductible.

Holiday cards

Sending holiday cards is a nice way to show customers and clients your appreciation. If you use the cards to promote your business, you can probably deduct the cost. Incorporate your company name and logo, and you might even want to include a discount coupon for your products or services.

Boost morale with festive gestures

If you have questions about giving holiday gifts to employees or customers or throwing a holiday party, contact Padgett! We can explain the tax implications.

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A company car is a valuable perk but don’t forget about taxes

Posted on December 11, 2023 - 4:18 pm by

One of the most appreciated fringe benefits for owners and employees of small businesses is the use of a company car. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees driving the cars. (And of course, they enjoy the nontax benefit of using a company car.) Even better, current federal tax rules make the benefit more valuable than it was in the past.

Rolling out the rules

Let’s take a look at how the rules work in a typical situation. For example, a corporation decides to supply the owner-employee with a company car. The owner-employee needs the car to visit customers and satellite offices, check on suppliers and meet with vendors. He or she expects to drive the car 8,500 miles a year for business and also anticipates using the car for about 7,000 miles of personal driving. This includes commuting, running errands and taking weekend trips. Therefore, the usage of the vehicle will be approximately 55% for business and 45% for personal purposes. Naturally, the owner-employee wants an attractive car that reflects positively on the business, so the corporation buys a new $57,000 luxury sedan.

The cost for personal use of the vehicle is equal to the tax the owner-employee pays on the fringe benefit value of the 45% personal mileage. In contrast, if the owner-employee bought the car to drive the personal miles, he or she would pay out-of-pocket for the entire purchase cost of the car.

Personal use is treated as fringe benefit income. For tax purposes, the corporation treats the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to personal use. If the corporation finances the car, the interest it pays on the loan is deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).

On the other hand, if the owner-employee buys the auto, he or she isn’t entitled to any deductions. Outlays for the business-related portion of driving are unreimbursed employee business expenses, which are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if the owner-employee finances the car personally, the interest payments are nondeductible.

One other implication: The purchase of the car by the corporation has no effect on the owner-employee’s credit rating.

Careful recordkeeping is essential

Supplying a vehicle for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use needs to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.

Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. (You may even be able to transfer the vehicle to the employee when you’re ready to dispose of it, but that involves other tax implications.) Contact Padgett today! We can help you stay in compliance with the rules and explain more about this fringe benefit.

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A cost segregation study may cut taxes and boost cash flow

Posted on November 28, 2023 - 7:42 pm by

Is your business depreciating over 30 years the entire cost of constructing the building that houses your enterprise? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow.

Depreciation basics

Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). In most cases, a business depreciates a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — including equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.

Frequently, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases, the distinction between real and personal property is obvious. For example, computers and furniture are personal property. But the line between real and personal property is not always clear. Items that appear to be “part of a building” may in fact be personal property. Examples are removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, decorative lighting and signs.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. These include reinforced flooring that supports heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment and dedicated cooling systems for data processing rooms.

Identifying and substantiating costs

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Speedier depreciation tax breaks

The Tax Cuts and Jobs Act (TCJA) enhanced certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other changes, the law permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

In addition, the TCJA expanded 15-year-property treatment to apply to qualified improvement property. Previously, this tax break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And the law temporarily increased first-year bonus depreciation from 50% to 100% in 2022, 80% in 2023 and 60% in 2024. After that, it will continue to decrease until it is 0% in 2027, unless Congress acts.

Making favorable depreciation changes

It isn’t too late to get the benefit of faster depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return you file, that will result in automatic IRS consent to a change in your accounting for depreciation.

Cost segregation studies can yield substantial benefits, but they’re not the best move for every business. Contact your Padgett advisor to determine whether this strategy would work for your business. We’ll judge whether a study will result in tax savings that are greater than the costs of the study itself.

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Contributing to your employer’s 401(k) plan: How it works

Posted on November 9, 2023 - 10:16 pm by

If you’re fortunate to have an employer that offers a 401(k) plan, and you don’t contribute to it, you may wonder if you should participate. In general, it’s a great tax and retirement saving deal! These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about contributing to a plan at work, here are some of the advantages.

With a 401(k) plan, you can opt to set aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income and defer tax on the amount until the cash (adjusted by earnings) is distributed to you in the future. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.

Tax benefits

Your wages or other compensation will be reduced by the pre-tax contributions that you make, which will save you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis. These are Roth 401(k) contributions. With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.

Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. In 2023, the maximum amount permitted is $22,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. In 2023, that additional amount is up to $7,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2023 is $30,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2023, $66,000, whichever is less.

In a typical plan, you’re permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.

Taking withdrawals

Another important characteristic of these plans is the limitation on withdrawals while you’re working. Amounts in the plan attributable to elective contributions aren’t available to you before one of the following events:

  • Retirement (or other separation from service),
  • Reaching age 59½,
  • Disability,
  • Plan termination, or
  • Hardship.

Eligibility rules for a hardship withdrawal are strict. A hardship distribution must be necessary to help deal with an immediate and heavy financial need.

