How Does QuickBooks Online Handle Mobile Expenses?

If you purchase several items and services away from the office, QuickBooks Online can help you record them while you’re out and about.

QuickBooks Online’s mobile app, available at the Apple App Store and Google Play, can do many of the same tasks that it performs on your office desktop. You can, for example:

  • Check account balances.
  • Add and edit estimates, invoices, and sales receipts.
  • Add and edit customers, vendors, products, and services.
  • Record invoice payments.

One of the most common uses of the app, though, is the recording of expenses. Rather than coming home from a trip with your briefcase stuffed full of receipts and notes about purchases you made, you can document them on the road using your mobile device. When you get back to the office and log on to QuickBooks Online, they’ll all be there.

How It Works


You can snap a photo of a receipt with your smartphone and attach it to an expense you record in QuickBooks Online’s mobile app.

Open your QuickBooks Online mobile app and click the plus (+) sign at the bottom, then tap the Expense icon. The New Expense screen will open. If you have a paper receipt, lay it flat on a table in a well-lighted area. Click the camera icon and then the Take Photo link. If you took the picture outside of QuickBooks Online for some reason, you’d select the Choose Existing link. Your device’s camera will open, and you’ll see four squared corners on the edges of the screen.

Hover your device over the receipt. You’ll need to position the camera so the receipt area that you want captured appears within the four corners. QuickBooks Online will provide advice along the way to help you do this. When you’re in the right place, you’ll see the phrase, Great! Snap the pic. Click the shutter icon below, and your device will snap the photo and display it. If you want to use it, click Use this photo (if you want to try again, click the X in the upper left of the screen).

QuickBooks Online will open the New Expense screen. You’ll see a miniature version of your receipt in the upper left corner. Looking at your original version—it will be too small to see here—fill in the blanks with the data from the purchase. Be sure to click the Billable button if you can bill someone else for it. Make any notes you’ll need in order to remind yourself of the transaction, and Add a Split if you need to divide the transaction between categories, customers or vendors, or billable status. Click Save when you’re done.

Automatic Synchronization


Once you’ve entered an expense in QuickBooks Online’s mobile app, it will be synchronized with your desktop, browser-based version.

Of course, no duplicate data entry is required once you’ve entered a receipt in the QuickBooks Online mobile app – the two versions always update each other.

Once you’re back at your desktop, on the browser-based version of QuickBooks Online, click Expenses in the toolbar to open the Expense Transactions screen. You should see the transaction you just created on your mobile device first in line on the list that displays. Click View/Edit at the end of that line to see it. Look toward the bottom under Item Details to see the link to an attachment that contains the photo you snapped of the receipt.


The record of the expense you entered on your mobile device will contain a link to an attachment that contains the photo of your receipt.
Of course, you don’t have to take a picture of your receipt with your mobile device. You can simply enter the details of your expense and Save the record.
QuickBooks Online’s mobile app can help you save time and improve the accuracy of your work done away from the office. As we mentioned earlier, the app is capable of doing much more than simply recording receipts. We would be happy to explain and review the app with you to make sure your remote accounting work is done correctly.  Please contact us with any questions or to make an appointment.

Several Ways to Defer the Tax on Gains

When a sale of a business or investment property results in a gain, the seller is typically taxed on that gain during the year of the sale, even when the gain was generated over many years. However, the tax code provides opportunities to spread this gain over several years, to postpone it by deferring the gain into another property, or to simply defer it for a specified period of time. These arrangements can be accomplished by selling the property in an installment sale, by exchanging the property for another, or by investing in a qualified opportunity fund. As with all tax strategies, these options have unique requirements. To follow is an overview of what tax law says about these strategies:

Tax-Deferred Exchange – Many people refer to this arrangement as a “tax-free exchange,” but the gain is not actually tax-free; rather, it is deferred into another property. The gain will eventually be taxed when that property is sold (or will be deferred again in another exchange). These arrangements are also known as “1031 exchanges,” in reference to the tax code section that authorizes them: IRC Sec. 1031.

In the past, these exchanges applied to all properties, but since 2017, they have only applied to business- or investment-related exchanges of real estate. One of the requirements is that the exchanges must involve like-kind properties. However, the tax regulations for real estate exchanges are very liberal, and virtually any property can be exchanged for any other, regardless of whether they are improved or unimproved. One exception to this rule is that U.S. property cannot be exchanged for foreign property.

Exchange treatment is not optional; if an exchange meets the requirements of Sec. 1031, the gain must be deferred. Thus, taxpayers who do not wish to defer gains should avoid using an exchange.

It is almost impossible to for an exchange to be simultaneous, so the tax code permits delayed exchanges. Although such exchanges have other requirements, they generally involve a replacement property (or properties) that is identified within 45 days and acquired within 180 days or the tax-return due date (including extensions) for the year when the original property was transferred—whichever is sooner. An exchange accommodator typically holds the proceeds from such exchanges until they can be completed.

The tax code also permits reverse exchanges, in which an exchange accommodator holds the replacement property’s title until the exchange can be completed. The other exchange property must be identified within 45 days, and the transaction must be completed within 180 days of the sale of the original property.

