Who Owes You? 5 QuickBooks Online Reports That Can Tell You Fast

How many of your invoices are unpaid? Have any of your customers gone over 30 days past due? Did you bill all of the time and expenses for that project you just completed for a customer?

If you’re doing your accounting manually, there’s simply no way to get that information quickly. Depending on your bookkeeping system, you may not be able to get it at all.

QuickBooks Online has more than one solution to this problem. Each time you log in, the Dashboard contains a graphic in the upper left corner that tells you how many invoices are overdue and unpaid. Click on the colored bar labeled OVERDUE, and you’ll see a list of invoices with the unpaid ones right at the top.


You can tell at a glance how much of your money is tied up in unpaid invoices.

While this is important information for you to have as you start your workday, it doesn’t tell the whole story. To get that, you’ll need to access some of QuickBooks Online’s reports, five of them in particular. Click Reports in the left vertical pane, and then scroll down to the heading labeled Who owes you.

These reports are listed in two columns. Each has the outline of a star next to it. Click on the star, and the report will be added to the Favorites list at the top of the page. Click on the three vertical dots next to it, and you’ll be able to Customize the report. And as you hover over the title, you’ll see a small, circled question mark. Click on this to get a brief description of the report.

There are several reports on this list that can provide insight into where your outstanding revenue is. We recommend you run five of them at least once a week, and more frequently if your business sells large quantities of products or services. The suggested reports are:

Accounts receivable aging detail

This report provides a list of overdue invoices, along with aging information. There are several columns in the report, but you’ll want to pay special attention to the last one: OPEN BALANCE.

Tip: If you have many customers or simply a high volume of unpaid invoices, you might consider running the Accounts receivable aging summary instead.

Changing the Content

Before you run the report, you should explore the customization tools provided for it. They won’t be the same for every report, but you can start to get an idea of what can be done. Hover over the report title and click Customize. A panel like the one pictured below will slide out of the right side of the screen.


QuickBooks Online provides deep customization tools for reports.

You can see some of your customization options in the image above. Beyond these, you can also work with filters and headers/footers. When you’re satisfied with your changes, click Run report.

If you want to run a report with its default settings, click on the report title in the list to display it. You’ll have access to limited customization from there.

Four other reports you should be generating regularly are:

  • Customer Balance Summary: Shows you how much each customer owes your business
  • Open Invoices: Lists invoices for which there has been no payment
  • Unbilled Charges: Just what it sounds like: tells you who hasn’t been invoiced yet for billable charges
  • Unbilled Time: Lists all billable time not yet invoiced

We don’t expect you’ll have any trouble understanding reports like these; they’re fairly self-explanatory. QuickBooks Online offers many other reports, including the standard financial reports that need to be generated monthly or quarterly, like Balance SheetProfit and Loss, and Statement of Cash Flows. You’ll need these if you apply for a loan or need to supply in-depth financials for any other reason. If you have any questions about how to run QuickBooks reports, please contact us. We can help you analyze them to get a comprehensive, detailed picture of your company’s fiscal health.

Life-Changing Events Can Impact Your Taxes

Article Highlights:

  • Marriage
  • Buying a Home
  • Having or Adopting Children
  • Getting Divorced
  • Death of Spouse

Throughout your life, there will be significant occasions that will impact not only your day-to-day living but also your taxes. Here are a few of those events:

Getting Married – If you are getting married, it is essential to understand that once you are married, you no longer file returns using the single status. Instead, you will file as married taxpayers filing jointly (MFJ). When you file MFJ, both spouses combine their income on one return. When both spouses have substantial income, your combined incomes could put you in a higher tax bracket. However, when filing MFJ, you benefit by being able to claim a standard deduction equal to twice that of the standard deduction for a single taxpayer. It may be appropriate for newly married couples to estimate the differences of filing as unmarried and filing as married before tax-filing time. Depending on your situation, you may decide to adjust withholding to compensate for the MFJ status.

Keep in mind that filing status is determined on the last day of the tax year. Regardless of when you get married during the year, you will be considered married for the entire year for tax purposes. In addition, when a spouse is changing names, the Social Security Administration should be notified, and the IRS should be informed of any address change by either or both spouses.