As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s plan may allow you to receive a loan, which you pay back to your account with interest.

Matching contributions

Employers may opt to match 401(k) contributions up to a certain amount. Although matching is not required, surveys show that most employers offer some type of match. If your employer matches contributions, you should make sure to contribute enough to receive the full amount. Otherwise, you’ll lose out on free money!

These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have so connect with your local Padgett advisor today!

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8 Tax Deductions Every Small Business Owner Should Know

Posted on September 29, 2023 - 3:03 pm by

As a small business owner, managing your finances is crucial to ensuring the success and growth of your venture. One of the most effective ways to optimize your financial strategy is by understanding and leveraging the various tax deductions available to you. By taking advantage of these deductions, you can significantly reduce your tax liabilities, increase your bottom line, and keep more of your hard-earned money. In this blog post, we’ll delve into the top tax deductions that every savvy business owner should be aware of.

1. Business use of your home

Running a business from home? You’re in luck. The home office deduction allows qualifying taxpayers to deduct a portion of their home-related expenses when part of their home is used exclusively for business purposes. This includes expenses like rent, utilities, insurance, and property taxes. To qualify, you must have a designated space used solely for business activities and meet specific IRS criteria. Qualified taxpayers can use the simplified method or regular method of calculating their home office expense deduction. Remember, accurate record-keeping is key to support your deduction claims.

2. Business use of your car

If you use your car solely for business purposes, you may deduct the entire cost of owning and operating it, although there are some limits to this deduction. However, if you use the car for both business and personal use, you can only deduct the expenses related to its business use. There are two main methods for calculating deductible car expenses: the standard mileage rate method and the actual expense method.  

Under the standard mileage rate method, you can deduct qualified business miles using the rate provided by the IRS. Under the actual expense method, you’ll need to calculate the precise expenses associated with operating the car exclusively for business purposes. This generally includes costs such as fuel, oil, maintenance, tires, insurance, registration fees, licenses, and even depreciation directly linked to the portion of total mileage driven for business miles. Please note that what the IRS considers commuting miles is not tax deductible; only business miles are. Reach out to your advisor to make sure you’re classifying your miles correctly!

3. Supplies and equipment

Your taxable income could be reduced significantly by deducting expenses related to supplies and equipment. The cost of supplies, such as office supplies, cleaning materials and other consumables crucial for day-to-day operations, can be deducted as legitimate business expenses. Equipment purchases, such as computers, machinery and essential tools, however, must be deducted over time through depreciation unless they qualify to be deducted in full. To ensure you can substantiate these deductions, it’s essential to maintain precise records and keep track of receipts. By making the most of these deductions, you can effectively manage your business finances and optimize your tax liability, ultimately contributing to the financial health and long-term sustainability of your venture. Remember to consult with a tax professional or accountant for tailored advice based on your specific business circumstances.

4. Cost of goods sold

As a small business owner, you can benefit from deducting the cost of goods sold (COGS) as a tax deduction. COGS encompasses the direct expenses associated with producing or acquiring the products you sell, such as raw materials and inventory purchases. By deducting COGS, you have the opportunity to lower your taxable income and potentially reduce your tax liability. It’s important to maintain accurate records to potentially claim this deduction.

5. Business related meals

Despite the changes brought about by recent tax reforms, meals continue to hold value. Business-related meals, whether with clients or during business travel, may still be deductible. However, it’s essential to maintain proper documentation, such as receipts and records that establish its business purpose. Remember, meals must meet the criteria of a qualified expense for it to be considered deductible. It’s also worth noting that the regulations governing these deductions have become stricter, so it’s advisable to collaborate with your advisor to stay informed about the latest rules.

6. Employee-related expenses

Having employees involves various costs, many of which are deductible. This includes wages, bonuses, payroll taxes and benefits like health insurance. Ensuring proper worker classification (employee vs. contractor) is vital and the first step in avoiding scrutiny.

7. Travel expenses

Expenses for business travel can quickly accumulate, but many of these costs are deductible. This includes transportation, lodging, most meals and incidental expenses. Keeping records and receipts is essential to substantiate your claims and establish its business purpose as opposed to a family vacation with a bit of work sprinkled in.

8. Health insurance premiums for owners

For small businesses, covering the health insurance premiums of its owners and their families can be a significant expense. The IRS allows for different ways to deduct these premiums depending upon your business’s tax entity type. Meeting the eligibility criteria is essential to claim this deduction.

Conclusion

Navigating the realm of small business taxes can be complex, but the potential benefits are undeniable. By being aware of these top tax deductions, you’re better equipped to make informed financial decisions that can have a positive impact on your business’s bottom line. However, tax laws and regulations change, so staying up to date is crucial. Consult with a tax professional to ensure you’re maximizing your deductions while staying compliant with the latest rules. By strategically utilizing these deductions, you can pave the way for a more financially efficient and prosperous small business journey. 

Remember, the information provided here is intended for general informational purposes only and should not be considered as professional tax advice. Contact your local Padgett advisor for personalized guidance tailored to your specific situation. Find your nearest Padgett advisor here!