The amount of gain that is deferred using the exchange method depends on the properties’ fair-market values and mortgage amounts, as well as on whether an unlike property (boot) is involved in the exchange. The rule of thumb is that the exchange is more likely to be fully tax deferred when the properties have greater value and equity.

Installment Sale – In an installment sale, the property’s seller provides a loan to the buyer. The seller then only pays income taxes only on the portion of the taxable gains that occur during the year of the sale; this includes the down payment and any other principal payments received in that year. The seller then collects interest on the loan at rates approaching those that banks charge. Each year, the seller pays tax on the interest and the taxable portion of the principal payments received in that year. For a sale to qualify as an installment sale, the seller must receive at least one payment after the year when the sale occurs. Installment sales are most frequently used for real estate; they cannot be used for the sale of publicly traded stock or securities. The installment sale provisions also do not apply when the sale results in a tax loss.

If the sold property is mortgaged, the mortgage must be paid off as part of the sale. Even if the seller does not have the financial resources to pay off the existing loan, an installment sale may be possible if the seller takes a secondary lending position or includes the existing mortgage in the new loan.

An installment sale has hazards; for instance, the buyer may decide to either pay off the installment loan or sell the property early. If either occurs, the installment plan ends, and the balance of the gains are taxable in the year when the buyer either paid off the loan or sold the property (unless the new buyer assumes the loan).

Qualified Opportunity Funds – Individuals who have capital gains from the sale of a personal, investment, or business asset can temporarily defer those gains into a qualified opportunity fund (QOF). In the Tax Cuts and Jobs Act, Congress created QOFs to help communities that still have not recovered from the previous decade’s economic downturn. QOFs are intended to promote investments in certain economically distressed communities, or “qualified opportunity zones.” To qualify as a QOF, a fund must hold at least 90% of its assets in qualified-opportunity-zone property.

Investments in QOFs provide unique tax incentives that are designed to encourage taxpayers to participate in these funds:

  1. For a gain to be deferrable, it must be invested in a QOF within 180 days of the sale that resulted in the gain.
  2. The gain is deferred until December 31, 2026—or to the year when the taxpayer withdraws the QOF assets, if that occurs earlier.
  3. As the investment is an untaxed gain, the taxpayer’s initial basis in the QOF is zero; this basis lasts for five years, so any funds withdrawn from the QOF in that time are fully taxable.
  4. If the funds are left in the QOF for at least five years, the basis increases to 10% of the deferred gain; in other words, 10% of the original gain is tax-free.
  5. If the funds are left in the QOF for at least seven years, the basis increases again, to 15% of the deferred gain; thus 15% of the original gain is tax-free.
  6. If the funds remain in the QOF after the tax on the gain has been paid, then the basis is equal to the amount of the original deferred gain.
  7. If the funds are left in the QOF for at least 10 years, the taxpayer can elect to increase the basis to the property’s fair market value. With this adjustment, the appreciation of the QOF investment is not taxable.

If a taxpayer’s investment in a QOF consists of both deferred gains and other funds, it is treated as two investments. The special tax treatment described above only applies to the deferred gains; the other funds are treated as an ordinary investment.

Unlike tax-deferred exchanges, QOFs only require the investment of the gains (not the entire proceeds of the sale).

Each of the aforementioned tax strategies is complicated and only applies in certain situations. None of these strategies should be utilized without careful analysis to ensure their suitability. Please note that not all of the qualifications for these strategies are included in this article.

If you have questions about these strategies or would like to make an appointment to analyze whether these tax-deferral options fit your situation, please call us.

Don’t Be a Victim of Cybercrooks

The season to prepare tax returns has begun. Unfortunately, it is also the season for scammers who are out to steal your identity, swindle you out of your money, and even file tax returns in your name. All of this can make you poorer, ruin your credit rating, cause financial havoc, and cost you hours of time trying to straighten out the messes caused by cybercrooks.

The best way to prevent your ID from being stolen, your computer from being hacked, or yourself from being tricked by some clever schemer is not to take their bait. These schemers will target you in a number of ways, including through email, regular mail and phone. Each one will try to scare you, appeal to your greedy side or trick you into allowing access to your electronic devices.

The most common way for cybercriminals to steal money, bank account information, passwords, credit cards and Social Security numbers is to simply ask for them in an unsuspecting way.

Here are a few steps you can take to protect against phishing and other email scams:

  • Be vigilant and skeptical. Never open a link or attachment from an unknown or suspicious source. Even if the email is from a known source, the recipient should approach it with caution. Cybercrooks are good at acting like trusted businesses, friends, family and even the IRS.
  • Emails and other electronic contact from the IRS. If you should receive an email claiming to be from the IRS or directing you to an IRS web site, you should know that the IRS never initiates contact via email. This includes asking for information via text messages and social media channels. The first thing you should do is contact this office. But above all, DO NOT reply to the message, open any attachments (which may contain malicious code that will infect your computer), or click on any links in a suspicious email or phishing website and enter your confidential information. The IRS never asks for detailed personal and financial information like PINs, passwords, or similar secret access information for credit cards, banks, or other financial accounts.
    The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org, or anything other than .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the site.
  • Double check the email address. Thieves may have compromised a friend’s email address. They might also be spoofing the address with a slight change in text, such as by using narne@example.com instead of name@example.com. Merely changing the “m” to an “r” and “n” can trick people.
  • Remember that the IRS doesn’t initiate spontaneous contact with taxpayers by phone or email to ask for personal or financial information. The IRS does not call taxpayers with aggressive threats of lawsuits or arrests. It is a common tactic for criminals to call, acting as an IRS agent to try collecting a tax bill and threatening to arrest you or have your home seized for payment. These same individuals will sometimes ask you to make payments using a gift card, which the IRS would never do.
  • Don’t click on hyperlinks in suspicious emails. It is common practice for cyber crooks to send out emails asking you to click on an embedded link to update your password or other sensitive information. Legitimate firms would not do that, so be safe and ignore and then delete the email. If the email is from a business or person you deal with and you are concerned, contact the business directly, either through its main webpage or by phone. Also remember that no legitimate business or organization will ask for sensitive financial information by email. Another trick cybercrooks employ is to hack into a friend’s emails and then send you messages asking you to click on an embedded link in the email, which can end up installing malware on your computer.
  • Use security software to protect against malware and viruses found in phishing emails. Some security software can help identify suspicious websites that are used by cybercriminals as well as detect malware on your computer.
  • Use strong passwords to protect online accounts. Experts recommend the use of a passphrase, instead of a password, with a minimum of 10 digits, including letters, numbers, and special characters. But don’t use a family name or birth date, as cybercriminals may already have that information and will try it.
  • Use multi-factor authentication when offered. Two-factor authentication means that in addition to entering a username and password, the user must enter a security code. This code is usually sent as a text to the user’s mobile phone. Even if a thief manages to steal usernames and passwords, it’s unlikely the crook would also have a victim’s phone.
  • Communication from the IRS. If you receive a phone call, fax, or letter from an individual claiming to be from the IRS, you should immediately contact us before providing any information. You should do this whether you suspect the contact is legitimate or not. You can also contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you.
  • Educate the elderly. The elderly are frequent victims of scammers. If you have elderly family members or friends, take the time to sit down with them and educate them about scammers, email phishing and the like.
  • Too good to be true. One of the tactics used by scammers is fooling you into thinking that you won a foreign lottery or have received a foreign inheritance and that you need to send money before the funds can be transferred. Remember the old adage: “If it is too good to be true, it probably isn’t true.”
  • Report phishing scams. Should you receive a suspicious email, you can help the government fight the cybercrooks by forwarding it to phishing@irs.gov.

Unfortunately, our modern communication methods have provided opportunities for cybercrooks to scam you, which is a growing problem. You have to be vigilant and always keep your guard up. Don’t take their bait.

Always contact us if you receive any communications from the IRS or state tax authorities. Be extra cautious with emails, phone calls, and mail. If you have questions related to phishing or ID theft, please call us.

Unforced Errors – The 8 Most Common IRS Tax Penalties and How to Avoid Them in 2019

You know the old line about the inevitability of death and taxes? It’s still true. What isn’t inevitable, however, is the need to pay penalties to the IRS. It happens, but it doesn’t have to, and the main reason that it does is because taxpayers don’t educate themselves about the rules. When you get hit with an IRS penalty, it adds on to a number that you already wish you didn’t have to pay.

To ensure that you get through tax season without unnecessary costs and aggravation, below is a list of the tax penalties that the IRS most frequently assesses against taxpayers.

The Eight Most Common Tax Penalties Assessed:

  1. Penalty for underpaying estimated tax payments
  2. Penalty for taking early withdrawals from tax-advantaged retirement accounts, including IRA accounts and 401(k) accounts
  3. Penalty for taking nonqualified withdrawals from 529 plans, health savings accounts (HSAs), and similar tax-favored accounts
  4. Penalty for failing to take required minimum distributions (RMDs) from tax-favored retirement accounts
  5. Penalty for making excess contributions to IRAs and other tax-favored accounts
  6. Penalty for failing to file, or for filing your required tax return after the designated due date
  7. Penalty for failing to pay your taxes on time
  8. Penalty for filing a substantially incorrect tax return or taking frivolous positions on a return

Let’s take a deep dive into each penalty. The more you know, the better you’ll understand how to avoid these mistakes.

1. Penalty for not making estimated tax payments
Where does your income come from? If you’re a W-2 employee whose employer withholds your federal income tax on your behalf, then estimated tax payments are not something you need to worry about. On the other hand, if you get income from which withholding isn’t deducted, then you are legally obligated to submit estimated quarterly tax. Failure to do so is subject to penalty.

Who has to submit quarterly estimated taxes? You do if you’re a part of the “gig” economy which makes part or all of your income from freelance jobs or independent contracting work, or if you’re a retiree who relies on or derives income from Social Security and your personal savings accounts or other accounts whose withdrawals are taxable (or subject to capital gains). Own a small business? If you’re subject to self-employment tax, then you’re supposed to submit it quarterly. Though this requirement is straightforward, most people start their income journey as W-2 employees: they may have no familiarity with estimated quarterly taxes, or if they do they may not be in the habit of paying it and have forgotten. Whatever the reason, the penalties for failure to make these payments can add up pretty quickly.