Buying a Home – Buying a home, especially your first home, can be a trying experience. Without a landlord to take care of repairs and upkeep of the property, those tasks will become your responsibility as a homeowner. When you rent, you are responsible for making a rental payment, which is not tax deductible. On the other hand, when you own a home, in addition to being accountable for its maintenance, you have to make homeowner’s insurance, mortgage, and property tax payments. While the routine upkeep costs aren’t tax deductible, the interest on the mortgage and the property taxes you pay may be tax deductible, providing you with a significant saving in income tax. However, if the standard deduction amount for your filing status exceeds the total of all itemized deductions the law allows you to claim, you won’t get a tax benefit from the home mortgage interest and property tax payments. So, when determining if you can afford a home, it’s important to consider whether you’ll benefit from those home-related tax savings. Also, consider the long-term benefits of homeownership. Homes have generally appreciated in the past, so you can look forward to your home gaining value. When you sell it, the gain up to $250,000 ($500,000 for a married couple) can be excluded from income if the property has been owned and used as your primary residence for any two of the five years just before the sale.

Having or Adopting Children – Besides the loss of sleep, changing diapers, middle of the night feedings, and constant attention, a newborn also brings some tax benefits, including a maximum $2,000 child tax credit, which can go a long way in reducing your tax liability. If both spouses work, you will no doubt incur childcare expenses, which can result in a maximum (can be less) credit of between $600 and $1,050 for one child or twice those amounts for two or more children. The credit amounts are based on a maximum childcare expense of $3,000 for one child and $6,000 for two or more multiplied by 20 to 35 percent of the expense based upon a taxpayer’s income.

Of course, the medical expenses are deductible if you itemize your deductions, but only to the extent that the medical expenses exceed 10% of your adjusted gross income. Although rarely encountered, the expense of a surrogate mother is not deductible.

If you adopt a child under age 18 or a person physically or mentally incapable of taking care of himself or herself, you may be eligible for a tax credit for the qualified adoption expenses you paid. The credit, which is a maximum of $14,080 for 2019, is not refundable, but if the credit is more than your income tax, you can carry over the excess and have five years to use up the credit. If the child is a special needs child, the full credit limit will be allowed for the tax year in which the adoption becomes final, regardless of whether you had qualified adoption expenses. The credit phases out for higher-income taxpayers.

It is also time to begin planning for the child’s future education. The tax code offers two tax-favored education savings accounts. The Coverdell account allows a maximum contribution of $2,000 per year, and the Qualified State Tuition plan, more commonly known as a Sec 529 plan, allows large sums of money to be put aside for a child’s education. There is no tax deduction for contributing to either of these programs. However, the earnings from the plans are tax-free if used for qualified education expenses, so the sooner the funds are contributed, the more significant the benefit from tax-free earnings.

Getting Divorced – If you are recently divorced or are contemplating divorce, you will have to plan for significant tax issues such as asset division, alimony, and tax-return filing status. If you have children, additional issues include child support; claiming of the children as dependents; the child, childcare, and education tax credits; and perhaps even the earned-income tax credit. Here are some details:

  • Filing Status – As mentioned earlier, your filing status is based on your marital status at the end of the year. If on December 31, you are in the process of divorcing but are not yet divorced, your options are to file jointly or to each submit a return as married filing separately. There is an exception to this rule if a couple has been separated for all of the last six months of the year, and if one taxpayer has paid more than half the cost of maintaining a household for a qualified child. In that situation, the spouse can use the more favorable head-of-household filing status. If each spouse meets the criteria for that exception, they can both file as heads of household; otherwise, the spouse who doesn’t qualify must have the status of married filing separately. If your divorce has been finalized and if you haven’t remarried, your filing status will be single or, if you meet the requirements, head of household.
  • Child Support – This is support for the taxpayer’s children provided by the non-custodial parent to the custodial parent. It is not deductible by the parent making the payments and is not income to the recipient parent.
  • Children’s Dependency – When a court awards physical custody of a child to one parent, the tax law is particular in awarding that child’s dependency to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the custodial parent may release this dependency to the non-custodial parent by completing the appropriate IRS form.
  • Child Tax Credit – A federal credit of $2,000 is allowed for each child under the age of 17. This credit goes to the parent who claims the child as a dependent. Up to $1,400 of the credit is refundable if the credit exceeds the tax liability. However, this credit phases out for high-income parents, beginning at $200,000 for single parents.
  • Alimony – The recent tax reform also impacts the tax treatment of alimony. For divorce agreements that were finalized before the end of 2018, the recipient (payee) of the alimony must include their income for tax purposes. The payer, in such cases, is allowed to deduct the payments above the line without itemizing deductions. This is technically referred to as an adjustment to gross income. The recipient, who includes this alimony income, can treat it as earned income to qualify for an IRA contribution, thus allowing the recipient to contribute to an IRA even if he or she has no income from working. For divorce agreements that are finalized after 2018, alimony is not deductible by the payer and is not taxable income for the recipient. Because the recipient isn’t reporting alimony income, he or she cannot treat it as earned income to make an IRA contribution.
  • Tuition Credit – If a child qualifies for either of two higher-education tax credits, (the American Opportunity Tax Credit [AOTC] or the Lifetime Learning Credit), the credit goes to whoever claims the child as a dependent even if the other spouse or someone else is paying the tuition and other qualifying expenses.