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Tax Tips for Self-Employed Individuals

Posted on September 18, 2023 - 5:49 pm by

Being a solo entrepreneur or independent contractor has its perks – flexible schedules, creative freedom, and the ability to be your own boss. However, it also comes with its fair share of responsibilities, particularly when it comes to managing your finances and taxes. Self-employed individuals are generally treated as independent contractors, which include freelancers, gig workers, sole proprietors and the like when it comes to paying taxes. These workers often face unique tax considerations that can be quite different from traditional employees. In this blog post, we’ll dive into some essential tax tips that can help these individuals navigate the world of taxes with confidence and help ensure they are making the most of their income. 

Understanding Your Tax Obligations

One of the key differences for self-employed individuals is the absence of employer withholding. Unlike traditional employees who have their taxes deducted from their paychecks, self-employed workers are responsible for calculating and paying their own taxes. This means that understanding your tax obligations is crucial to avoiding any unpleasant surprises come tax season. 

1. Self-Employment Tax and Income Tax

If you are considered self-employed by the IRS, you are generally responsible for paying both the self-employment (SE) tax, which consists of Social Security and Medicare taxes, and income tax. Unlike individuals employed by someone else, self-employed individuals are responsible for the full 15.3% tax rate. But don’t worry, there is an SE tax deduction we’ll talk about that could be a big tax saver. 

2. Estimated Taxes

Since self-employed people don’t have taxes withheld from their income throughout the year, it’s important to make estimated tax payments on a quarterly basis. This prevents a significant tax liability from accruing at the end of the year. There are several ways to approach calculating estimated taxes, depending on the other activity expected on your return and what your tax goals are. Remember, underestimating your payments might lead to penalties, so it’s wise to consult a tax professional for accurate estimations.

3. Record-Keeping

Be sure to keep track of all your income, expenses, invoices, and receipts. This will make it easier to calculate your taxable income and claim deductions when the time comes. Numerous digital tools and apps are available to simplify record-keeping and expense tracking.

Maximizing Deductions

Self-employed individuals can take advantage of various deductions to reduce their taxable income, ultimately lowering their tax liability. Here are some common deductions self-employed folks should explore:

1. Home Office

If you use a portion of your home exclusively for business purposes, you might be eligible for the home office deduction. This deduction allows you to write off a percentage of your home office repairs, utilities, and other related expenses.  

2. Business Expenses

For a business expense to be deductible, it must be both ordinary and necessary to the business. Per the IRS, “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” It’s important to keep in mind that even though some expenses may be both ordinary and necessary, they may not be eligible for a deduction. That’s why it’s essential to maintain receipts and document the business purpose of each expense. It can be tempting to overestimate your eligible expenses, but there may be consequences for doing so. Not only do you risk underpaying your taxes, but it could also distort your overall financial picture. This could have an impact on things like getting a mortgage.

3. Self-Employment Tax

As mentioned earlier, self-employed individuals are generally responsible for the SE tax, which includes both the employee and employer portions of Social Security and Medicare taxes. The good news is that you can deduct one-half of the SE tax when calculating your adjusted gross income.

4. Self-Employed Health Insurance

With the Small Business Jobs Act self-employed individuals may deduct up to 100% of their insurance premium. This includes premiums that cover the self-employed individual and their families. Be careful, not all premiums will be considered tax deductible so reach out to your advisor for guidance. 

Consulting a Tax Professional

Given the complexity of being self-employed when it comes to taxes, it’s wise to work with a tax professional. A tax expert can help you navigate the intricacies of tax law, help you take advantage of all available deductions, and provide guidance on estimated tax payments. 

As a recap, being self-employed offers a world of opportunities, but it also requires diligent financial management, especially when it comes to taxes. By understanding your tax obligations, making timely estimated tax payments, keeping meticulous records, and maximizing deductions, you can set yourself up for financial success. Remember, consulting a tax professional can provide personalized guidance tailored to your unique situation, making tax season a less daunting experience. If you’re on the other end of the spectrum as a small business owner and are looking to hire a freelancer or independent contractor, we also have a guide to help you make the right choice! Remember to prepare for tax season today with your local Padgett advisor. Find your local office here!

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Tax Audits Demystified: How to Prepare and Respond as a Small Business

Posted on August 16, 2023 - 7:17 pm by

As a small business owner, the term “tax audit” might strike fear into your heart, conjuring images of auditors poring over your financial records with a fine-tooth comb. While tax audits can be intimidating, understanding the process, being proactive in your tax compliance, and knowing how to respond can help ease the stress. In this article, we’ll demystify tax audits, provide tips to reduce audit risk, and guide you through steps to take if your small business is audited.

What is a Tax Audit?

A tax audit is an examination of your financial records and tax returns by the Internal Revenue Service (IRS) or state tax authorities to ensure the accuracy of your reported income, deductions, and credits. Per the IRS, audits can be conducted randomly, but more often they are triggered by certain red flags, discrepancies, or patterns that catch the attention of tax authorities. 