The government has set up the quarterly payments so that the IRS Form 1040-ES is marked with four dates throughout the year — April 15th, June 15th, September 15th and January 15th (or the next business day if the 15th falls on weekend or legal holiday) of the year that the year’s tax filing is due. In doing so, they have it set up so that the majority of the taxes that are owed are paid throughout the year, though not on a weekly, biweekly or monthly basis the way that W-2 employees withholding is sent in. Failing to send the monies in for each quarter of 2018 is set to be penalized on an annualized basis of 4 to 5 percent. The best way to avoid the penalty is to pay your taxes on the dates that they’re due, calculating the payments accurately enough to represent either 90 (85% for 2018) percent of the actual amount you end up owing or 100% of the amount that was appropriate from the previous tax year. That 100% of the previous year’s amount is acceptable under what is known as safe-harbor, though for those whose income is more than $150,000, the percentage needed is 110% of the previous year’s income tax. Conversely, those who owe less than $1,000 in annual taxes do not get penalized at all. It is important to note that the penalty percentage has jumped to 6 percent as of the first quarter of 2019.

2. Penalty for taking early withdrawals from tax-advantaged retirement accounts, including IRA accounts and 401(k) accounts
Having a retirement account is a smart thing to do, and it’s something that the government has encouraged by allowing for the creation of special tax-advantaged vehicles. These tax advantages represent a tremendous incentive and benefit, but they come with strings: until you are 59 ½, you are not permitted to take money out of those accounts prior to retirement without having to have to pay a hefty 10% penalty.

As important as it is to know about the penalty so that you don’t take money out hastily and without a full understanding of the impact of doing so, but it’s also important to know when you can take the money out without being penalized. You’re permitted to take out up to $10,000 from an IRA for the purchase of a first home, as well as to pay any uncovered, unreimbursed medical bills that add up to more than ten percent of your adjusted gross income from any retirement plan. If you’ve been out of work and received unemployment compensation for a minimum of 12 weeks, you can take out up to $10,000 from and IRA to pay for your health insurance premiums.  Distributions can also be taken from an IRA to pay for qualified higher education expenses, including fees, room and board and of course tuition, all without penalty. And if you’re leaving your job during the same year that you’re turning 55 or older, you can take money out of a 401(k) account from the job that you’re leaving without penalty. The fact that there is no penalty does not negate the income taxes that you would be required to pay on withdrawals from any retirement account.

3. Penalty for taking nonqualified withdrawals from 529 plans, health savings accounts (HSAs), and similar tax-favored accounts
Just as the government works hard to make sure that the retirement accounts they’ve allowed to be tax-advantaged are used as intended, they take a similar approach to other tax-advantaged accounts, penalizing improper use and withdrawals from 529 plans, health savings accounts, and similar vehicles.

  • 529 plans – These plans provide the ability to set aside funds to pay for the cost of college, and were expanded under the recent tax reform act to also allow for funds to grow tax-free for eligible expenses for K-12 education too. Any money that is deposited into a 529 can be withdrawn without penalty as long as the money is going to pay for tuition, books and similar school-related expenses, but if the money is withdrawn for any other purpose, the withdrawn amount is subject to both income taxes on appreciation and a 10% penalty on the entire distribution. One important thing to note: if you have set up a 529 in one child’s name and wanted to use the monies for another child, that is not subject to penalty as long as you change the beneficiary. The same is true for Coverdell ESAs.
  • Health Savings Accounts (HSAs) – These plans were created to assist with the payment of out-of-pocket healthcare expenses. Money deposited into those accounts can grow to be withdrawn tax free as long as they are used for eligible costs; however, if you’re under the age of 65 and you use any of those funds for nonmedical expenses, the withdrawn amount will be subject to a 20% penalty and will also need to be reported on your tax return as income.

4. Penalty for failing to take required minimum distributions (RMDs) from tax-favored retirement accounts
If you are a person who has been dedicated to putting money into your 401(k), your IRA, or another retirement account, then the idea of taking money out before you feel like you need it will just feel wrong. Unfortunately, the government requires that you do so once you hit a certain age. The IRS’ rules say that once you are 70 ½ you have to take what is known as a required minimum distribution, a percentage that is based on a published table that factors in your life expectancy and how much your account holds. As much as you might want to let your money continue to grow, the government wants to limit the amount of tax-deferred growth that each taxpayer can realize and start claiming its portion of the money you’ve been keeping it from taxing: that’s the reason for the requirement.

No matter how much you’d prefer not to touch your principal, the IRS takes an aggressive approach to make sure that you do so: the penalty for failure to take the amount out on the government timetable is more than significant – it’s 50% of the amount that you were supposed to take out, and if you don’t take out the right amount then you’re going to have to pay half of whatever you should have taken out but didn’t. The annual deadline is December 31st, though for the first year that you owe you have until April 1st to take the withdrawal. Not only do you have to make sure that you make your payment on time, but you have to calculate it correctly, and that can be somewhat complicated because the amount changes each year as your life expectancy and the value of your account shift. The good news is that the bank or investment company where you’re holding your money is generally equipped to assist with the calculation, and can even make things easier by arranging for automatic dispersals. Setting this up makes a lot of sense, as it eliminates the emotional twinge of writing a check and makes sure that it gets done so you can avoid that draconian penalty. However, the IRS does have the power to waive the penalty if you can show reasonable cause for failing to take the distribution and have a made a corrective distribution before applying for a penalty waiver.