Death of Spouse – Losing a spouse is painful emotionally. Unfortunately, it can be accompanied by several tax issues that may or not apply to the surviving spouse. Here is an overview of some of the most frequent problems:

  • Filing Status – If a spouse passes away during the year, the surviving spouse can still file a joint return for that year if the surviving spouse has not remarried. However, after the year of death, the surviving spouse will no longer be able to file with the deceased spouse jointly and will have to use a less favorable filing status.
  • Notification – If the deceased spouse is receiving Social Security benefits the Social Security Administration must be immediately notified. This would also be true of pensions and retirement plans of the deceased spouse.
  • Estate Tax – Where the deceased spouse’s assets and prior reportable gifts exceed the current lifetime inheritance exclusion ($11.4 million for 2019), an estate tax return may be required. However, the lifetime inheritance exclusion can be changed at the whim of Congress. Even when an estate tax return isn’t needed because the value of the deceased spouse’s estate is less than the exclusion amount, it may be appropriate to file the estate tax return. There could be an impact on the estate tax of the surviving spouse when he or she passes.
  • Inherited Basis – Under normal circumstances, the beneficiary of a decedent’s assets will have a tax basis in those assets equal to the fair market value of the assets on the date of death. Thus, generally, a qualified appraisal of the assets is required. However, for a surviving spouse, this can be more complicated depending upon whether the state of residence is a community property state and how title to the property was held.
  • Changing Titles – The title to all jointly held assets needs be changed into the survivor’s name alone to avoid complications in the future.
  • Trust Income Tax Returns – Many couples have created living trusts that, while they are both alive, don’t require a separate tax return to be filed for the trust and can be revoked. But upon the death of one of the spouses, this trust may split into two trusts, one of which remains revocable and the other becomes irrevocable. A separate income tax return for the latter trust will usually have to be prepared and filed annually.

These are just a few of the issues that must be addressed upon the death of a spouse, and it may be appropriate to seek professional help from your Tarlow tax advisor.

If you have questions about the tax impacts of life-changing events or situations, please contact us.

Tax Issues Related to Hobbies

Article Highlights:

  • Hobby Losses
  • Not-for-Profit Rules
  • Determining Factors
  • Trade or Business Presumption
  • Hobby Tax Reporting
  • Self-Employment Tax

Generally, a hobby is an activity an individual enjoys for leisure, and without the goal of making money. A hobby is a way to describe an activity that is not known to create any income. Tax law generally does not allow deductions for personal expenses except those allowed as itemized deductions on the 1040 Schedule A, and this also applies to hobby expenses.

Some hobbyists try to get a tax deduction for their hobby expenses by treating their hobby as a trade or a business. For instance, if someone’s hobby expenses exceed their hobby’s income, they may try to report the difference between hobby income and expenses as a deductible business loss. To curtail hobbies being treated as businesses, the tax code includes rules that do not permit losses for not-for-profit activities such as hobbies. The not-for-profit rules are often referred to as the hobby loss rules.

The distinction between a hobby and a trade or business sometimes becomes blurred, and the determination depends upon a series of factors, with no single factor being decisive. All of these factors have to be considered when making the determination:

  • Is the activity carried out in a businesslike manner?
  • How much time and effort does the taxpayer spend on the activity?
  • Does the taxpayer depend on the activity as a source of income?
  • Are losses from the activity the result of sources beyond the taxpayer’s control?
  • Has the taxpayer changed business methods in attempts to improve profitability?
  • What is the taxpayer’s expertise in the field?
  • What success has the taxpayer had in similar operations?
  • What is the possibility of profit?
  • Is profit from asset appreciation possible?

