Although the chances of an audit are rare, the fact is tax audits are a fairly routine business for the IRS. That said, audits can be especially scary for small business owners. After all, there are certainly horror stories in which IRS audits have resulted in company closures.
Fundamentally, an IRS audit is an evaluation of your business’s financial accounts and information. As such, you’ll find most audits are a result of discrepancies on tax returns. The IRS is simply reviewing your entries to ensure everything is in order. Sometimes an audit is random, and other times it can be based on suspected suspicious activity.
So, here are some red flags that could trigger an IRS audit of your business.
1. Data Entry Errors
The more manual your accounting and expense management functions are, the more likely you are to make errors when filing your taxes. Your accounting system is crucial to understanding business performance and is also vital to tax preparation.
While most accounting functions are digitized nowadays, data entry blunders like treating expenses as income or duplicating an entry could trigger a letter from the IRS. An audit can be triggered by something as simple as misspelling your business name. This is where e-filing comes in handy because you can load vital information from past tax returns.
If your math is a little shaky, soliciting the services of a tax preparer near you could save you the headache of an IRS audit.
2. Failing to Report Some Income
Underreporting your income on your tax return is a top audit trigger. The IRS compares your income from one tax year to the next. A noticeable discrepancy without supporting information can make Uncle Sam sit up and take notice.
The IRS wants what it’s owed and will go to great lengths to verify the reported amount of tax is correct according to tax laws. So, it’s only a question of when before it spots your omission. This is especially true for cash-heavy businesses like barbershops and nail salons.
3. Questionable Business Deductions
It’s not uncommon for small business owners to have itemized deductions on their returns, like home office deductions. While these tax deductions can reduce your taxable income, they can also raise red flags when they don’t measure up to your income. Same case if you’ve made significant contributions to charity.
The IRS also compares your tax returns to those of other businesses in your industry – anything that’s out of the ordinary may subject you to further scrutiny.
4. Excessive Business Expenses
The IRS stipulates that a business expense has to be both ordinary and necessary to qualify as a deduction. For instance, a professional painter could claim paint and paintbrushes as business expenses, but a software engineer who paints as a hobby cannot.
If you have large expenses, it’s pertinent to keep all your receipts in case you are asked for verification. However, matters get a little more complicated when it comes to entertainment, travel, and meal expenses, as they may blur the lines between personal and business expenses.
5. Earning Substantial Income
One in 100 businesses get audited each year, and usually the ones that earn more than $1 million per year, especially if they report a significant change in income. It’s not unheard of for companies to start raking in millions in revenue seemingly “out of the blue”, particularly in the age of social media when branding has a direct impact on your bottom line.
Don’t be surprised if you hear from an IRS agent when you start showing a substantial increase from year to year. That’s also a great time to bring in a business advisor to develop a growth strategy.
6. Reporting Too Many Losses on a Schedule C
If you claim a business loss each time you file a tax return, you may be due for a tax audit. While it’s not uncommon for small businesses to have losses, having many years of Schedule C losses could have the IRS questioning the legitimacy of your business. If you don’t turn a profit, the IRS may consider your business a hobby which could limit your tax deductions.
Keep all your business documentation that shows your company’s revenue and expenses throughout the year to cover all your bases.
7. Being Self-Employed
Unfortunately, the IRS tends to scrutinize self-employed individuals, especially if they fail to report a profit for at least three out of five years. This applies to freelancers and anyone working in the gig economy as well. Yet again, the IRS could claim your business to be a hobby, which would disqualify you from claiming certain business deductions.
As a small business owner, you should consider forming an LLC to lower your audit risk. Consult a tax professional near you to determine which entity would work best for you.
8. Misclassification of Employees
Some businesses intentionally misclassify employees as part-time workers or independent contractors for several reasons:
To lower labor costs
To avoid paying certain small business taxes
To reduce business insurance expenses
It’s important to classify your employees appropriately and keep documentation of any independent contractors you hire.
Avoid the Dreaded IRS Tax Audit with FMA CPA
Talk to FMA CPA about your accounting practices, income, or deductions to determine what could trigger an IRS audit. We’re a CPA firm in Clearwater offering business advisory services designed to help you understand your business better and keep you on Uncle Sam’s good side.
