Five Tips You Should Know About the Chart of Accounts in QuickBooks Online

You probably didn’t expect you’d have to become an accounting expert when you started your small business. You knew you’d have to deal with recording income and expenses, maybe track your inventory and process a payroll. But you may not have understood just how complex financial bookkeeping could be.

That’s why you decided to use QuickBooks Online, or are at least considering it. The service is an expert on accounting, and it simplifies the process. It knows exactly how you have to document transactions to stay compliant with the rules that accountants and other businesses follow. This is good practice, and it’s absolutely necessary if, for example, you ever have to apply for financing.

One QuickBooks feature you should understand is the Chart of Accounts. You won’t have to alter it in any way. In fact, we strongly advise against it—but you’ll encounter it when you work with transactions. Here are five tips you should know about it.

What is it?

These three columns from QuickBooks Online’s Chart of Accounts display account NamesTypes, and Detail Types.

QuickBooks Online’s Chart of Accounts is a list of financial categories that are used to classify your company’s transactions when you record them. If you were doing your accounting manually, you would have to create your own Chart of Accounts. But QuickBooks Online builds one for you based on the company type and industry you choose when you’re setting up the site.

Why is the Chart of Accounts important?

Some people refer to the Chart of Accounts as the “backbone” of your company file. All transactions flow to it. Its primary importance can be summed up in one word: reports. Your reports will not be accurate if your Chart of Accounts is poorly constructed or if you categorize transactions incorrectly. This becomes as issue when you want to:

  • Prepare taxes. Your income tax return will not reflect your reportable income and deductible expenses if transactions are not assigned to the right classifications.
  • Apply for financing, take on an investor, sell your company, etc.
  • Monitor your finances. You won’t get a true picture of your income and expenses, which makes it difficult to analyze your company’s fiscal health and plan for the future.

What’s in the Chart of Accounts?

There are two types of accounts. One contains information that’s used in the Balance Sheet report. These accounts will have a number in the QuickBooks Balance column that’s based on all transactions up to the current date. They include Assets (bank accounts, accounts receivable, inventory, etc.), Liabilities (unpaid bills, credit cards, payroll and sales taxes, loans, etc.), and Equity.

The remainder of the accounts are used in the Profit and Loss report, otherwise known as the Income Statement. They’re divided into Income (sales, discounts given, etc.), Cost of Goods Sold (labor, shipping, materials and supplies, etc.), Expenses (advertising, insurance, payroll, etc.), Other Income, and Other Expense. You won’t see a number in the QuickBooks Balance column for these accounts because the Profit and Loss report changes based on the date range selected.

Should I ever make any modifications to my Chart of Accounts?

You can set up bank and credit card accounts in QuickBooks Online’s Chart of Accounts.

As we stated earlier, we strongly recommend that you never modify your Chart of Accounts without consulting us. However, there are two exceptions to this. You’ll want to create entries for your bank and credit card accounts. To do this, first open the Chart of Accounts by clicking the gear icon in the upper right and selecting Chart of Accounts under Your Company. When it opens, click New in the upper right corner. Choose Bank or Credit Card and fill in the blanks.

Do I need to use account numbers in the Chart of Accounts?

Generally, the smaller the business, the less need there is for account numbers. If your business is big enough that you have dedicated A/P and A/R individuals, you may want to post transactions to account numbers.

Understanding Reports

QuickBooks Online makes it possible for you to view the Chart of Accounts and those two critical reports, Balance Sheet and Profit & Loss. Customizing and analyzing them, though, is something you should do with the assistance of a tax professional. Please contact us for a consultation, our tax advisors are happy to guide you through your Chart of Accounts as well as other advanced areas of QuickBooks Online.

See the U.S. Tax System Illustrated in One Complex Map

Not sure whether you should hire a tax professional to file your taxes? Thinking that maybe this year you’ll do it yourself? You may want to think again after taking a look at a new graphic released by the Taxpayer Advocate Service (TAS). The organization, which is dedicated to helping taxpayers resolve tax problems, releases a map every year that’s designed to help us all understand the workings of the tax system.