Reducing Audit Risk

While audits can happen to anyone, there are steps you can take to minimize your audit risk: 

  1. Accurate Recordkeeping: Maintain thorough and organized records of your financial transactions, including receipts, invoices, bank statements, and expense reports. This transparency can provide a clear trail of your business activities. 
  2. Consistency: Ensure consistency in your reported income and deductions from year to year. Drastic changes can raise eyebrows and trigger audits. 
  3. Classify Expenses Correctly: Properly categorize your business expenses. Misclassifying personal expenses as business expenses can lead to an audit.
  4. Reasonable Deductions: Claim only legitimate business deductions. Exaggerated or questionable deductions can invite scrutiny. 
  5. Hire a Professional Accountant: A certified tax professional can help ensure accurate tax filing and adherence to tax laws, reducing the chances of errors that might trigger an audit. 
  6. Report All Income: Ensure you report all income, including cash payments. Omissions can lead to serious consequences if discovered. 

Steps to Take If Audited

Even with precautions, audits can still occur. If your small business receives an audit notice, follow these steps: 

  1. Stay Calm: Don’t panic. An audit notice doesn’t necessarily mean you’ve done something wrong. It’s a routine procedure to verify your records. 
  2. Read the Notice Carefully: The notice will outline the scope of the audit, the years under review, and the specific documents requested. Understanding the requirements is crucial. 
  3. Gather Documentation: Collect all requested records, including financial statements, receipts, invoices, and relevant tax returns. Having organized records will make the process much smoother. 
  4. Consult a Professional: If you don’t already have a tax professional, hire one now. They can guide you through the process, help you understand your rights, and represent you before the tax authorities. 
  5. Cooperate and Respond Promptly: Respond to the audit notice within the specified timeframe. Cooperation with the auditor is key. Provide only the requested information but be thorough and honest. 
  6. Be Prepared to Explain: Be ready to explain any discrepancies or unusual entries in your records. A logical and honest explanation can go a long way in resolving issues. 
  7. Understand Your Rights: Familiarize yourself with your rights as a taxpayer during an audit. These rights include the right to representation, the right to appeal decisions, and protection against unfair treatment. 
  8. Appeal if Necessary: If you disagree with the audit findings, you have the right to appeal within the IRS or through the courts if necessary. Your tax professional can guide you through this process.

How Padgett Can Help

While tax audits may seem daunting, they are a part of maintaining a fair and accurate tax system. At Padgett, we can help you maintain accurate records and prepare you for the process, enabling you to navigate audits with confidence. Contact us today to find your local Padgett advisor.

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What should you do if you can’t pay your taxes?

Posted on March 17, 2023 - 9:27 pm by

While many of us are hoping to have a payday when our tax refunds arrive, if you owe taxes, you may find that April 15th is the wrong kind of “pay day.” If you’re struggling to pay your taxes this year, here’s what you need to know.  

1. File your return or extension by the due date.

To avoid any penalties for late filing, the first thing you should do is file your personal return by April 15th or request an extension of time to file. Since April 15th falls on a weekend this year and April 17th is a national holiday, April 18th is the filing deadline for 2022 individual returns. Note that an extension only extends your time to file, not to pay your balance due. Talk to your tax advisor to get your return or extension filed on time.  

2. Pay what you can.  

Even if you can’t pay the full amount at once, go ahead and pay what you can to reduce your overall balance. A lower balance may mean you owe less in interest late payment penalties later.   

3. Determine if you qualify for an installment payment plan.  

Talk to your tax preparer about applying for a payment plan. To manage your payment plan online, you’ll need to set up an account on the IRS website—you can follow our guide to get started. There are various kinds of payment plans, including short-term (120-days or less) and long-term, and they each have different fees and interest. Talk with your financial advisor about which option will be best for you.   

4. As a last resort, talk to your tax advisor about an offer-in-compromise.  

If you find that you aren’t able to pay your taxes, even with an installment plan, you may be eligible for an “offer in compromise,” which allows you to settle your debt for less than what you owe. The IRS considers factors that affect your ability to pay, like your income, expenses, and asset equity to determine eligibility. This program is not for everyone, so be sure to talk to a qualified tax professional about your options.  

We understand that owing the IRS money can be stressful, but don’t panic! A qualified tax professional can assist you in finding the best ways to manage your debt. Padgett has a nationwide network of CPAs and EAs who are ready to help, so you don’t have to worry. Find an office near you today!  

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10 reasons your 2022 tax refund may be lower

Posted on March 9, 2023 - 7:23 pm by

Have you already filed your 2022 tax return? If so, you may have noticed that your refund is lower than it was in 2020 or 2021. As we return to the “new normal” after the COVID-19 pandemic, many tax credits and deductions from the last two years are no longer available in tax year 2022. This may be contributing to a smaller tax refund or a larger balance due.    

Here are some of the key differences to keep in mind.

