How to Ensure Your Officer Compensation is Reasonable

How to Ensure Your Officer Compensation is Reasonable

Throughout this year of economic upheaval, Congress and the US Treasury Department has put continual pressure on the IRS to produce additional tax revenue; the tax administration quickly responding with the intention to increase its enforcement of audits. A common theme to many of those audits, reasonable officer compensation for S corporation shareholders has always been a hot spot for tax cases. With vagueness on the law providing enough confusion for business owners to either intentionally or unintentionally break it, the high penalties at stake are simultaneously just the “additional revenue” the IRS seeks. So, if there’s no clear definition on what qualifies as “reasonable” officer compensation, how can shareholders know what to pay to act in accordance of tax law and to protect themselves from a possible future audit? Here’s a few tips to keep business owners on the straight and narrow… Shareholders Count as Employees While there’s no one-size-fits-all measurement of what constitutes as reasonable officer compensation, existing tax code does define S corporation shareholders as “employees” under the Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and federal income tax withholding. As such, all compensation received by the business owner – including fringe benefits like paid-for health insurance premiums – are considered wages and are thereby taxable under federal employment tax standards. Test the Compensation with the 9-Point Rule Operating on a case-by-case basis, whenever a tax court looks at an officer compensation lawsuit to see if the amount it reasonable, they consider these 9 factors: The responsibilities of the shareholder; The time and energy spent working for the business; The experience and training...
What to Do if You Receive an IRS Notice in the Mail

What to Do if You Receive an IRS Notice in the Mail

Let’s be honest: it can be scary to receive a notice from the IRS in the mail – our minds often jumping straight to worst case scenario of racked up penalties, or wondering if it could be a scam… Thankfully, unlike phone calls from those claiming to be IRS representatives, most mail notices are legitimate and usually not a reason to panic. Have you received an IRS notice recently? Here’s what to do. 1)    Don’t Ignore It As almost all letters from the IRS are notices about important changes or requests regarding your federal tax return or account, it’s important that you don’t ignore or throw them away. Often, simply reading the letter fully and following instructions will allow you to clear up any issue. However, all notices received from the IRS should always be top priority, as not responding with the appropriate action in a timely manner can lead to added penalties. 2)    Read the Letter Carefully Before doing anything else, you should read the letter carefully. Is it a notice for a corrected or changed tax return? If so, compare the information with your original filing to make sure it matches up before noting the changes in your personal records or alerting your tax professional. Is it a notice for taxes due or the required payment of fees? Again, review the details to see if what’s listed coincides with your records, before following the instructions to submit the appropriate payment. Check to make sure you didn’t accidentally post a payment to a different period. I’ve seen individuals handling their own payroll post into the wrong quarter leaving...
The IRS Moves Forward with Five-Year Plan

The IRS Moves Forward with Five-Year Plan

The recent Tax Cuts and Jobs Act (TCJA) has made some big changes to the nation’s tax landscape, and in the spirit of renovation, the IRS has made it clear they’re not going to stop there. Starting in 2018 and ending in 2022, the IRS has announced the details to their five-year plan with the aim of improving tax administration, taxpayer service, and the efficiency of their operations. According to The Fiscal Year 2018-2022 IRS Strategic Plan, the approach will be guided by six main goals: To give taxpayers the ability to meet their tax requirements; To encourage the compliance and enforcement of the Tax Code through improved administration; To actively work with external partners to help achieve said improvement; To amass an engaged, diverse, well-equipped, and flexible workforce; To improve systems of data access, analytics, and functionality for efficient and informed decision-making; and To increase the speed, effectiveness, and security of IRS operations through advanced technology and systems. Currently, the IRS is focusing a majority of their attention on fulfilling this sixth goal, as it’s widely believed that better technology will aid the resolution process for the remaining five goals, as well as help solve common taxpayer pain points through improved digital access like long waits on hold. Having already allocated $291M out of their budget of $11.4B to go towards purchasing new technology for their workplaces, the IRS is well on track. But experts like CPA and tax partner, Melissa Horne, at the CPA firm Smith & Howard in Atlanta, questions whether that will be enough. “The $291 million doesn’t seem like that much to spend on...
5 Tax Saving Tips for Small Businesses