To truly understand just how complicated America’s tax system is, take a look at the newest TAS chart:

If you were to Google, “Why are taxes so complicated in the U.S.?” You would receive endless options for pages and websites looking to give you an explanation. Reviewing the top results will make it clear that even though we were promised taxes so simple that we could send them in on a postcard, the Tax Cuts and Jobs Act of 2017 made the situation even more complicated. Even tax professionals are still scratching their heads and trying to figure the whole thing out.

Though the leader of TAS, National Taxpayer Advocate (NTA) Nina Olson’s goal is to “recommend changes that will prevent problems,” her hopes for doing that are as dashed as the average taxpayer’s when she looks at this year’s chart. “Anyone looking at this map will understand that we have an incredibly complex tax system that is almost impossible for the average taxpayer to navigate,” she said.

In the face of increasing complexity, what’s a taxpayer to do to make sure that their taxes are prepared properly and in a way that minimizes their tax liability? The only good answer seems to be to seek professional help.

Hire a Tax Professional.

It’s tempting to try to make your way through your tax forms yourself, especially with the advent of so many off-the-shelf, do-it-yourself tax programs. But in light of the complexities that the process involves, you are subject to a wide margin of error. We strongly recommend that you retain an accounting firm that is on top of every rule change and regulation, as it is issued. If you’re on the fence, just consider what you’d have to do to get even a basic understanding of the impact of the latest tax reform law: for instance, reading this 14-page document from the IRS. Unfortunately, reading this document is not likely to make things particularly clear or easy to understand.

When you consider the amount of studying you would have to do just to understand the basics, and not even scratch the surface of the extra deductions and credits that you may be entitled to, there’s no doubt that it’s worth your investment to hire a tax professional. It’s the decision that 72% of small business owners have made, acknowledging that the money they spend on these services is well worth it.

If you have any questions or would like to discuss your particular tax situation and planning options, please contact us.

Earn Tax-Free Income from Working Abroad

Article Highlights:

  • Tax-Free Income from Working Abroad
  • Foreign Earned Income and Housing Exclusions
  • Foreign Self-Employment Income
  • Claiming or Revoking the Exclusion

U.S. citizens and resident aliens are taxed on their worldwide income, whether they live inside or outside of the U.S. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs.

This exclusion applies to both employees and self-employed individuals. In addition to the excludable income, this can also be an attractive option to individuals who wish to travel the world while still earning income from their employer or self-employment clients.

You can have payroll disbursements and client payments deposited in your U.S. bank account, charge expenses on your credit card, and use online banking to make credit card payments, thus avoiding any foreign bank account reporting.

You will still have to file a U.S. 1040 tax return and report your income the same way as if you were living and working in the U.S. However, if you meet certain requirements, you will be able to exclude some or all of your foreign earnings from income tax.

To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:

  • Have foreign earned income (income received for working in a foreign country, including payroll disbursements from a U.S. employer and self-employment income);
  • Have a tax home in a foreign country; and
  • Meet either the bona fide residence test or the physical presence test.

The foreign earned income exclusion amount is adjusted annually for inflation. For 2019, the maximum is up to $105,900 per qualifying person. If the taxpayers are married and both spouses work abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $211,800 for the 2019 tax year, but if one spouse uses less than 100% of his or her exclusion, the unused amount cannot be transferred to the other spouse.

In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct a foreign housing amount from their foreign earned income. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is generally limited to 30% of the maximum foreign earned income exclusion. The housing amount limitation is $31,770 for the 2019 tax year. However, the limit will vary depending on where the qualifying individual’s foreign tax home is located and the number of qualifying days in the tax year. The foreign earned income exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion.

It’s important to note that foreign earned income does not include the following amounts:

  • Pay received as a military or civilian employee of the U.S. Government or any of its agencies.
  • Pay for services conducted in international waters (not a foreign country).
  • Pay in specific combat zones, as designated by a Presidential Executive Order, that is excludable from income.
  • Payments received after the end of the tax year when the services were performed to earn the income.
  • The value of meals and lodging that are excluded from income because they were furnished for the employer’s convenience.
  • Pension or annuity payments, including Social Security benefits.