Because determining these factors is so subjective, the IRS regulations provide that the taxpayer has a presumption of profit motive if an activity shows a profit for any three or more years during five consecutive years. However, if the activity involves breeding, training, showing, or racing horses, then the period is two out of seven consecutive years.

Making the proper determination is important because of the differences in tax treatment for hobbies versus trades or businesses. If an activity is determined to be a trade or business in which the owner materially participates, then the owner can deduct a loss on his or her tax return, and it is not uncommon for a business to show a loss in the startup years.

However, hobbies (not-for-profit activities) have special, unfavorable rules for reporting the income and expenses, which have been exacerbated by the 2017 passage of the Tax Cuts and Jobs Act (tax reform). These rules are:

  1. The income is reported directly on the hobbyist’s 1040;
  2. The expenses, not exceeding the income, are deducted as a miscellaneous itemized deduction. Thus, the expenses are only allowed if a taxpayer is itemizing deductions, rather than taking the standard deduction; and
  3. Due to tax reform, for tax years 2018 through 2025, miscellaneous itemized deductions that must be reduced by 2% of the taxpayer’s adjusted gross income – which is the category into which the hobby expenses fall – have been suspended (are not deductible). Thus, for those years, there is no deduction at all for hobby expenses, and any hobby income will be fully taxable. Example: Marcia has an income of $750 from her hobby (a not-for-profit activity) of coin collecting and expenses of $500. So, Marcia must include the $750 on her 1040. But because miscellaneous itemized deductions are currently suspended, she will not be able to deduct her $500 in expenses, leaving the full $750 as taxable income. 

Another concern for hobbyists who are reporting income from their hobby on their 1040 is whether or not that income is subject to self-employment tax. Luckily, there is an exception for sporadic or one-shot deals and hobbies, which are not subject to self-employment tax.

If you have questions related to how the not-for-profit rules may apply to your hobby, please contact us.

In a Divorce, Who Claims the Children: You Or Your Ex-Spouse?

Article Highlights:

  • Custodial Parent
  • Dependency Release
  • Joint Custody
  • Tiebreaker Rules
  • Child’s Exemption
  • Head of Household Filing Status
  • Tuition Credit
  • Child Care Credit
  • Child Tax Credit
  • Earned Income Tax Credit

If you are a divorced or separated parent with children, a commonly encountered, but often misunderstood issue is, who claims the child or children for tax purposes. Parents often dispute this issue; however, tax law includes some particular but complicated rules about who profits from the child-related tax benefits. Under consideration are many benefits, including the children’s dependency, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and, in some cases, even filing status.

This is one of the most complicated areas of tax law, and inexperienced tax preparers or taxpayers preparing their returns can make serious mistakes, especially if the parents are not communicating well. If parents cooperate, they often can work out the best tax result overall. Even though it may not be the best for them individually, it’s possible to compensate for it in other ways.

Physical Custody (Custodial Parent) – If a family court awards physical custody of a child to one parent, tax law is particular in awarding that child’s dependency to the parent with physical custody, regardless of the amount of child support provided by the other parent. However, the custodial parent may release that dependency to the non-custodial parent for tax purposes by completing the appropriate IRS form. The release can be granted every year or for multiple years at one time. But once made, it is binding for the specified period.

CAUTION – The decision to relinquish dependency should not be taken lightly, as it impacts several tax benefits.

Joint Custody – On the other hand, if the family court awards joint physical custody, only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and the child is actually claimed by both, the IRS tiebreaker rules will apply. Per the tiebreaker rules, the child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year. Or, if the child lives with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income will claim the child as a dependent. Parents in the process of divorcing should be aware that for tax purposes, the IRS’s rules as to who can claim a child’s dependency takes precedence over what a divorce decree says or what a judge may have ruled. So, for example, if the family court awards full custody of a child to Parent A but says that Parent B can claim the child as a tax dependent, the IRS’s position is that the child is a tax dependent of Parent A unless Parent A releases the dependency to Parent B, as explained above.