5. Penalty for contributing too much to tax-favored accounts
Have you ever heard the phrase “they get you coming and going?” It may have been written for the IRS. Just as you’re learning that they’ll penalize you for not taking out enough money, you find out that they’ll also penalize you for depositing too much. Tax-deferred accounts like IRAs and 401(k)s limit the amount that you can contribute each year, and if you end up putting in too much, you’re going to be hit with a 6% charge. Though that penalty is a significantly lower percentage than is imposed for not taking the annual required minimum distribution, the amount can grow over the years if it isn’t addressed: if you make the mistake of leaving the excess funds in the account, you’ll face the same penalty each year until it’s been withdrawn. That can add up quickly, especially if you aren’t aware of the mistake you made until the government hits you with the penalty several years later.

The solution is to review the amount that you’ve deposited to make sure that there is no overage, and if there is to take it out before the deadline for your tax return. If you’ve filed an extension, then you’ve also extended the deadline for the withdrawal. This penalty applies to all tax-deferred accounts that limit the amount of money you can deposit in a given year.

6. Penalty for failing to file, or for filing your required tax return after the designated due date
The tax deadline is set in stone every year. It’s in the news; it’s on the IRS website and your tax forms. There’s no escaping it, and if you try, then you’re going to get penalized. Some people miss the deadline because they are procrastinators or they just forgot, while others make the mistake of thinking that if they don’t send in paperwork, then they won’t have to pay. Whatever the reason, you’re going to end up getting caught one way or another and having to pay the penalty. Those who run on the idea of “if I don’t send them my name and income then they’ll never know that I owe them money” fail to realize that the entity that provided that income also is required to send in paperwork to the government. When there is no tax return filed to match the tax information filed by your employer or investment, the government is going to begin an audit, and you’ll be in far bigger financial trouble than you would have been if you’d filed a return and let the government know that you couldn’t afford to pay what you owe. Failure to file results in penalties that add up quickly: 4.5% of the tax due will be assessed and added to your tax liability for each month that you’re late, up until you pass the five-month mark and hit the maximum penalty of 22.5%. There is also a minimum penalty amount of smaller of $210 or 100% of your tax due where it greater the percentage amount.

7. Penalty for failing to pay your taxes on time
In all fairness, some people don’t file their tax return because they don’t have the money available to pay what they owe. The truth is that the amount that is penalized for failing to file is much more than what you would be penalized if you did file without paying. Though you’re looking at a penalty one way or another, it makes sense to file, even without sending in the money that you owe.

We’ve already gone over the 4.5%  monthly penalty for failure to file, up to a maximum penalty of 22.5%. On top of the failure to file penalty, there is 0.5% penalty per month for failure to pay to bring the total penalty for failing to file and pay for the first five months to 5% per month. However, If you get your paperwork on time without actually sending in a payment, you avoid the 4.5% late filing penalty. Even after the first 5 months, the late payment penalty continues to accrue until the tax is paid.  One important thing to remember is that the requirement to pay begins on the tax due date – even if you request an extension for filing your return, the clock starts ticking on the non-payment penalty on the tax deadline date. If you’re at all able to send in money, then do so – even if it’s only a portion of what you owe.

For those who are suffering from financial difficulties, the IRS offers installment arrangements to make things easier. Though penalties are still likely to be tacked on to your tax liability, setting up an arrangement will prevent you from getting into arrears with the government and stop them from initiating a collection action. There are also negotiations available for those who provide proof of their inability to pay. The government is willing to help and does help many taxpayers, offering compromises where appropriate. You’re much better off coming forward, submitting all necessary paperwork on time, and asking for help.

8. Penalty for filing a substantially incorrect tax return or taking frivolous positions on a return
The IRS understands that mistakes happen: people have trouble with mathematical calculations or misunderstand definitions, and when that happens, and they discover the errors, they generally send out a letter notifying the taxpayer of their mistake and are open to hearing explanations. Sometimes they forgive the mistake and allow a correction to be made, and in other cases, they impose a penalty, usually no more than 20% of the underpayment for innocent errors. When the penalty is that high, it’s generally an indication that the government has reason to believe that the mistake represents legal negligence. It can also be a reflection of the magnitude of the underpayment, with larger underpayments resulting in more significant penalties.

However, none of these penalties are as significant as what you will face if the government has reason to believe that your underpayment was intentional.

Purposely understating the information on your tax return to minimize your liability constitutes civil fraud, and subjects you to 75% penalties of the amount that you underpaid. Of course, you will also still be on the hook for the amount that you should have paid in the first place if your tax return had been accurate and reflective of your real income. The IRS has little patience for either fraud or for what they refer to as frivolous tax arguments meant to help people evade paying what they owe. Depending upon the individual situation, some taxpayers are penalized with no concern for the amount that they actually owed, and are required to pay a flat rate of $5,000.

These penalties are what results from civil fraud, but that is not the worst penalty you can face. The IRS has the right to charge a person who perpetrates significant underpayment or tax evasion as a criminal fraud subject to jail time in addition to economic penalties. Where the line between civil tax fraud and criminal tax evasion is drawn is subjective, but assume that when the government can prove that you purposely tried to get out of paying what you owe, you’re going to be held accountable in a way that’s going to hurt. Lying on a return is considered a form of perjury, and there are plenty of tax evaders who have been forced to spend years in jail and to pay hundreds of thousands of dollars in penalties.