A qualifying individual may also claim the foreign earned income exclusion on foreign-earned self-employment income. The excluded amount will reduce the individual’s regular income tax but will not reduce his or her self-employment tax. Also, the foreign housing deduction—instead of a foreign housing exclusion—may be claimed.

A qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions. In other words, the exclusion is “off the bottom,” not “off the top.”

Once the foreign earned income exclusion is chosen, a foreign tax credit—or a deduction for foreign income taxes—cannot be claimed on the income that can be excluded. If a foreign tax credit or tax deduction is claimed for any of the foreign taxes on the excluded income, the foreign earned income exclusion may be considered revoked.

Other issues to consider are as follows:

Earned income credit – Once the foreign earned income exclusion is claimed, the earned income credit cannot be claimed for that year.

Timing of election – Generally, a qualifying individual must initially choose the foreign earned income exclusion with one of the following income tax returns:

  • A return filed by the due date (including any extensions);
  • A return amending a timely filed return;
  • An amended return, which generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid; or
  • A return filed within 1 year from the original due date of the return (determined without regard to any extensions).

A qualifying individual can revoke an election to claim the foreign earned income exclusion for any year. This is done by attaching a statement to the tax return revoking one or more previously made choices. The statement must specify which choice(s) are being revoked, as the election to exclude foreign earned income and the election to exclude foreign housing amounts must be revoked separately. If an election is revoked, and if the qualifying individual again wishes to choose the same exclusion within 5 years, he or she must apply for approval by requesting a ruling from the IRS.

State Tax – If your U.S. state of residence when departing the U.S. is one with state income tax, you may be required to report all of the foreign income on the state tax return, unless there is an exception.

If you are considering working abroad, please contact us before you make your decision. We can provide information on foreign earned income and housing allowance exclusions, or about how to meet the bona fide residence or physical presence tests.

Tax Ramifications Related to an Old Vehicle

Article Highlights:

  • Trading in a Vehicle
  • Selling a Vehicle
  • Gifting a Vehicle
  • Donating a Vehicle to Charity

If you are planning on buying a new car, you may be wondering what to do with the old one. There are a number of options, some of which have tax implications and some of which don’t. These options include trading the car in with the dealer, selling it to a third party, donating it to a charity, gifting it to someone, or even keeping it as a second car. Here are the details for each option.

Note:  This article does not discuss in detail how to treat the disposition of a vehicle used for business.

Trade-In – Although you may be able to get more for your car by selling it yourself, trading the car in with the dealer eliminates the hassle of selling the vehicle and is the option selected by many people when they purchase a new car. Prior to the passage of the tax reform, if a vehicle was used partially for business and the disposition of that vehicle would have resulted in a gain, it was better to trade the vehicle in because the tax law allowed the gain to be deferred. However, that is no longer an option. Now, whether you trade in your vehicle or sell it to a third party, it is treated as a sale.

If a car has been used 100% for personal purposes (no business use), whether you trade it in or sell it generally makes no difference since, except in rare cases, the vehicle will have declined in value and there would be no gain from the transaction. When there is a loss from the sale of personal-use property, tax law does not allow the loss to be deducted. On the other hand, the law says that when a personal-use item such as a vehicle is sold for a profit, the profit is taxable.

Sell the Vehicle – There are a variety of online websites you may use to determine the value of your used vehicle for little to no cost. There are also used car dealers that will buy your car and relieve you of all the DMV transfers and sales tax issues. Of course, you can sell it yourself through online sites or perhaps by just placing a “for sale” sign in the car, in which case you need to make sure the title is properly transferred so you have no future liability. It is also important to be cautious of potential buyers, to make sure someone does not try to scam you with a bad check or the promise of a future payment. In most states, vehicle sales are “as is” sales, provided you do not attempt to conceal a material defect.