Child’s Exemption Allowance –While there is no longer (through 2025) a monetary tax deduction, or an “exemption allowance” for a dependent child, it still matters who claims the child as a dependent because certain tax credits are only available to the taxpayer claiming the child as a dependent.

Head of Household Filing Status – An unmarried parent can claim the more favorable ‘head of household’ filing status if he or she is the custodial parent, and pays more than half of the costs of maintaining a household that is the child’s principal place of abode for more than half the year. This is true even when the child’s dependency is released to the non-custodial parent.

Tuition Credit – If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whoever claims the child as a dependent. Credits are significant tax benefits because they reduce the tax amount dollar-for-dollar, while deductions reduce income to arrive at taxable income, which is then taxed according to the individual’s tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500, of which 40% is refundable. However, both education credits phase out for higher-income taxpayers. For instance, the AOTC phases out between $80,000 and $90,000 for unmarried taxpayers and $160,000 and $180,000 for married taxpayers.

Child Care Credit – A nonrefundable tax credit is available to the custodial parent for childcare while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and be a dependent of the parent. However, a special rule for divorced or separated parents provides that if the custodial parent releases the child’s exemption to the non-custodial parent, the custodial parent can still qualify to claim the childcare credit, and the noncustodial parent can not claim it.

Child Tax Credit – A $2,000 credit is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $200,000 for unmarried parents and $400,000 for married parents filing jointly.

Earned Income Tax Credit (EITC) – Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency of a child or children to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. The noncustodial parent is prohibited from claiming the EITC based on the child or children whose dependency has been released by the custodial parent.

Many complex rules are surrounding the tax benefits provided by the children of divorced parents. If you are a divorced parent with children, it is highly recommended that you consult with your Tarlow tax advisor to prepare your return. If you are the custodial parent, you should contact us before deciding whether to release a child as a tax dependent.

The Extended Tax Filing Due Date is Today, October 15, 2019

Article Highlights:

  • October 15 is the extended due date for filing federal individual tax returns for 2018.
  • Late-filing penalty
  • Interest on tax due.
  • Other October 15 deadlines.

If you could not complete your 2018 tax return by the normal April filing due date and are now on extension, that extension expires today, October 15, 2019. Failure to file before the extension period runs out can subject you to late-filing penalties.

Unless you are in a designated disaster area, there are no additional extensions. If you still do not have all of the information necessary to complete your return today, please contact us. We can help you explore options to lessen potential penalties.

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns is September 16 (September 30 for fiduciary returns). If you have not received that information yet, it is necessary to begin making inquiries as soon as possible.

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 15 for most states.

In addition, interest continues to accrue on any balance due, currently at the rate of 5% per year. This rate is subject to quarterly adjustments.

If your Tarlow tax advisor is waiting for some missing information to complete your return, we will need that information today, and as soon as possible. If you anticipate complications related to providing the needed information, please contact your Tarlow tax advisor today to determine a course of action to avoid the potential penalties.

Additional October 15, 2019 Deadlines – In addition to being the final deadline to timely file 2018 individual returns on extension, October 15 is also the deadline for the following actions:

  • FBAR Filings – Taxpayers with foreign financial accounts, the aggregate value of which exceeded $10,000 at any time during 2018, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The original due date for the 2018 report was April 15, but individuals have been granted an automatic extension to file until October 15, 2019.
  • SEP-IRAs – October 15, 2019 is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2018. The deadline for contributions to traditional and Roth IRAs for 2018 was April 15, 2019.
  • Special Note – Disaster Victims – If you reside in a Presidentially declared disaster area, the IRS provides additional time to file various returns and make payments.

Please contact us for extended due dates of other types of filings and payments and for extended filing dates in disaster areas. If you have any questions or concerns regarding the October 15 deadlines, please contact us today!

Disaster-Related Tax Losses May Be Less Than Expected

Article Highlights:

  • Limitation to Losses within Disaster Areas
  • Cost versus Market Value
  • Home Tax Losses
  • Home Tax Gains
  • Replacement Properties
  • Home Gain Exclusion

The late-2017 tax-reform package changed the rules for personal casualty losses, which now are only deductible if they occur in a federally declared disaster area. As a result, if a home is destroyed in a forest fire or other disaster within a declared disaster zone, the homeowner can claim a casualty loss on that year’s tax return. However, if a home is destroyed as a result of a normal accident, or is destroyed in a natural disaster but lies outside of a disaster zone, the homeowner cannot claim a casualty loss. Currently, the rules are only in effect for the years 2018 through 2025. Because of these rules, you should also make sure that your home insurance coverage is adequate.