Contact us for comprehensive tax preparation services and any questions you might have.
The I.R.S. recently announced a new tax rule for small business owners related to the 2021 American Rescue Plan Act. And as a result, any payment your business receives from a digital service or third party that accepts credit cards will appear on your income tax return if it exceeds $600. Between this rule and the coronavirus-related tax changes, you might wonder what the small business tax rate will look like in 2022.
Here’s everything you need to know.
Business Tax Changes Related to the COVID-19 Crisis
The U.S government brought in tax breaks and made specific changes to help businesses hold out during the pandemic.
Coronavirus Aid, Relief, and Economic Security (CARES) Act. This act encompasses the Paycheck Protection Program (P.P.P.), a loan meant for utility, employee payrolls, and mortgage payments. Your business may apply for loan forgiveness. If granted, this P.P.P. loan will not appear on your taxable income.
Economic Injury Disaster Loan (EIDL). The S.B.A. increased the borrowing limit for this low-interest loan.
Employee Retention Tax Credit (ERTC). Small businesses whose gross receipts decreased by at least 50% due to the pandemic qualify. If eligible, companies receive a tax credit, that is 50% of staff wages.
Families First Coronavirus Response Act (FFCRA). This act mandated particular businesses to offer sick pay and family leave arising from COVID-19. These companies would then receive 100% tax credits.
Small Business Tax Rates for 2022
Small business tax rates aren’t straightforward. This complexity is because of the non-existence of a uniform tax rate for all of them. Below are the small business tax rates by business structure.
C corporations
C corporations’ small business tax rate is perhaps the simplest form, courtesy of the 2017 Tax Cuts and Jobs Act. If you qualify, you will pay a flat tax rate of 21%. Moreover, there’s no need to worry about the alternative minimum tax (A.M.T.) as the TCJA got rid of this requirement. Note that C-corporations comprise approximately 5% of small businesses.
As for dividends, your business must pay shareholder dividends. Your shareholders must then include the dividends tax on their individual income tax returns, hence the term “double taxation.” The shareholders’ tax rate varies based on whether it’s a qualified or ordinary dividend. While C-corp experiences double taxation, their corporate tax rate is less than several personal tax bracket returns.
Pass-through entities
Pass-through businesses include partnerships, S corporations, sole proprietorships, and Limited Liability Companies(L.L.C.s).
These entity types make up about 95% of small businesses in the U.S. and don’t pay federal income tax. Instead, an employer includes business income on their individual income tax returns. Therefore, your income in a tax year will determine your federal income tax rate.
Therefore:
If you are a business owner and receive secondary income from a different job or investment, your tax rate will reflect the total income.
Also, the more your taxable income is, the steeper your tax rate.
Two primary factors determine your small business tax rates.
1. Tax credits
Tax credits are precise reductions. For businesses, these may include work opportunities and alternative car credit. Individuals also receive federal tax credits such as the adoption credit and the earned income tax credit.
2. Deductions
Deductions reduce your taxable income. Examples of business deductions include rent expenses and legal fees. Individual deductions include medical expenses and charity donations.
Other Small Business Taxes
Small businesses must pay other taxes besides federal income taxes.
These include:
State income tax. Tax rules differ by state. The only states without a state tax are Florida, Wyoming, Alaska, South Dakota, Washington, Nevada, and Texas. As for the other states, businesses are subject to a corporate income tax within the 2.5 and 11.5 percent range.
Gross receipts tax. This tax typically applies to states that don’t levy a state income tax.
Payroll tax. Payroll taxes are a requirement for any business that has employees. These taxes include federal and state unemployment taxes and Federal Insurance Contributions Act taxes ( Social Security and Medicaid).
Self-employment tax.
Excise tax. Businesses that sell specific goods and services like gasoline and indoor tanning must pay the excise tax.
Sales tax. Sales tax is a requirement in 45 states. Rules differ for each state. And in some cases, you may need to remit taxes for more than one local jurisdiction.
We, therefore, recommend working with a C.P.A. firm to help you navigate these tax rules.
Property tax. You must pay property tax if you own vehicles and real estate.
Tax-Saving Tips
Here are several ways to make tax filing more successful in the 2022 tax year.