Gift It to Someone – It is quite common for individuals to gift their old car to a child, a family member, or an acquaintance. There are no gift tax ramifications as long as the fair market value (FMV) of the vehicle is less than the annual gift tax exclusion amount ($15,000 for 2019). Where a married couple jointly makes the gift, the annual gift tax exclusion applies to each spouse; thus, the vehicle’s value could be as much as $30,000 without any tax ramifications. If the vehicle’s FMV exceeds those limits, a gift tax return is required. The gift is not allowed as a charitable contribution on the former owner’s income tax return, even if the person to whom the car is given is “needy.”

Donate the Vehicle to Charity – You’ve probably seen or heard ads urging you to donate your car to charity. But donating a vehicle may not result in a big tax deduction, or any deduction at all. A few years back, this was a popular type of charitable donation promoted by many charities. However, vehicle donations were so abused by taxpayers claiming values higher than what the vehicles were worth that Congress had to step in. The result is a number of rules that, in some cases, limit the amount of the charitable deduction to $500.

The deduction is limited for motor vehicles, as well as for boats and airplanes, contributed to charity whose claimed value exceeds $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.

If the charity sells the vehicle without any “significant intervening use” to substantially further the organization’s regularly conducted activities or without any major repairs, the donor’s charitable deduction can’t exceed the gross proceeds from the charity’s sale of the vehicle. Examples of qualifying significant intervening use include delivering meals every day for a year or driving 10,000 miles during a one-year period while delivering meals.

The gross proceeds limitation on a donor’s auto contribution deduction doesn’t apply if the charity sells it at a price significantly below FMV (or gives it away) to a needy individual. This exception applies only if supplying a vehicle to a needy individual directly furthers the donee’s charitable purpose of relieving the underprivileged who need a means of transportation. In this case, the fair market value of the vehicle is used to determine the amount of the contribution.

Additionally, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgement from the donee. To be contemporaneous, the acknowledgment must be obtained within 30 days of either (1) the contribution or (2) the disposition of the vehicle by the donee organization. The donor must include a copy of the acknowledgment with the tax return on which the deduction is claimed.

Acknowledgement by the donee organization must include whether the donee organization provided any goods or services in consideration of the vehicle as well as a description and a good -faith estimate of the value of any such goods or services. Or, if the goods or services consist solely of intangible religious benefits, a statement to that effect. Form 1098-C incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane.

If you have questions about what to do with an older vehicle, please contact us.

Receiving Tips Can Be Taxing

Article Highlights:

  • Collecting Tips
  • Tip Splitting
  • Service Charges
  • Record Keeping
  • Employer Reporting
  • Allocated Tips

Anyone who collects gratuities must include them in their taxable income. This requirement applies to restaurant servers, rideshare drivers, beauticians, concierges, porters, baristas, and delivery people.

Gratuities, or ‘tips’ are amounts freely given by a customer to a person providing a service. They are generally given as cash, but also include tips made on a credit or debit card or as part of a tip-sharing arrangement. Tips can also be in the form of non-traditional gifts such as tickets to events, wine, and other items of value. If you receive $20 or more in tips in any month, you should report all of your tips to your employer. However, there are a few exceptions:

  • Tip-splitting – Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement. You should only report the net gratuities you receive to your employer.
  • Service (cover) charges – These are charges arbitrarily added by the business establishment (employer). For example, a specific percentage of the bill for parties exceeding a certain number. These are excluded from the tip-reporting requirements. If your employer collects service charges from customers, your share of these charges as determined by your employer, is taxable to you and should already be included as part of your wages.

Keep a running daily log of tip income – It is good practice to keep a daily log of your tips, as gratuities are often audited. The IRS provides a log in Publication 1244 that includes the Employee’s Daily Record of Tips and the Report to Employer for recording your tip income.

Report tips to your employer – If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes. State taxes may have to be withheld as well. If the tips received are less than $20 in any month, they are still taxable, although they do not need to be reported to your employer. Gratuities should always be reported on your tax return, and are subject to income, Medicare, and Social Security taxes.