IRS Penalties Are An Entirely Preventable Problem
Though the list of penalties provided here is not exhaustive, it gives you a good idea of where you can get into trouble, as well as how to avoid it. Learn the requirements, follow them, and when in doubt, contact us with any questions and to request assistance. It’s also important to know that if you get yourself into trouble, you’re much better off facing your situation then trying to pretend it doesn’t exist. Our professionals can guide you through the process, help you find answers, and implement solutions.


Short-Term Rental, Special Treatment

With the advent of online sites such as Airbnb, VRBO, and HomeAway, many individuals have taken to renting out their first or second home through these online rental sites, which match property owners with prospective renters. If you are doing that or are planning to do so, there are some special tax rules you need to know.

These special (and sometimes complex) taxation rules are based upon the length of time you rent your property out and with varying tax outcomes. In some situations, the rental income may be tax-free. In other situations, your rental income and expenses may need to be treated as a business, as opposed to a rental activity. The following is a general synopsis of the rules governing short-term rentals (those rented for average rental periods of 30 days or less).

Rented for Fewer Than 15 Days during the Year – When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A.

The 7-Day and 30-Day Rules – Rentals are generally passive activities. However, an activity is not treated as a rental if either of these statements applies:

A. The average customer use of the property is for 7 days or fewer—or for 30 days or fewer, if the owner (or someone on the owner’s behalf) provides significant personal services.

B. The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use.

If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated interest and taxes, will be reported on Schedule C instead of Schedule E, the IRS form used to report longer-term real estate rentals. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.” Substantial services do not include furnishing heat and light, cleaning public areas, collecting trash, and such.

Exception to the 30-Day Rule – If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.

Profits and Losses on Schedule C – Profit from a rental activity is not subject to self-employment tax, but a profitable rental activity that is reported as a business on Schedule C is subject to this tax. A loss from this type of activity is still treated as a passive activity loss unless the taxpayer meets the material participation test – generally, providing 500 or more hours of personal services during the year or qualifying as a real estate professional. Losses from passive activities are deductible only up to the passive income amount, but unused losses can be carried forward to future years. A special allowance for real-estate rental activities with active participation permits a loss against nonpassive income of up to $25,000 – but phases out when one’s modified adjusted gross income is between $100K and $150K. However, this allowance does NOT apply when the activity is reported on Schedule C.

These rules can be complicated; please call us to determine how they apply to your particular circumstances and what actions you can take to minimize the tax liability and maximize the tax benefits from your rental activities.

Big Tax Changes for Divorce Decrees after 2018

Welcome to 2019 and a delayed provision of the tax reform, also known as the Tax Cuts and Jobs Act (TCJA). For divorce agreements entered into after December 31, 2018, or pre-existing agreements that are modified after that date to expressly provide that alimony received is not included in the recipient’s income, alimony will no longer be deductible by the payer and won’t be income to the recipient.

This is in stark contrast to the treatment of alimony payments under decrees entered into and finalized before the end of 2018, for which alimony will continue to be deductible by the payer and income to the recipient.

Having the alimony treated one way for one segment of the population and the exact opposite for another group of individuals seems unfair and may ultimately make its way into the court system. But in the meantime, parties to a divorce action need to be aware of the change and compensate for it in their divorce negotiations, for a decree entered into after 2018.

This is not the first time Congress has tinkered with alimony. Way back in the mid-1980s, the definition of alimony was altered to prevent property settlements and child support from being deducted as alimony. Under the definition of alimony since then, payments:

(1) Must be in cash, paid to the spouse, the ex-spouse, or a third party on behalf of a spouse or ex-spouse, and the payments must be made after the divorce decree. If made under a separation agreement, the payment must be made after execution of that agreement.

(2) Must be required by a decree or instrument incident to divorce, a written separation agreement, or a support decree that does not designate payments as non-deductible by the payer or excludable by the payee. Voluntary payments to an ex-spouse do not count as alimony payments.

(3) Cannot be designated as child support. Child support is not alimony.

(4) Are valid alimony only if the taxpayers live apart after the decree. Spouses who share the same household can’t qualify for alimony deductions. This is true even if the spouses live separately within a dwelling unit.

(5) Must end on the death of the payee (recipient) spouse. If the divorce decree is silent, courts will generally consider state law, and where state law is vague, judges may make their own decision based on the facts and circumstances of the case.

(6) Cannot be contingent on the status of a child. That is, any amount that is discontinued when a child reaches 18, moves away, etc., is not alimony.

Taxable alimony payments under pre-2019 decrees and agreements are treated as earned income for IRA contribution purposes, allowing the spouse receiving the alimony to make IRA contributions based upon the alimony. The ability to make IRA contributions under pre-2019 decrees and agreements remains unchanged. However, for alimony received as a result of a post-2018 decree or agreement, the alimony can no longer be used as a basis for making an IRA contribution.

To summarize:
Pre-2019 Decrees – For decrees entered into before 2019 and unmodified after 2018:

  • Alimony continues to be deductible by the payer spouse/ex-spouse.
  • Alimony is includable in the income of the recipient spouse/ex-spouse.
  • The recipient spouse/ex-spouse can make IRA contributions based upon the alimony received.