For individuals:

  • Economic Impact Payments (EIP): Also known as stimulus checks, EIPs were not issued to taxpayers in 2022. You likely claimed a tax credit on your 2020 or 2021 tax return if you were eligible for a stimulus payment but didn’t receive it.   
  • Child tax Credits: For 2022, the credit is now worth $2,000 per child, down from $3,000 per child and $3,600 for children under age six in 2020 and 2021. This credit now ends when your child reaches age 16 rather than 17. This could further reduce the amount of credit you receive.  
  • Child and Dependent Care Assistance Credit: In 2021, this credit was refundable and taxpayers whose adjusted gross income (AGI) was less than $125,000 were eligible for the maximum credit of 50% of eligible expenses paid. In 2022, the maximum percentage dropped to 35%. The full credit is only available to taxpayers with AGI $15,000 or less. The credit is now nonrefundable, meaning it’s limited to the amount of tax you owe. 
  • Earned Income Tax Credit: This credit has reverted to pre-pandemic rates of 7.65% instead of the increased amount of 15.3% in the last two years. The eligibility ceiling has also decreased to $7,320.  
  • Charitable contributions for non-itemizers: In 2020 & 2021, a $300 per person deduction was available to taxpayers who made a qualified charitable donation and did not itemize. For 2022, only taxpayers who itemize can deduct charitable donations. 
  • Employer-Provided Child Care: This year, only $5,000 in employer provided childcare is excluded from your taxable income on the Cafeteria Plan. This is a decrease from the $10,500 that was excluded from income in previous years. This means more of your income is taxable in 2022, which could result in a lower tax refund. 
  • Healthcare Premium Tax Credit: This is another credit that has reverted to pre-pandemic rules. In the past few years, the credit expanded, allowing individuals on unemployment to qualify. However, in 2022, the eligibility is based on household income in comparison to the federal poverty limit. If you were eligible for the credit before, your eligibility may have changed. 

For businesses:

As a business owner, you may also face an increase in taxable income from your business activity. There are a few reasons for this, including: 

  • COVID-19 Employer Payroll Credits and loan forgiveness (including Employee Retention Credits, Paycheck Protection Program and Paid Sick and Family Leave Credits): During the pandemic, several credits, loans and benefit programs were available to businesses. In 2022, many of those pandemic relief efforts have expired.  
  • Business Interest Expense Limits: The calculation for the limitation has changed in 2022 and may result in less of a deduction for interest expense.  
  • Corporate charitable deduction limits: The charitable contribution limit has reverted to pre-pandemic rules. In 2022, corporations are limited to a charitable deduction of no more than 10% of their taxable income. This is down from the 25% limit imposed in 2020 and 2021.  

Are you unsure you’re getting your maximum tax refund or feeling surprised by your tax results? That may be a sign that your tax professional isn’t right for you. Padgett’s nationwide network of CPAs and EAs can help, so find a location near you today! 

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Employee gifts: the must-know tax rules

Posted on March 3, 2023 - 10:03 pm by

How do you show your employees you appreciate their hard work? If you choose to give your staff gifts or throw them a party, remember that only certain types of gifts are tax deductible. Here’s a quick overview of some employee gift options to help you show your appreciation: 

Employee Gifts:

The IRS doesn’t recognize non-cash gifts of nominal value as taxable income, but rather as a de minimis fringe benefit (one in which the value and number of times it’s given is so small, accounting for it isn’t practical). But cash or a cash equivalent — like gift certificates or gift cards, or prepaid cards — are taxable employee gifts. Regardless of the amount, cash gifts must be included in the employee’s wages.

However, depending on circumstances, the IRS states that a gift certificate for a specific item can be considered a de minimis fringe benefit. The item must be one “that is minimal in value, provided infrequently, and is administratively impractical to account for.” 

Parties: 

Thinking of throwing an office party? Remember, the food is fully deductible only if the party is for the benefit of employees and their families. Historically, if clients, independent contractors, or customers attend the soirée, then entertainment rules apply and only 50% of the food and beverage costs associated with these partygoers are deductible (and this applies even if you hold the party virtually). Don’t get too lavish! The IRS always keeps an eye on business deductions and the costs associated with an extravagant event. 

Thinking of showing your thanks with some employee gifts this year? Reach out to our trusted network of accountants, tax experts and business advisors at Padgett so we can help ensure your employees benefit from the present and you make the most of the available tax deductions. Find an office near you today!

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MFJ vs MFS: filing options for married taxpayers

Posted on February 16, 2023 - 7:07 pm by

If you’re married, you may not be aware of your tax filing options and assume that filing a return jointly with your spouse is the only choice available to you. In fact, married taxpayers can file separate returns. It’s tricky, though. There are specific situations where filing separately makes sense, and other times where it doesn’t. It’s important to choose the right method, because once you file jointly, you can’t amend your return to filing separately.    

There are no rules of thumb on when it makes sense for married taxpayers to file separately. Although in most cases, filing jointly will produce the most beneficial results, tax law has grown so complex that a great number of factors need to be considered. So what’s the real difference between the two options?   