Employer allocation of tips – If you work for a large restaurant, you may find tips you didn’t know about on your W-2 form. Restaurants with a large serving staff report a total called “allocated tips” to the IRS. Here is what allocated tips are all about:

Tip allocation applies to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to employees who “underreport,” which happens if an employee reports tips that are less than 8% of that employee’s share of the employer’s gross sales. The employer must allocate the difference between what the employee reported and the 8% amount to those underreported employees.

If this situation applies to you, the allocation amount will be noted in a separate box on your W-2, and these allocated tips won’t be included in the total wages shown on your W-2 form. You will need to report the allocated tip amount as additional income on your tax return unless you have adequate records to show that the amount is incorrect. The IRS frequently issues inquiries if the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on his or her tax return.

Self-Employed Individuals – If you are self-employed, you don’t have an employer to report tips to, and you simply include the tips you received in your self-employed income on your tax return for the year when you received the tips.

Because they are usually paid in cash, tips are a frequent audit item. If you are receiving tips and have any questions about their taxability, please contact us.

Watch Out for Fake IRS Letters

Article Highlights:

  • Matching Season
  • IRS Letters
  • Fake Letters
  • Demand for Immediate Payment

Every year, the vast majority of taxpayers file their returns with the IRS between the end of January and the April due date. However, the IRS does not just take taxpayers’ word regarding the information on their returns. For this reason, tax season is followed by “matching season.” This is when the IRS attempts to match the information on each taxpayer’s return with the information from the various returns that other entities (employers, financial firms, educational institutions, the insurance marketplace, etc.) have filed. The goal is to identify possible accidental oversights and intentional omissions.

When the IRS finds a discrepancy, it sends the taxpayer a letter to detail the discrepancy and to describe the options for dealing with the issue.

Is the letter real? Unfortunately, thieves know about “matching season” and the IRS’s practice of sending correspondence to taxpayers. They often send fake letters to trick people into making payments on false tax liabilities. Taxpayers need to be cautious to avoid being deceived by these scammers. The best practice is to have a tax professional review any letter that you receive before taking any action. If the letter is real, it requires a timely response. If it is fake, it should be ignored.

Thieves take advantage of the anxiety that comes with receiving a letter from the IRS and they are counting on the likelihood that you will rush to make the potential problem go away. For instance, most of these fake letters demand immediate payment and threaten arrest if payment isn’t made. Such language should make your scam alarm go off. The IRS never demands immediate payment or threatens arrest. Thieves also often ask individuals to make payments by providing them with the serial numbers of gift cards. This allows them to quickly access money without a trace. Any such request should also alert you to the scam attempt, as the IRS would never collect payments that way.

We encourage you to educate your family members – especially older ones – about these fake letters so that they do not fall for the scam.

Of course, if you receive a real letter from the IRS, you should not procrastinate. A timely response is necessary to prevent the IRS from escalating the situation.

We strongly recommend contacting your Tarlow tax advisor if you receive any correspondence from the IRS so that we may review its validity and, if necessary, respond to it in a timely and correct manner. In addition, beware of phone calls, texts, and e-mails claiming to be from the IRS; this should also set off a scam alarm. The first contact from the IRS on a given matter is always by U.S. mail. These clever crooks are trying to separate you from your money, but you can stop that from happening. Don’t be scammed. Contact us if you have further questions.

Foreign Account Reporting Requirements (FBAR)

Article Summary:

  • Foreign Account Reporting Requirement
  • Financial Crimes Enforcement Network
  • Penalties for Failure to File
  • Type of Accounts Affected
  • Form 8938 Filing Requirements

U.S. citizens and residents with a financial interest, signature, or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during the year. The due date for 2018’s report was April 15, 2019, with an automatic six-month extension to October 15, 2019. Failure to file can result in draconian penalties. Form 114 is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System and not as part of the individual’s income tax filing with the IRS.

Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, and any other accounts at a financial institution. Commodity futures and options accounts include mutual funds, and non-monetary assets such as gold. It becomes a “foreign financial account” if the financial institution is in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account.  In addition, the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. is not a foreign financial account.

You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank accounts in case something happens to them. If the combined value of those accounts exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling at an online casino and it is based in a foreign country, and your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.