Even those who have deductible losses may quickly find out that they cannot claim as much in tax losses as they expected. This is because the losses are not based on the cost of replacing the home; instead, they are based on the original cost of the home (plus any improvements prior to the date of the casualty). For those who have owned their homes for a long time before a casualty, the tax benefits of the resulting loss are greatly diminished.

This all stems from the fact that a casualty loss on a home is valued at the lesser of the home’s cost or its current market value (minus any insurance reimbursements). Because real estate generally appreciates in value, most casualty losses are based on the original cost of the home rather than on its current value or its replacement cost.

Example #1: Joe and Susan purchased their home many years ago for $125,000, but its current market value is $400,000. Their home is then destroyed as a result of a federally declared disaster. They did not have insurance. Thus, their casualty loss is only $125,000 (the original cost), as that is less than the current market value. Thus, even though they suffered a $400,000 financial loss, the tax loss is only $125,000. (Even worse, the actual deductible loss is even less, as reductions of $100 per casualty and 10% of adjusted gross income must first be applied.)

If a home is insured, then an actual financial loss due to a disaster can actually result in a tax gain.

Example #2: The circumstances are the same as in Example #1, except Joe and Susan’s homeowners’ insurance paid them 100% of the home’s current value. For tax purposes, the $125,000 original cost must be used; the insurance reimbursement is then subtracted from that cost to determine the casualty loss. As a result, after the $400,000 reimbursement, Joe and Susan actually have a $275,000 tax gain ($400,000 minus $125,000) instead of a loss.

Luckily, the new tax law includes a provision in which the homeowner can treat the involuntary conversion of a principal residence due to destruction (among other situations) as a sale. Such sales are eligible for the home-sale gain exclusion, provided that the taxpayers meet certain requirements for length of ownership and occupancy. Married taxpayers who file jointly can exclude up to $500,000 of home-sale gain after such a disaster, provided that they have owned and lived in the destroyed home for at least 2 of the prior 5 years. (For a single taxpayer, that exclusion is $250,000.) Thus, in Example 2, if Joe and Susan meet these requirements, they can exclude all of their $275,000 gain (because it is less than $500,000). If the gain is greater than this limit, the remaining amount can be deferred, provided that the taxpayer purchases a replacement residence.

The insurance proceeds that homeowners receive for a destroyed residence (or its contents) are treated as a common pool of funds. If those funds are used to purchase a property that is similar to lost property, then the taxpayer must recognize the gain only to the extent that the funding pool exceeds the cost of the replacement property. The period for replacing damaged or lost property is four years, starting with the end of the first taxable year when any part of a gain due to involuntary conversion is realized.

Under all circumstances, homeowner’s insurance is appropriate; in fact, mortgage lenders generally require it. Be sure that your home is insured for an appropriate amount that includes any appreciation.

As you see, disaster-related casualty losses can be tricky, and the results can be unexpected. Please contact us if you have experienced a disaster-related loss or if you have any questions.

Earned Income Tax Credit: Used, Abused and Altered

Article Highlights:

  • Purpose of the Earned Income Tax Credit
  • Qualifications
  • Earned Income
  • Qualified Child
  • Credit Phaseout
  • Computing the Credit
  • Investment Income Limit
  • Combat Pay Election
  • Fraud
  • Safeguards

Any discussion of the earned income tax credit (EITC) needs to begin with a discussion of why Congress created it in the first place. It has a twofold purpose: first, as an incentive for people to work and get off public assistance. And second, to provide financial assistance for low-income taxpayers and their families based upon their income from working, which the tax code refers to as “earned income.” When originally created back in 1979, it even allowed taxpayers to obtain the credit in advance through their employer’s payroll payments, based on projecting the credit they would be entitled to on their tax return for the year. This was referred to as advanced EITC. However, because of the many problems associated with the advanced payment credit, it was repealed for years after 2010.