Make use of accountable plans
Monitor your adjusted gross income as it affects your deductions
Track all business transactions
Avoid late payments
Consider business restructuring
Take advantage of technology by installing a tax preparation software
Knowing which entity type will offer better tax rates can be confusing. For instance, L.L.C.s have several options available and may pay taxes as S corps or sole proprietors. A business advisor can break down the rates to help you choose the most beneficial option.
F.M.A. C.P.A. is a C.P.A. firm in Clearwater with a team of professionals who understand state tax rules. Our business advisory services include tax planning and accounting. Tax season doesn’t need to be stressful. Contact us at 727-530-0036 to learn how our team can make your small business tax planning stress-free.
Income Tax Brackets—How is Your Income Tax Calculated?
The United States operates under a progressive tax system that imposes a higher tax rate on taxpayers who have higher incomes. Generally, you’ll pay more tax as you move up the pay scale, which is accomplished by creating income tax brackets that group taxpayers based on income ranges.
Seven tax brackets exist for the 2021 tax year or taxes due in April 2022 or October 2022, with an extension. These are 10pc, 12pc, 22pc, 24pc, 32pc, 35pc and 37pc. The bracket you fall under depends on several factors such as your taxable income, credits, deductions, and your filing status: single taxpayer, married couples filing jointly, or married filing separately.
Upcoming Tax Brackets & Tax Rates for 2021-2022
The IRS tends to adjust tax rates, allowances, and thresholds every year based on inflation.
Here’s a look at the brackets and tax rates for taxes due in April 2022.
Income Tax Rate
2021
Single Filers
Married Filing Jointly and Qualifying Widow(er)s
Head of Household
10%
$0 – $9,950
$0 – $19,900
$0 to $14,200
12%
$9,951 – $40,525
$19,901 – $81,05
$14,201 – $54,200
22%
$40,526 – $86,375
$81,051 – $172,750
$54,201 – $86,350
24%
$86,376 – $164,925
$172,751 – $329,850
$86,351 – $164,900
32%
$164,926 – $209,425
$329,851 – $418,850
$164,901 – $209,400
35%
$209,426 – $523,600
$418,851 – $628,300
$209,401 – $523,600
37%
$523,601 and above
$628,300 and above
$523,601 and above
For married couples filing separately, the tax brackets are similar to single filers, with deviations coming in for incomes above $209,425. The tax rates for married couples filing separately become:
35%, for incomes between $209,425 and $314,150
37% for incomes over $314,150
In November 2021, the IRS provides tax inflation adjustments for tax year 2022. As such, here are the tax brackets for taxes due April 2023 or October 2023, with an extension.
Income Tax Rate 2022
Single Filers
Joint Filers
Heads of Households
10%
$0 to $10,275
$0 to $20,550
$0 to $14,650
12%
$10,275 to $41,775
$20,550 to $83,550
$14,650 to $55,900
22%
$41,775 to $89,075
$83,550 to $178,150
$55,900 to $89,050
24%
$89,075 to $170,050
$178,150 to $340,100
$89,050 to $170,050
32%
$170,050 to $215,950
$340,100 to $431,900
$170,050 to $215,950
35%
$215,950 to $539,900
$431,900 to $647,850
$215,950 to $539,900
37%
$539,900 and above
$647,850 and above
$539,900 and above
How Federal Income Tax Brackets Work
Almost everyone agrees that the current tax system is too complicated. Tax brackets are not as intuitive as they seem at first glance because odds are you’ll have to look at more than one tax bracket to figure out your effective tax rate. That’s why most people opt to work with a CPA firm for tax planning and business advisory services.
The tax bracket your top dollar falls into is your marginal tax rate. However, not all your income is levied at this rate across the board. Let’s say you’re a single taxpayer with a taxable income of $80,000 in tax year 2021. Your marginal tax rate is 22%, but here’s how your taxes will be broken down.
The first $10,275 will be taxed at 10% resulting in a tax of $1,027.50.
The next $31,500 ($41,775-$10,275) will be taxed at 12% resulting in a tax of $3,780.
The last $38,225 ($80,000-41,775) will be taxed at your marginal tax rate of 22% resulting in a tax of $8,409.50.