You may also have an additional requirement to file IRS Form 8938, which is like the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married and you and your spouse file a joint return, if the value of certain financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year, you must file Form 8938. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high as $50,000.

As you can see, not complying with the foreign account reporting requirements can have very serious repercussions. Please contact us with questions or if you need assistance in meeting your foreign account reporting obligations.

The IRS Has Cryptocurrency on Its Radar

Article Highlights:

  • IRS Focus
  • About Cryptocurrency
  • Tax Treatment
  • IRS Compliance Program
  • Letters Being Sent

If you own cryptocurrency, you should know that the IRS has owners of cryptocurrency in its sights because many cryptocurrency owners are not reporting or paying taxes on their cryptocurrency transactions. In fact, the IRS is so focused on this issue that it recently issued warning letters to over 10,000 taxpayers suspected to be under-reporting their digital profits.

About Cryptocurrency – If you are unfamiliar with the term cryptocurrency, the short definition is a form of digital money that is not controlled by any central authority. The first cryptocurrency created was Bitcoin, back in 2009. Since then, over 4,000 other cryptocurrencies have been created. Cryptocurrency can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, euros, and other real or virtual currencies.

Tax Treatment – One of the big issues of cryptocurrency is how it is treated for tax purposes. The IRS says that it is property, so that every time it is traded, sold, or used as money in a transaction, it is treated much the same way as a stock transaction would be. The gain or loss over the amount of its original purchase cost must be determined and reported on the owner’s income tax return. That treatment applies for each transaction every time it is sold or used as money in a transaction.

Example A: A taxpayer buys Bitcoin (BTC) so he can make online purchases without the need for a credit card. He buys one BTC for $2,425 and later uses it to buy goods worth $500 (let’s say BTC was trading at $2,500 at the time he made his purchase). He has a $75 ($2,500 – $2,425) reportable capital gain. This is the same result that would have occurred if he had sold the BTC at the time of the purchase and used cash to purchase the goods. This example points to the complicated record-keeping requirement for tracking BTC’s basis. Since this transaction was personal in nature, no loss would be allowed if the value of BTC had been less than $2,425 at the time the goods were purchased. Of course, if the taxpayer in this example only sold a fraction of a Bitcoin – enough to cover the $500 purchase – the gain would only be $15: $500/$2500 = .2 x 2425 = 485; 500 – 485 = 15

For most, cryptocurrency is generally treated as a capital asset, so any gain is a capital gain, and if the gain is held for more than year and a day, any gain will be taxed at the more favorable long-term capital gains rates. If the cryptocurrency is being held as an investment and the sale results in a loss, then the loss may be deductible. Capital losses first offset capital gains during the year, and if a loss remains, taxpayers are allowed a $3,000-per-year loss deduction against other income, with a carryover to the succeeding year(s) if the net loss exceeds $3,000.

When cryptocurrency is used as payment to an employee, the usual payroll withholding and reporting rules still apply.  If used to make payments to an independent contractor, 1099 form reporting is still required. If the individual receiving payment in cryptocurrency is subject to backup withholding, the payer is required to withhold the required amount. In all reporting and withholding instances, the amounts must be in U.S. dollars.

IRS Compliance Program – That brings us to the issue at-hand. The IRS began sending letters to taxpayers at the end of August, and more than 10,000 taxpayers will receive one of three varieties of letters. If you received one of these letters, do not ignore it! The IRS compiled this list of taxpayers that it feels has not been reporting their cryptocurrency transactions from various ongoing IRS compliance efforts. The following is a synopsis of the types of letters:

Letter 6173 – Requires a response from the taxpayer, either by the taxpayer providing a statement to the IRS that they have already complied with the required reporting or by filing a return that reports their cryptocurrency transactions. For situations where the taxpayer had already filed a return, but had left off the cryptocurrency transactions, an amended return (Form 1040X) will need to be filed. Taxpayers who ignore this letter may face a full-blown audit by the IRS and could be subject to penalties.