Post-2018 Decrees– For decrees entered into after 2018 (and pre-2019 decrees that are modified and include the TCJA alimony rules): Alimony is not deductible by the payer-spouse/ex-spouse.

  • Alimony is not includable in the income of the recipient spouse/ex-spouse.
  • The recipient spouse/ex-spouse cannot make IRA contributions based upon the alimony received.

One additional complication is if state tax treatment is different than that at the federal level. Some states, such as California, have not conformed to the TCJA; as a result, the state treatment of alimony paid under both pre-2019 and post-2018 decrees in these states will continue to follow pre-2019 law, with alimony payments continuing to be deductible and alimony received being taxable.

If you have questions related to alimony or about how your state will tax alimony beginning in 2019, please give us a call.

Getting the W-4 Right Is Important

As they do at the beginning of every year, employers will request that employees complete the IRS Form W-4. Its purpose is to provide employers with the information they need to determine the amount of federal income taxes to withhold from an employee’s paycheck. So, it is very important that the form is completed correctly.

The problem is that as simple as the form looks, getting those entries on the form to produce the desired withholding amount can be tricky. The passage of the tax reform added additional complications, and the IRS has delayed a major revision of the W-4 until the 2020 tax year. In the meantime, taxpayers must get along as best they can using the old version of the W-4.

Even though the W-4 form itself appears to be simple, the instructions come with an extensive worksheet, which may or may not produce the desired results. In addition, there are other issues to consider, such as:

  • Perhaps you desire to have a substantial refund when your taxes are completed next year. This generally requires custom W-4 adjustments, to produce excessive withholding. Keep in mind: when you have a large refund, you have provided Uncle Sam with an interest-free loan.
  • Your spouse may also work, and your combined incomes may put you in a higher tax bracket. Although the IRS provides a special worksheet for married taxpayers if both spouses work, it may not always provide the desired results.
  • In addition to payroll income, you may also have self-employment income, which is subject to both income tax and self-employment, and so you may require a combination of payroll withholding and estimated tax payments, adding additional complications to the W-4.
  • These are just the tip of the iceberg, as there may be investment income or losses, business losses, tax credits, special deductions and loss carryovers, just to name a few more situations that could impact your tax prepayments and withholding for the year.

If you are concerned about getting your withholding correct, please contact us. We can project your 2019 tax liability and complete your W-4 after taking into account multiple employments, a working spouse, self-employment income and other tax issues unique to your specific tax situation.

Reasons Why Your Small Business Needs an Employer Identification Number

Entrepreneurs often shrug off the idea of obtaining an employer identification number, or EIN, believing that their small business really doesn’t need one. Though there are some cases where a solo business can get away with merely utilizing the business owner’s Social Security Number, doing so is not necessarily the best idea, even if you don’t have plans to hire employees in the future. In almost all instances, having an EIN is a good idea. It provides many benefits that go beyond facilitating the payment of employees.

Using an EIN Instead of Your Social Security Number Protects Your Personal Information
One of the top benefits offered by an Employee Identification Number is that it can help protect your personal identity. Though you still need to protect your EIN and shouldn’t share it without being certain of how it will be applied, using it for your business means that your personal information will have less exposure. Government forms and documents require an identifier, and the EIN (which is issued by the IRS) can be used on all of these instead of the Social Security Number. Though you can still suffer significant damage if your EIN is stolen, the information that is limited to your business is less sensitive than the information that is connected with your Social Security Number. Both require vigilant protection.

If You’re Going to Incorporate, You Need an EIN
Immediately incorporating your business makes it into a separate entity, and as such, it needs its own form of identification, especially if you’re going to have employees. Even if you’re considering yourself an employee, you will need to pay yourself a salary, and that means that you will need to collect payroll tax and take other steps that keep you in step with the IRS requirements. This is true whether your entity is established as a corporation, an LLC, and especially as a partnership, as you can’t use two Social Security numbers for filing financial papers.

The EIN Has Multiple Applications
Having an Employer Identification Number has long-term benefits that go far beyond its initial issuance. In addition to facilitating payroll, it can also be used to apply for all types of credit accounts and bank accounts needed by entities including general partnerships, LLCs, S corporations and sole proprietorships. You’ll need to have that number available for filing to change your business’ entity, for filing your tax returns every year, for setting up financial instruments such as profit-sharing plans, pensions, and retirement plans, and more.

Every business is different, and though we encourage all business owners to give serious consideration to obtaining an Employer Identification Number, we know that it may not apply to your situation. Please call us if have questions related to an Employer Identification Number and your particular circumstances.

IRS Giving a Break to Some Taxpayers Who Under-prepaid Their 2018 Taxes

Taxpayers are required to pre-pay their taxes for any tax year through payroll withholding, estimated tax payments or a combination of the two. Employees and retirees generally accomplish this through withholding, and self-employed individuals and those with investment income by paying quarterly estimated payments.

The late-2017 passage of tax reform that became effective for 2018 and its radical changes added considerable confusion for taxpayers trying to determine how much they should prepay for 2018. This confusion was made worse because the existing W-4 that employees complete and that their employers use to determine the correct withholding was designed for prior law and does not work well with the new tax law. As a result, there has been ongoing concern by the IRS that many taxpayers will end up owing tax this year when they file their 2018 returns, even though they got a tax reduction due to the tax reform changes, simply because their pre-payments through withholding and estimated tax payments were not enough.