Therefore, your total tax returns will amount to $13,217, or the sum of $1,027.50 +$3,780 + $8,409.50. As you can see, the last dollar you earn is taxed more than the first dollar you earn – this is technically the principle of a progressive tax system.
How To Get Into a Lower Tax Bracket
No one wants to pay higher taxes than they need to. Fortunately, you can lower your tax bill through tax credits and tax deductions.
Several tax credits exist to help low-income and middle-income households reduce the amount of taxes they owe. Some examples include:
Earned income tax credits to offset the burden of Social Security taxes
Child tax credit to defray the costs for childcare for dependents under age 13
Lifetime learning credit to offset the costs of post-secondary education
You can also lower your income using tax deductions. For instance, you can deduct property taxes and the mortgage interest paid on a home loan. Additionally, there’s a defined dollar amount that lowers your taxable income.
Let’s look at the 2021 and 2022 tax years, where the standard deduction is as follows:
Filing status
2021 tax year
2022 tax year
Single
$12,550
$12,950
Married, filing jointly
$25,100
$25,900
Married, filing separately
$12,550
$12,950
Head of household
$18,800
$19,400
The IRS allows you to take the standard deduction on a no-questions-asked basis. But taking the standard deduction means you cannot deduct home mortgage interest, medical expenses, plus charitable donations from your tax bill. If your standard deduction is less than your other deductions combined, it’s best to itemize your deductions and save money.
The Bottom Line for Income Tax Brackets
FMA CPA is a CPA firm in Clearwater, specializing in helping individuals and small business owners with all matters of tax preparation and tax planning. As business advisors, we can help you get your house in order when filing taxes to ensure you don’t have to pay Uncle Sam more than what’s necessary.
Business Development Strategy: Boost Your Performance & Optimize Your Processes
Having a business development strategy is critical to the growth and success of your business. It’s a process that ensures everyone in your company is working toward a common goal and is used to identify and nurture new business opportunities.
Most small businesses, no matter how niche-specific their products and services, operate in a competitive business environment. Working with a strategic business advisor can help align your short-term operations with your long-term vision to drive growth and profitability. Although most organizations have the same overarching goals of increasing revenues and building strategic partnerships, the scope of business development is wide-ranging and varies from one corporation to another.
In brief, business development is all about identifying the initiatives and business operations that will make your business better. Not all businesses get strategic planning straight away. It’s a complex process that spans a multitude of departments, from sales and marketing to project management and vendor management. A business advisory firm will help you develop a framework that aligns the different departments to create a competitive advantage and prevent your teams from losing sight of the company’s objectives.
Grow Your Business with Small Business Advisory Services
Small business owners wear many hats and take on many different roles, including that of chief executive officer, hiring manager, and sales representative. Taking on these roles and dealing with the occasional crisis can take up too much of your time and, in turn, derail the growth and the sustainability of your enterprise. This is where business advisory services come in.
Business advisors are experts in financial planning and forecasting and can provide the insights needed to guide your operations and decision-making. They do this by identifying redundancies and inefficiencies in the way you do business and providing strategic solutions to unlock growth and elevate your business to the next level.
That doesn’t mean you should only bring in a business advisor when you have a fire to put out; their advice and expertise are fundamental for business growth, whether you’re just starting out or looking to expand your business.
Here’s what you stand to gain from small business advisory services.
Understand Your Competitive Landscape
The success of your business is dependent on far more than your internal processes. You must have a solid understanding of the competitive landscape in your industry and keep up with a constantly evolving business environment. Getting a crystal-clear perspective on the changing factors in your market and industry is how you differentiate your brand and gain an edge over your competitors.
For business advisors, keeping up with changing trends, methodologies, and business strategies is just part of the job. Leveraging their services means you’ll always have the latest research at your fingertips.
Strategic Planning
The day-to-day requirements of running a business don’t leave enough time to plan for the future. Without a clear plan, you risk stagnation or, worse, obsoletion. A business advisory firm provides you with a board of experts from diverse industries and fields whose aim is to help you develop a strategic plan and roadmap for the future.
They can advise on how to enter a new market, acquire a new business, or whether to drop a certain department or product from your portfolio.