Letter 6174 – This is a “soft notice” that does not require a response, and the IRS says it won’t be following up on it. However, the notice also warns that if the taxpayer had cryptocurrency gains and fails to amend their return or continues to be noncompliant on future returns despite receiving the letter, the taxpayer will be in hot water.

Letter 6174-A – The taxpayer isn’t required to respond to the letter, but does need to correct their prior returns in which cryptocurrency transactions have been omitted. The IRS warns of future enforcement action if the taxpayer doesn’t amend their return(s) or file their delinquent returns. After receiving the letter, the taxpayer can’t use an excuse of not knowing the law for failing to report their cryptocurrency gains.

Last year, the IRS announced a virtual (crypto) currency compliance campaign to address tax noncompliance related to virtual currency use through outreach and examinations of taxpayers. The IRS announced that it will remain actively engaged in addressing non-compliance related to virtual currency transactions. They will do so through a variety of efforts, ranging from taxpayer education to audits and criminal investigations.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are liable for the tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

If you have received one of these IRS letters – or even if you haven’t received correspondence from the IRS, but have unreported cryptocurrency transactions from past years, please contact us. We can provide assistance in responding to the letter or in preparing the amended or late original returns to report your cryptocurrency transactions.

The Checklist Every Small Business Owner Needs for New Hires

Growing your business to the point that you need to start hiring employees is exciting. However, it can be challenging to hire the right people and small businesses face additional challenges when it comes to compliance, cash flow, and keeping operations on track. Use this new hire checklist to make your onboarding process as smooth as possible:

1. Obtain the new hire’s ID, work eligibility, and tax withholding forms in order before you do anything else.

Make a copy of the employee’s government-issued photo ID and confirm that the new hire is eligible to work in the United States. This requires completing an I-9 form and checking with the government database that it’s valid. Neglecting to collect an I-9 at the time of onboarding can result in fines worth $375-$16,000 per violation, with another $100-$1,100 per violation if you fail to produce a valid I-9 for each employee at the time of inspection.

In order to make sure that the employee’s paychecks are calculated correctly from the first payroll period onward, you will need to collect a Form W-4. If your state and/or city has income taxes, you will also need state and local withholding forms. This is particularly important if your organization hires talent from multiple states, such as the greater New York City and Philadelphia areas. This is also the ideal time to complete direct deposit forms.

2. Order a background check.

If your newly hired employee has committed a crime in the past that is relevant to their job, i.e. an inventory manager committing larceny, you may be held liable for your employees’ actions and deemed negligent in the hiring process. You may not need every piece of information that comes up in a background check, but it can help ensure the safety and security of your clients, staff, and other stakeholders.

3. Enroll the employee in any benefit programs offered.

Even if there’s a grace period involved, it’s best to onboard new hires into any benefit programs immediately. As a result, neither of you will have to be inconvenienced by manual enrollment in the future. Health insurance and retirement benefits are the most crucial benefits for immediate enrollment.  If you offer any other programs like pre-tax transit passes, flex accounts, and wellness plans (e.g. gym memberships), you also need to get the new hire enrolled or leave instructions on how to do so.

4. Walk the new hire through your business processes, policies and procedures.

Once all the relevant government and payroll forms have been completed and you’re ready to proceed, the next integral step of the onboarding process is to familiarize new employees with the business environment and organizational culture.

If you have an employee handbook, provide your new hire with a copy. Outline the critical policies that are most relevant to the job, such as code of conduct, dress code, guidelines for remote work and total hours worked, parking rules, and other policies and procedures they should be aware of on the first day. As appropriate, order business cards with the employee’s name and contact information.

Other important aspects of readying the workspace include ordering name and security badges or employee IDs, updating any registries if located within a building or complex, keys, filing cabinets, and setting up new employee e-mail addresses.

5. Arrange the new hire’s workspace.

Does your new hire have a desk and chair, a properly set-up computer and any other tools that may be necessary? If the position is not a desk job, do you have the required uniforms in the correct size, along with tools and any other occupational gear your new hire will need? Is the area properly furnished?