For most of 2018, the IRS was issuing alerts that taxpayers may be under-withheld because of tax reform and the fact the W-4 could no longer be relied upon to produce a correct withholding amount.

Taxpayers whose pre-payments are less than certain safe harbor amounts are penalized. Those safe harbors are:

  • 90% of the current year’s tax liability; or
  • 100% of the prior year’s tax liability (110% where the prior year AGI is over $150,000 ($75,000 if married and filing separate returns).

Recently several members of Congress have called upon the IRS to waive underpayment penalties for 2018. On January 16, 2019, although not waiving the penalties entirely, the IRS did change the current year safe harbor from 90% of the 2018 tax liability to 85%, providing a break for some taxpayers.

Even if you don’t meet one of the safe-harbor exceptions, a waiver of the penalty for 2018 may apply if you:

  • Retired (after reaching age 62) or became disabled in 2017 or 2018.
  • You did not make payments because of one of the following situations and it would be inequitable to impose the penalty:
    a. Casualty
    b. Disaster, or
    c. Other unusual circumstance.

There are two other exceptions to the penalty for 2018:

  • If the total tax shown on your 2018 return minus the tax that was withheld is less than $1,000, you will not owe a penalty.
  • If you had no tax liability in 2017, were a U.S. citizen or resident alien for all of 2017, and your 2017 return was for a full 12 months (or would have been had you been required to file), you won’t be charged an under-prepayment penalty.

In addition, where your tax liability and /or tax pre-payments were uneven, the penalty amount may be mitigated by figuring it on a quarterly basis.

If you have questions or would like to make sure your withholding and estimated payments are adequate for 2019, please give us a call.

Important — Rental Owners! Guidance Related to the 20% Pass-Through Deduction

Ever since tax reform was passed over a year ago, taxpayers have been uncertain whether rental property will be classified as a trade or business for purposes of qualifying for the new IRC Sec 199A 20% pass-through deduction (commonly referred to as the 199A deduction).

Finally, on January 18, 2019, the IRS issued a notice which provided “safe harbor” conditions under which a rental real estate activity will be treated as a trade or business for purposes of the 199A deduction.

It’s important to note that this notice prescribes several conditions that must be met for a rental real estate enterprise (a tax term introduced by the IRS in this notice) to be deemed to be a trade or business and eligible for the section 199A 20% deduction. For purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties.

Failure of the taxpayer to satisfy the requirements of this safe harbor does not preclude a taxpayer from otherwise establishing that a “rental real estate enterprise” is a trade or business for purposes of section 199A. The following are the requirements that must be satisfied for the safe harbor:

  1. Separate books and records must be maintained for each rental real estate enterprise;
    a. A real estate enterprise can consist of a single or multiple real estate rentals.
    b. Commercial and residential rentals cannot be combined in the same real estate enterprise.
  2. For years prior to 2023, at least 250 hours of rental services must be performed by the taxpayer and workers for the taxpayer for the year in question with reference to each rental real estate enterprise.
    A three-year lookback rule applies for taxable years for 2023 and following. It specifies that the taxpayer must meet the 250-hour requirement for the rental enterprise for any three of the five prior consecutive taxable years; and
  3. The taxpayer must maintain contemporaneous records, including time reports, logs, or similar documents, to document the following:
    a. hours of all services performed;
    b. a description of all services performed;
    c. dates on which such services were performed; and
    d. who performed the services.Because the safe harbor requirements were issued after the close of 2018, the requirement for contemporaneous records for 2018 will not apply.

    Rental services that may be counted toward the 250 hour requirement include: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in tenant applications; (iv) collecting rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials for operation such as repairs; and (viii) supervision of employees and independent contractors.

    However, rental services do NOT include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

    Rental services counted toward the 250 requirement may be performed by owners or employees, agents, and/or independent contractors working for the owners.

Triple net Leases are not eligible for safe harbor. Real estate rented or leased under a triple net lease agreement is not eligible for this safe harbor. A triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities. Also ineligible for the safe harbor is a property leased under an agreement that requires the tenant or lessee to pay a portion of the taxes, fees, and insurance, and to be responsible for maintenance activities allocable to the portion of the property rented by the tenant.

Vacation rentals are not eligible for safe harbor. Real estate used as a residence by the taxpayer for any portion of the taxable year is not eligible for the safe harbor rules.

The Statement must be attached to the tax return. A statement signed by the taxpayer, or the person responsible for keeping the records with personal knowledge of them, must be attached to the return declaring that all of the safe harbor requirements have been met and must include the following language: “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”

Double-edged sword. The 199A deduction is 20% of a taxpayer’s qualified business income from all of the taxpayer’s trades or businesses subject to certain limitations. Many rentals do not show a profit and a rental that is treated as a trade or business that shows a loss for the year will reduce the qualified business income of other trades or businesses of an individual, and as a result, reduces the 199A deduction of that individual.

If you have questions regarding rentals as a trade or business or other issues related to this new 199A deduction, please call us to schedule a consultation.