Married Filing Jointly (MFJ)

Married filing jointly means that you and your spouse will file just one tax return, with income and deductions for both of you. The IRS usually encourages couples to file jointly. You’ll usually get a lower tax rate this way, and the IRS offers some tax breaks for joint returns. Some common benefits available to joint filers include:  

  • Earned Income Credit (EIC)
  • Dependent care credit 
  • Tuition credits
  • Child-care credits (unless you lived apart from July to December)
  • American Opportunity Credit
  • Lifetime Learning Credit for education expenses
  • Student interest loan deductions
  • More limited IRS contribution deduction
  • Lower limit on capital losses  

If you live in a community property state, such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, a joint return is also much more convenient, as it avoids some tricky tax rules on separate returns.   

Married Filing Separately (MFS)  

There are some cases where filing separately may be a better choice for married taxpayers. Filing separately means that you will each file your own tax return and keep your income and deductions separate from your spouse’s.    

You may want to file separate returns if it means some deductions become available. For example, the spouse with the lower income may be eligible for a medical expense deduction if their income is kept separate, but not if it’s combined. Keep in mind, your filing status selection on your federal return could impact your state income tax return. Before finalizing your decision, be sure to consider the impact to both your federal and state returns.  

There are a few reasons to file separately even if doing so means you collectively pay more tax or get less of a refund. One is when you and your spouse keep separate finances as a rule. Another is to avoid being liable for each other’s amounts due. When filing jointly, the IRS can come after either of you to collect the full amount. And remember, if you’re filing separately and need to extend, you’ll need to each file your own extension as well.

How to choose?

The best way for married taxpayers to know for sure which method of filing is the best fit is to prepare the return both ways and compare the results. This means you’d have to prepare three returns—the joint return, and two separate returns. But who has time for that?  

Happily, most tax professionals can use their software, along with their knowledge of tax law and how it applies to unique separate filing situations, to determine whether it’s likely that filing separately would be better from a tax due or refund perspective. If your preparer isn’t offering this service, you might be missing out!     

If you want to be sure you’re not leaving tax money on the table, turn to a tax professional to help you file. Padgett’s network of CPAs and EAs can help you determine which method of filing is the best fit so you don’t have to worry. Find a location near you today!  

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8 tips to manage stress during tax time

Posted on February 8, 2023 - 10:44 pm by

When filing mistakes can be costly, it’s understandable that tax time can be stressful if trying to handle your finances on your own. This time of year can be especially difficult if you’re dealing with issues like Seasonal Affective Disorder, as wintry weather can add extra stress. So, how do you manage stress to stay in control now and during other stressful times?

Avoid financial surprises.

Last year, Capital One found that 73% of Americans say their finances are a major cause of anxiety. But money doesn’t have to be so stressful! While you can’t always predict a costly emergency, working with an accountant throughout the year can help you avoid many other unexpected costs, like a surprise tax bill. With a good accountant by your side, finances can be one less worry on your plate, allowing you to feel more in control of your situation.

Keep your desk or work area clean.

If you’re feeling overwhelmed, try tidying your workspace. You may find that a clean desk can be a huge boost to your productivity—up to 84%! Regularly cleaning and disinfecting commonly touched surfaces can also help you avoid getting sick.

Open and sort any physical mail.

When you get mail, open it, and consider what kind of mail it is. Is it something to do, something to delegate, something to file, or something to toss? Sort your mail accordingly. Make sure you’re holding onto any financial statements or tax documents for your accountant. Don’t forget to actually do the task or toss the junk! Even neat piles become a mess tomorrow.

Organize your email inbox.

Read your incoming emails and sort them the same way as your physical mail. If you find email notifications distracting, you can try a strategy called email batching. Instead of checking and responding to emails constantly, set aside time to respond to them in “batches.” Checking your email only a few times a day can help you manage stress and may give you more time to focus on other tasks.

Set realistic priorities.

Don’t overload yourself or commit to doing more than you’re able. Consider what you can realistically get done in your time frame. If you’ve already overcommitted, prioritize your tasks. Do what you can, and for what you can’t…

Communicate honestly and promptly.

When problems arise, let people know as early as you can if a commitment you made can’t be met. If possible, reschedule for when you will be able to meet their needs. Keeping communication open—with both your clients or customers, your staff, and your coworkers—can help avoid a lot of stress. And when you’re short on time, don’t be afraid to skip the small talk and focus on business.

Establish checklists and set procedures.

If you have standard ways of doing tasks, you may find yourself feeling less worried about things getting done correctly. Research has shown that having a routine can make it easier to manage stress. Whether it’s getting your financial system organized with an accountant, setting procedures for handling incoming tasks, or just developing daily habits for yourself, maintaining structure during stressful times can help you feel like you’re in control of your surroundings.

Don’t do it alone.   

Mental health is as nuanced and individualized as physical health, so no solution is one-size-fits-all. As with taxes, mental health is something you shouldn’t hesitate to discuss with a professional, especially if you are struggling with serious negative thoughts or intense anxiety.

If you’re feeling overworked, don’t be afraid to delegate tasks to others. That’s where Padgett can help. Finding a full-time tax and accounting partner can help take some time-consuming tasks off your plate so you can spend more time and energy on the things that matter most. Reach out to a Padgett tax professional near you today to find out how we can help get your life back in balance.