Accounting and Bookkeeping services
Typically, businesses seek advice from a CPA firm at least once a year when organizing their books. However, an accountant can provide advice on a myriad of matters, including tax filing and audits, business investment strategies, payroll management, and financial legal advice.
With a business advisor, you get a clear and unbiased perspective on your finances as well as the best possible advice that will help you achieve your business objectives.
Financial Planning and Forecasting
From tax planning to improving cash flow and financial modeling, a business advisor helps you better understand your financials and take measures to improve your company’s financial health. Financial planning allows for increased productivity and stronger business decisions. Having a financial plan sets forth a process to ensure your business goals are achievable from a financial point of view.
Create a Social Media and Digital Marketing Strategy
It takes a lot of research to keep pace with the latest marketing trends. Today, every business needs a business marketing strategy to remain competitive. A business advisor can equip you with the knowledge and tools to launch and maintain a successful marketing strategy.
Working with a business advisor helps in creating an organizational plan and marketing strategy that caters to the needs of your customers. It also allows you to prioritize your products and services in a way that maximizes profitability.
Contact FMA CPA for Business Advisory Services and Business Development Strategies
FMA CPA is a CPA firm in Clearwater specializing in helping small businesses create business development strategies to increase their bottom-line revenues and sustain long-term growth. Contact us today to schedule your free consultation for our business development strategy services.
A business advisory plan is key in a dynamic business environment. Regulations and technology change much faster, creating new opportunities and challenges. Today, global competition continues to increase, forcing business owners to rethink their strategies.
As a business owner, you may not have all the knowledge required to deal with these changes in the business environment. You need help from people with a deeper understanding of business dynamics. These are the business advisors.
Business advisors are professionals who possess critical knowledge of various aspects of a business. They help you with strategic planning, taxation, investment, and estate planning.
A trusted business advisor works with your accountant and attorneys to provide you with more relevant assistance. So why do small businesses need advisory plans?
Let’s explore five reasons.
To Save Time
You may not have all the knowledge required to make your business take the lead in the market. As a small business owner, your skills may somewhat be limited to one field of study.
For instance, if you’re an expert in marketing, you might need assistance with auditing and taxation. It takes a lot of time to study and build our knowledge in any of these fields. Now, since time is limited, the best option is to have a business advisory plan.
With a business advisory plan, your work is in the hands of experienced people. They can do the work much faster and save you much time. These services mean you can concentrate on what you do best without worrying about delayed reports and tax returns.
To Boost Profits
A business advisor can help you come up with wise financial plans. These plans benefit you in two ways: maximizing revenues and minimizing expenses. To maximize revenue, a business advisor can help you in several ways. These include:
Identifying new opportunities
Diversifying your business
Making wise investment decisions
Business advisory services can help minimize costs in various ways. A common approach is to help spot a legal advantage that can help lower your taxes.
To Make Strategic Plans
Small business owners, especially new ones, may lack the essential skills needed in strategic planning. A business advisory plan helps tap into the minds of experienced professionals to come up with sound plans. These professionals help point out various aspects of a business that need your attention.
Strategic plans may also act as the fuel that propels your business to higher growth. Some of these plans may require presentation to third parties. For instance, a lending institution may request such documents to approve a loan. So, when you prepare these documents with the help of an expert, they become more presentable to third parties.
To Compete with Large Businesses
Unlike large companies, small businesses may lack the resources to hire highly skilled professionals. But that doesn’t mean you can’t get professional services. With a business advisory plan, you have access to expert services. That’s to say, you’ll have the same advantage large companies have at a reasonable cost.
As a result, you can survive in the same market. Best of all, your expenses don’t increase too much after outsourcing expert services. These professionals work on a contractual basis or an hourly basis. Whatever the case, you get their services at a lower cost than hiring a full-time expert.
To Comply with Government Regulations
Businesses must follow many laws from the state and federal governments. Business laws, especially auditing and taxation, tend to be bulky and complicated. But with a business advisory plan, they shouldn’t be a problem.
An advisory plan can help you with various legal issues. These include registering intellectual properties and drafting legal documents for business formations. A business advisory plan also provides consultations on new legal matters that affect your business.