6. Integrate new employees into the workplace.

Arrange for any meetings or lunches with the appropriate managers, clients, or key employees that new hires need to get to know better. Send a welcome email to all employees to introduce your new hire.  As appropriate, add your new hire to your website and social media.  Have them tour the workplace to familiarize themselves with how it operates and determine training or additional resources that may be required. Make sure that the new hires also understand the required job duties and how they fit within the department or overall organization. Encourage questions and comments throughout the entire process.

Onboarding can be a stressful time for smaller organizations that are just starting to grow. If you have questions about transitioning a new hire, please contact us.

Is It Time for a Payroll Tax Checkup?

Article Highlights:

  • Tax Reform
  • Underpayment Penalties
  • W-4 Modifications for 2020
  • Withholding Estimator
  • Penalty Abatement

Was your 2018 federal tax refund less than normal, or did you owe taxes despite usually receiving a refund? If so, this was most likely due to the last-minute passage of the Tax Cuts and Jobs Act at the end of 2017. Because the law was only passed late in the year, the IRS did not have adequate time to adjust its W-4 form and the related computation tables to account for all the changes in the law. Thus, even if your taxes were lower for the year, the lack of adjustments to the W-4 and payroll-withholding tables meant that you likely had lower withholding and higher take-home pay for 2018. The bottom line is that, because your withholding was lower than it should have been, either your refund was lower than normal, or you ended up owing money instead of getting a refund.

This situation surprised many taxpayers, some of whom faced financial hardships because they depended on their federal refunds to cover other expenses, such as home property taxes.

Throughout 2018, the IRS issued nearly weekly warnings that the W-4 form and its corresponding withholding tables did not properly account for the tax reform’s changes. The warnings stated that in many cases this caused the 2018 withholding amounts to be inappropriate. The problem was so widespread that Congress asked the IRS to waive underpayment penalties for taxpayers who ended up with a balance due but who had prepaid at least 80% of their 2018 tax liabilities. (Normally, taxpayers need to prepay 90% of their tax liabilities to avoid this penalty.)

Unfortunately, this problem will not be solved in time for the 2019 returns. Despite the problems in 2018, the IRS is waiting until 2020 to implement a new W-4 and to revise the accompanying computations to accommodate the tax reform’s changes. As a result, the problem of insufficient withholding will persist for many taxpayers in 2019.

We are now over halfway through 2019, so it may be a good time to double-check your withholding and projected tax amounts in order to prevent another unpleasant surprise at tax time. Your Tarlow tax advisor can assist you and we encourage you to contact us. If you are conversant with tax terminology, you can use the IRS’s newly updated withholding estimator. This online tool helps you to determine whether your employer is withholding the right amount of tax from your paychecks. However, the results are only as good as the information that you put into the withholding estimator. You must also estimate your income for the year from various sources.

Regarding the underpayment penalty, there are two points to consider:

  • First, if you filed early in 2018 and you had tax due, then you may have paid an underpayment penalty because you hadn’t prepaid enough tax through either withholding or estimated tax payments. As mentioned earlier, the IRS allowed a special exception to the underpayment penalty for those who prepaid at least 80% of their 2018 tax liabilities. However, it didn’t establish the 80% penalty waiver until well into March, so those who filed early may have paid a penalty that they did not end up being liable for. To determine if you paid a penalty, look at line 23 of your 2018 Form 1040. If there is an amount on that line but you met the 80% minimum for the underpayment exception, you will receive a refund from the IRS. On August 14, 2019, the IRS announced that they will automatically refund the penalty to all qualifying taxpayers. There is no need to contact the IRS to apply for or request the waiver.
  • Second, don’t count on the IRS again lowering the underpayment penalty for this year; it has given fair warning to taxpayers, who have had many months to review and adjust their tax withholding amounts. If you need to increase your 2019 withholding, you should do so soon; the end of the year will be here before you know it and spreading out the adjustment over a longer period results in the least amount of pain in your budget.

If you are self-employed, pay estimated tax, or have questions about your federal tax refund, please contact us. We can assist you by performing a tax checkup and answer any questions you may have about a complicated tax return.