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6 tax deductions self-employed workers should know

Posted on February 1, 2023 - 10:13 pm by

There are a host of tax deductions available to self-employed individuals that can generate real savings when filing your tax return. As you prepare to file your 2022 taxes, here are a few deductions you should be mindful of:    

  1. Home office expenses: If you’re using an area of your home regularly and solely for business, you may be able to deduct expenses for a home office from your taxable business income.     

  2. Office supplies: Hang on to those receipts for pens, paper and printer ink as you may be eligible to deduct the total cost of your office supplies.   

  3. Social Security: Remember that if you’re self-employed, you’ll be paying more Social Security taxes than if you were on the payroll of a company. However, you can deduct half of these taxes on your return.  

  4. Vehicle expenses: If you use your vehicle for business, you can deduct either the actual expenses or the standard mileage rate, based on the business use of the vehicle. For the first half of 2022, the standard mileage rate is 58.5 cents per mile, and it increased to 62.5 cents per mile for the second half of the year.

  5. Section 179: This part of the tax code allows profitable business owners the opportunity to deduct up to the full cost of qualifying capital assets — like furniture, equipment and technology — immediately rather than depreciating them throughout their use. Any unused deductions can be carried forward and put toward next year’s tax return.  

  6. Food and beverages: The stimulus bill passed in December 2020 changed the deduction for meals, allowing businesses to deduct 100 percent of their qualifying food and beverage expenses if purchased from a restaurant in 2022.    

Curious about what deductions you might be eligible for on your 2022 tax return? Padgett’s talented network of CPAs, EAs and tax professionals near you can help navigate the confusing world of tax planning and filing. Find an office near you today! 

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Recap: our top 10 tax tips of 2022

Posted on December 29, 2022 - 9:45 pm by

It’s hard to believe that 2022 is already coming to an end!  We’ve covered a lot of tax tips in the past year. Here’s a quick recap of some topics you may need to discuss with your tax advisor and some tips for how best to prepare for that discussion: 

  1. Make sure you check your mail for important tax documents that will be coming out soon, like W-2s and 1099s. Check out our checklist for an idea of what you need to keep on hand. 

  2. Are you self-employed? Ask your tax preparer about some deductions you may be eligible for, such as home office expenses, vehicle expenses, and qualifying food and drink expenses. 

  3. If you’re married, make sure you discuss your filing options with your spouse and your tax preparer, so that you can determine whether it’s better to file a joint return or separate ones. You’ll also need to make sure your information and withholding is up to date, if you were married recently.

  4. Own a vacation home, Airbnb or VRBO property? Be sure to discuss that rental income with your tax preparer to make sure you’re following the “mixed-use” property tax rules.

  5. Whether you won or lost, if you gambled this year, make sure to keep good records and bring your documents to your tax preparer. Gambling winnings are often taxable income, and you may receive a Form W-2G if you earned money. But if you didn’t, your losses could be tax deductible with proper documentation.

  6. If you’re expecting a large tax refund, it may be worth considering whether or not that’s actually a good thing. A large refund can be useful if those funds are handled responsibly. However, it may mean you’re withholding more than you should from your regular paycheck. You may want to reevaluate your withholding after tax time.

  7. Ask your tax preparer about your eligibility for certain education tax credits, if you or a dependent is enrolled at an eligible educational institution. Don’t forget to factor scholarships or student loans into your budget and find out what could be taxable—or deductible!

  8. If you have business travel coming up soon, make sure to talk to your tax advisor about how you could mix some leisure time in with your business travel and still get some tax deductions. 

  9. Considering purchasing an electric vehicle soon? There have been some changes to the Clean Vehicle Credit, so make sure to check the rules regarding your eligibility and discuss the details of the purchase with your tax professional. 

  10. Opting for non-cash employee gifts this holiday season is one way to help ensure the gift is considered a de minimis fringe benefit, rather than taxable income for your staff. You may also be eligible for some tax deductions on gift and party expenses, so as always, check with your tax preparer. 

The best thing you can do to save money on your taxes is to start working with a tax advisor early. Be sure to work with them throughout the year on your tax planning. A good tax advisor can help you identify opportunities to save money, but you have to make sure you have time to implement their suggestions before it’s too late.  

If you don’t have a tax professional yet, or yours isn’t a good fit, we can help. Padgett’s nationwide network of CPAs and EAs are ready to lend a hand. Find an office near you today! 

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The Tax Implications Of Student Loan Forgiveness

Posted on October 12, 2022 - 6:37 pm by

If you’re one of the 45 million Americans with student loan debt, you’re probably aware of President Biden’s proposed plan for student loan forgiveness. On August 24, the Biden administration announced their Student Debt Relief Plan, which would offer forgiveness of up to $10,000 for most Americans, and up to $20,000 for Pell Grant recipients. 

While there’s still much we don’t know about the plan, Padgett President Roger Harris has some answers to common questions: 

Will I really be getting $10,000? 

“Don’t go and spend it yet,” Roger warns. Though the President has promised this loan forgiveness, there are some court challenges to the plan. Some have questioned his authority to initiate the plan without Congressional approval, meaning a court could potentially throw out the entire plan. Unfortunately, we don’t know for sure what will happen yet.