The EITC is a refundable credit, meaning if any unused credit remains after offsetting all of a taxpayer’s tax liability, that remainder is refunded to the taxpayer. This refundable feature has made the EITC a giant target for fraud, which is discussed later in this article. In addition to the other requirements discussed below, the EITC is not allowed to married couples filing separately, nor can the taxpayer claiming the credit be a dependent of another taxpayer. In addition, the taxpayer must have been a U.S. citizen or resident alien all year and have a Social Security Number (SSN). Any children used to qualify the taxpayer for the credit are also required to have a SSN. Furthermore, because this credit is meant for lower-income individuals, if a taxpayer is working overseas and is able to exclude foreign earned income, he or she is barred from claiming the EITC. As previously mentioned, the EITC is based in part on the amount of a taxpayer’s (or in the case of a married couple, both a filer’s and a spouse’s) taxable earned income. For example, taxable earned income includes:

  • Wages, salaries, and tips;
  • Union strike benefits;
  • Long-term disability benefits prior to minimum retirement age; and
  • Earnings from self-employment.

Taxable earned income does not include any form of earned income that is excluded from income, such as a clergyperson’s housing allowance, excluded military combat pay (but see the election for combat pay later), tax-deferred retirement contributions, or excludable dependent care benefits.

Qualified Children – The EITC is also based upon the number of the taxpayer’s qualified children who lived with the taxpayer in the United States for more than half of the year for which the credit is being claimed. Generally, for EITC purposes, a qualified child must be younger than the taxpayer and be under the age of 19 or a full-time student under the age of 24 who had the same principal place of abode as the taxpayer for more than half of the tax year and is not married and filing a joint return (exceptions may apply).

For the EITC, “child” is defined as the taxpayer’s:

  • Son, daughter, adopted child, stepchild, eligible foster child, or a descendant of any of them (for example, a grandchild); or
  • Brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them (for example, a niece or nephew).

Exceptions to the residency requirement include temporary absences from the home, such as for school, vacations, illness, and military service.

Computing the Credit and Phaseout – The amount of the EITC increases as the earned income increases until it reaches the maximum credit amount, and then it phases out as the taxpayer’s modified adjusted gross income (MAGI) increases above the phaseout threshold. The following table illustrates how the credit is determined and the maximum amount of the credit for 2019.

Number of Qualifying Children Credit Percentage Earned Income Maximum Credit
None 7.65 $6,920 $529
One 34.00 $10,370 $3,526
Two 40.00 $14,570 $5,828
Three or more 45.00 $14,570 $6,55

If a taxpayer has no qualifying children, the taxpayer must be age 25 or older but under the age of 65 before the end of the year. This is to prevent children and retired individuals from claiming the credit. As can be seen from the table above, the credit for a taxpayer who doesn’t have a qualifying child is significantly less than for someone with one or more children.

Example #1: Ted and Jane have two qualifying children, and their only income is Ted’s wages (earned income) of $31,738. From the table above, based on two children, we determine their EITC before the phase-out as being the lesser of $12,695 (40% of $31,738) or $5,828 (the maximum for taxpayers with two qualifying children). Thus, in this case, the EITC before phaseout is $5,828.

Phaseout – The tax law limits the EITC to lower-income taxpayers by phasing out (reducing) the credit as a taxpayer’s MAGI increases above a threshold, with the credit fully phased out when the MAGI reaches the complete phaseout amount shown in the table below.

Number of Qualifying Children Phaseout Percentage Phaseout Threshold Complete Phaseout
None 7.65 Joint Filers: $14,450
Others: $8,650
$21,370
$15,570
One 15.98 Joint Filers: $24,820
Others: $19,030
$46,884
$41,094
Two 21.06 Joint Filers: $24,820
Others: $19,030
$52,493
$46,703
Three or more 21.06 Joint Filers:$24,820
Others: $19,030
$55,952
$50,162

 

Example #2: Using Ted and Jane from example #1, who have two qualifying children, we had determined that their EITC before phaseout was $5,828. The next step is to determine their credit after phaseout. We do that using the chart above, and for a married couple with two qualified children, the phaseout threshold begins at $24,820 and the phaseout percentage is 21.06%. Ted and Jane’s only income was Ted’s wages, so their MAGI is also $31,738. Their MAGI exceeds the phaseout threshold by $6,918 ($31,738 – $24,820). Multiplying that amount by the 21.06 phaseout percentage equals $1,457, which is the amount of the EITC that will be phased out. Thus, Ted and Jane’s EITC for 2019 will be $4,371 ($5,828 − $1,457).