Where to Get Business Advisory Services
Business advisors are professional individuals who keep monitoring emerging business trends. They possess specific knowledge which is always up to date. Plus, they understand the high level of service that clients need. A trusted advisor focuses on your situation and comes up with tailored solutions designed just for you.
If you’re looking for business advisory services, FMA-CPA is here for you. Our CPA firm in Clearwater provides business advisory services to help your business thrive. Need help with taxation and accounting services? Don’t hesitate to reach out to us today for a free consultation.
IRS Announces Inflation-adjusted Rates for 2022 Tax Returns
The IRS announced new rates for 2022 tax returns. These rates have increased due to inflation, which was higher in 2021. The new rates will become effective starting January 2022. So, you’ll need to take the changes into account for the first time in 2023—when filing your 2022 tax returns.
Below are some of the main changes you should expect in your 2022 tax returns.
Tax Brackets to Have Higher Limits
While tax rates remain the same, limits under each bracket have increased by at least 3%. Meaning, your income could increase by 3% and still leave you in the same tax bracket. These rates depend on whether one is single or married. For married couples, your rates depend on two things: whether you’re filing separately or jointly.
Increase in Standard Deductions
Taxpayers usually must choose between standard deductions and itemized deductions. These are expenses that the IRS allows taxpayers to deduct from their taxable income. Since you can’t have both the standard and the itemized deductions, it makes sense to go with the highest.
For married couples filing jointly, standard deductions increased from $25,100 to $25,900. For single taxpayers and married couples filing separately, deductions increased from $12,550 to $12,950. Lastly, for those filing as heads of households, standard deductions rose from $18,800 to $19,400.
Earned Income Tax Credit (EITC)
EITC is a federal tax provision that allows tax refunds to taxpayers who qualify. If you have children and your income is low, you may be eligible for the child tax credit. In 2022 taxes, those with three or more qualifying children will get a tax credit of $6,935. And those with one qualifying child will get $3,733. Since the income phase-out limits have increased as well, your income could increase and still qualify for EITC.
Increase in 401K Contributions
The 401K contributions increased from $19,500 in 2021 tax returns to $20,500. So if your employer provides for social security, you’ll have to contribute more to this fund. But since the contribution is tax-deductible, this means your taxable income will decrease.
Annual Exclusion for Gifts
When you give someone a gift, you may be required to pay taxes if the gift’s value exceeds certain amounts. In tax year 2021, the limit was $15,000, but this amount will be $16,000 for 2022 tax returns. That means you can give a person a gift valued at up to $16,000 annually without paying taxes on it.
Foreign Earned Income Exclusion
If you live abroad and earn money from different countries, you can qualify for the foreign earned income exclusion. Tax laws allow for a deduction of a certain amount of your income earned abroad. In 2021, the limit was $108,700. But in the new tax season, the limit will be $112,000.
Standard Mileage Rates
These are tax-free reimbursements that employers give employees who use personal cars for business. It applies to cars, vans, panel trucks, and pickups. These rates fall into three categories: business, charitable purposes, and medical/military moving.
In 2022 tax filings, the applicable rates will be:
58.5 cents per mile for business
14 cents per mile for charitable uses
18 cents per mile for military and medical moving expenses
Capital Gains Tax
These are taxes paid when you sell real estate, stocks, or other investments at a profit. These rates haven’t changed for the 2022 tax year. They remain at 0%, 15%, and 20% respectively. However, the taxable limits under each rate have increased from 2021 to 2022.
For single taxpayers, capital gains taxes (at 0%) have increased from $40,400 to $41,675. The same limit applies to married couples filing separate returns. For married couples filing jointly, the amount increased from $80,800 to 83,350. For heads of households, the amount rose from $54,100 to $55,800.
These are a few examples of tax rates applicable to 2022 tax returns. All the adjustments show an upward increase in both payments and deductions. So, you must keep up to date for you to file accurate returns and avoid cases of owed taxes. For a simple transaction, you can use a tax calculator. But for detailed calculations, you must be careful with each item in the tax law.
A business advisor can help you lower your taxes without violating any tax laws. If you’re under pressure to file returns for the year ending December 31, 2021, reach out to our CPA firm in Clearwater. We can help you file your returns. Our tax experts can also help you apply for an automatic extension to give you more time.
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