If the plan passes, you may be eligible for student loan debt relief if your annual income in 2020 or 2021 was less than $125,000 (individual or married, filing separately) or $250,000 (filing jointly). Most federal student loans are eligible for forgiveness, but be sure to check the StudentAid.gov website to learn more.

How do I get the loan forgiveness? 

The application is not yet live, but we expect to see it online sometime this month, October 2022. When the application is available, you’ll be able to find it online at StudentAid.gov, and you can sign up for email alerts for when the form goes live. You’ll have until December 31, 2023 to apply, but it’s recommended to apply as soon as possible, before the payment pause ends.

It’s free to apply for the loan forgiveness, so be wary of scammers. “Anytime money is involved, scammers will pop up,” Roger says. “Don’t pay anyone to get rid of your debt for you.”  

The U.S. Department of Education also warns users not to reveal their FSA ID or account information to anyone, not to give personal information to unfamiliar callers, and not to refinance your loans without knowledge of the risk to your debt forgiveness eligibility.  

Will this be taxable? 

The forgiveness of debt is usually a taxable event, however the federal government has already stated that this student loan forgiveness is an exception. You will not need to pay federal income tax on the forgiven amount.  

State taxes are another story. “It’s up to the states to decide whether or not they will tax that income,” Roger says. “Right now, there are several states that, unless they change their rules, will tax the student loan forgiveness.”  

Be sure to check your state’s tax websites and speak to your local Padgett advisor to learn more about the situation in your area. 

Do I need to report it on my tax return?  

When your student loan debt is forgiven, you may or may not receive an IRS form called a 1099-C for the forgiven amount, and you may wonder if that you need to report that on your taxes. The short answer, Roger says, is “maybe.” If you are in a state that will not be taxing the forgiven debt, and it isn’t taxed federally, you likely won’t need to report it. If your state does tax the loan forgiveness, you will likely need to report that information.

And remember, receiving or not receiving the 1099-C is not an indication of whether or not you need to report. It’s unlikely that the government will send these forms if the forgiveness is nontaxable, but if you receive a form in a non-tax state, don’t report it unnecessarily. And “if you live in a state that will tax the loan forgiveness, not getting a form doesn’t excuse you from not reporting it,” Roger warns. Be sure to talk to your tax professional about your situation, and bring them any IRS forms you may receive.  

If you don’t have a tax professional yet, start thinking about it now so you’re ready for tax time. Padgett’s nationwide network of EAs and CPAs are here to help you navigate the tax implications student loan forgiveness and beyond. Find an office near you today! 

Meet Roger Harris, Padgett President

Roger Harris is the president of Padgett and has been serving in this role since 1992. He has worked with the company for 50 years, since studying at the J.M. Tull School of Accounting at the University of Georgia. Prior to becoming president of the company, Roger served as President and Chairman of the Board for 10 years in one of the largest Padgett franchises in the system, giving him years of valuable expertise in the franchise industry. He has used his expertise as an industry expert in the Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News and Accounting Today. Roger has also offered testimony before Congress, putting his decades of experience to work as an advocate for small business legislation.

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Can You Claim A Mileage Deduction When Working From Home?

Posted on August 3, 2022 - 7:11 pm by

While Zoom meetings can start to wear thin, removing the daily commute is a huge bonus afforded to those small business owners who are or who have already transitioned from a physical location to a permanent work-from-home setup. 

Generally, the cost of travel between your home to your main workplace is a non-deductible commuting expense. But what if your main workplace is your home office? If you’re self-employed and meet the qualifications of a home office, a mileage deduction for business travel from your home office is allowed. For employees who meet the qualifications of a home office, a mileage reimbursement from the employer for business travel from your home is allowed.  

For your home office to qualify as your principal place of business, the space must be exclusively used for the business. Employees must also show that the home office meets the “for convenience of the employer” test to qualify.  

An employee’s home office is deemed to be for an employer’s convenience only if it is: 

  • a condition of employment 
  • necessary for the employer’s business to properly function, or 
  • needed to allow the employee to properly perform his or her duties. 

This test is not met if you simply use a home office for your convenience or because you can get more work done from home. Employees who are unable to meet these requirements will not be allowed a mileage reimbursement.  

Even if you qualify for a home office deduction as self-employed person or employee, you will also need to maintain adequate records to substantiate your mileage, such as a log or record-keeping app through your smart phone to claim a deduction. You should include the date, the mileage (preferably the beginning and ending odometer readings), and the business purpose for each trip.    

This will be especially important if you are using the standard mileage rate method rather than the actual expense method in 2022. The IRS raised the standard mileage rate from 58.5 cents per mile to 62.5 cents per mile effective July 1st in response to the increase in gas prices nationwide. You will need to track your mileage for the first half of the year and the last half of the year to maximize your deduction. 

If you are working from your home, Padgett’s nationwide network of trusted small business advisors and tax professionals can help you determine if you qualify for these deductions to maximize your tax savings. Find an office near you today! 

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