5 Tax Saving Tips for Small Businesses

After the Tax Cuts and Jobs Act (TCJA), guidelines and tax expectations have become a little confusing lately. To help small businesses save some money and avoid accidental penalties in the wake of our current loophole-filled tax law, here are some tax saving tips to start employing within your small business today – courtesy of the National Association of Enrolled Agents. 1) Expense All Large Asset Purchases For businesses who recently bought expensive assets for their company, under the new TCJA, those asset purchases will continue to have a 100% depreciation bonus until the year 2022. Many company vehicle purchases may also qualify for the complete write-off, making now the perfect time for small businesses to start outfitting their workspaces with necessary assets. 2) Restructure Your Business For owners of qualifying pass-through businesses such as sole proprietors, S corporations, partnerships, or LLC and LLP members, the TCJA offers a valuable 20% tax deduction. Under the current law, however, to get this deduction with the maximum tax savings, business owners may be required to change their current tax structure. For example, sole proprietors could save more in tax dollars by making the switch on paper to an S corporation instead. It’s a confusing law and full of vague terminology that as of yet lacks IRS clarification, but if you’re a small business who could qualify for the 20% deduction, be sure to meet with your tax professional to discuss your options. 3) Watch for Deduction Changes Small businesses should be wary of continuing old habits in how they do business each year, as the many changes in what’s deductible could...
Was the Taxpayer Transparency and Fairness Act a Good Idea?

Was the Taxpayer Transparency and Fairness Act a Good Idea?

When Governor Jerry Brown signed the Taxpayer Transparency and Fairness Act into California state law on June 27th, 2017, the effective gutting of the Board of Equalization (BOE) into two separate tax agencies – the Office of Tax Appeals (OTA) and the California Department of Tax and Fee Administration (CDTFA) – garnered some mixed and apprehensive feelings from lawmakers and taxpayers alike. Today, this decision still leaves many wondering: was the Taxpayer Transparency and Fairness Act a good idea? What Is Different? Traditionally run by four elected officials, California’s BOE used to decide everything from standard tax appeal cases, to the administration of taxes statewide. And though sometimes a bit more of a sinecure, at least the officials elected often ruled more in favor of the taxpayer as a natural recourse towards reelection and securing a higher office. Today, it is the CDTFA handling sales, use, excise, and business tax administration, as well the assessment of state fees and business tax appeals, while the OTA oversees sales, use, and income tax disputes. Meanwhile, the BOE’s power has been minimized to merely managing public utility property taxes, adjusting local property tax assessments, reviewing insurance company taxes, and administrating the tax rates on alcohol and gas. Why the Change? It’s no secret that the public has been calling for changes within the BOE for a while now due to reoccurring scandals from misspending to nepotism, however, many now worry that the state Legislature’s decision to practically abolish the board – versus implementing a few audits and key policy changes – might have been potentially harmful overkill. The real reason for the...
New Tax Law Says Entertainment Write-Offs are a No-Go

New Tax Law Says Entertainment Write-Offs are a No-Go

The nation has seen a lot of tax changes this year, but the latest ban on entertainment deductions might be the most disappointing for both prospective clients and business owners. While the previous tax code of 2017 held that treating a client to a Giants game or nice meal could be deductible by 50%, as long as the entertainment was used to discuss a business deal, as of the start of 2018, such write-offs are now reduced to zero. Exceptions to the Rule Though not many in number, there are a few exceptions to the rule. For one, meals purchased while on business trips will remain 50% deductible, though meals given to employees on the business premises will drop from a complete write-off to only half. Other exceptions that will not be affected by the tax change include: Expenses for entertainment goods, facilities, and services that are sold to customers; Entertainment, recreation, or amusement that is given to employees as apart of their W2 compensation; and Expenses for social and recreational activities – including facilities – for employees that do not qualify as Highly Compensated Employees (HCE). As of 2018, an employee is classified as an HCE if they make more than $120,000 or have a 5% share or higher in the company. The Impact the Change Will Have For many businesses, this “small” change in tax law could have a rather large impact. For instance, businesses that focus on entertainment – such as golf courses or club lounges – could see a dramatic drop in memberships and sales, as companies are forced to entertain their clients in another,...

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