Each year, the IRS develops credit look-up tables that take into account the taxpayer’s filing status, number of qualifying children, earned income, MAGI, and phaseout, so that the math we did in the above example is not needed.

Investment Income Limit – Congress further limited the credit so that taxpayers with substantial financial assets will not qualify for the credit. A taxpayer’s income from investments is used as a gauge for financial assets, and for 2019, taxpayers with investment income of $3,600 or more are disqualified from the credit.

Special Election for Combat Pay – Military members can elect to include their nontaxable combat pay as earned income for the credit. If that election is made, then the military member must include in his or her earned income all nontaxable combat pay received. If spouses are filing a joint return and both spouses received nontaxable combat pay, then each one can make a separate election.

Fraud – As mentioned earlier, the EITC is also a target of major fraud by unscrupulous tax preparers and ID thieves. In fact, the fraud has been so prevalent that the IRS has developed procedures, and Congress has passed tax laws, to combat the abuse.

One of the major areas of fraud was scammers filing returns with stolen IDs and phony income as soon as the IRS began accepting e-filed returns around the end of January. Filing early prevented the IRS from verifying the reported income because employers were not required to file W-2s and 1099s until the end of February. That also minimized the chances that the individuals whose IDs the fraudsters were using would file before them and cause the IRS to reject the return. In fact, many scammers would file married joint returns using the names and SSNs of two unrelated individuals, taking advantage of the IRS’s privacy policies; thus, if one of the victims contacted the IRS, the IRS would be unable to communicate with the individual because the victim would not know the name or SSN of the other filer on the fraudulent joint tax return. Of course, the income reported on the fraudulent returns was an amount meant to maximize the EITC and minimize the phaseout. The scammers also took advantage of the automatic refund deposit feature and had the refunds deposited into bank accounts that they opened in the names of the individuals whose IDs they were using on the fraudulent returns. Once the refunds were deposited into the accounts, the accounts were quickly cleaned out, leaving absolutely no trace of the scammers who were rarely caught. However, in a notable case in Florida, the scammer got away with millions of dollars in fraudulent credits and would not have ever been caught had she not bragged about her exploits online.

The IRS has since altered its return-processing procedures and plugged that hole, by not issuing refunds that include the EITC until after mid-February. The filing due dates for W-2s and 1099s have been moved up to January 31, giving the IRS adequate time to verify the earned income before issuing the refunds.

The IRS has also established the Identity Protection Specialized Unit to assist taxpayers who have been victims of ID theft. These taxpayers can file their returns by using an Identity Protection PIN provided annually by the IRS. Taxpayers who are or suspect they are victims of ID theft can call the IRS at 877-438-4338 for assistance.

Safeguards – Congress has also included consequences for taxpayers who have been found to abuse the EITC rules and has included mandatory taxpayer identification procedures for tax preparers.

  • Taxpayers – For taxpayers who recklessly or intentionally disregard the EITC rules, the IRS can make them ineligible for the credit in the two subsequent years, and if fraud is involved, the suspension period can be for ten years.
  • Tax Preparers – Tax preparers are required to follow mandated EITC due diligence procedures that require them to complete an EITC due diligence check sheet and verify the identity of anyone claiming the EITC before a return can be filed. Failure to adhere to these safeguards can result in a $530 tax-preparer penalty for each failure to comply with the due diligence requirements.

Many taxpayers who legitimately qualify for this credit are failing to claim it because they don’t fully understand the credit. For instance, the IRS estimates that 1.5 million taxpayers don’t realize that taxable long-term retirement benefits received before reaching minimum retirement age qualify as earned income, making them eligible for the EITC. The IRS also estimates that between 20 and 25 percent of the individuals who qualify for the EITC don’t claim it.

If you have questions about your qualifications for this credit or need help amending or filing a prior year’s return to claim the credit, please contact us.

What Is the Statute of Limitations on Unpaid Taxes?

If you have unpaid taxes that you haven’t yet been making payments toward, it might make you fearful that the IRS will come a-knocking one day to collect on what you owe. Tax debt can quickly snowball from interest, penalties, late fees, and the amount of the taxes due.

However, a lot of the scaremongering surrounding the IRS is largely sensationalized in media and daily conversation. Agents won’t come bursting through your door just because you have tax debt. Instead, they must follow due process in accordance with the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA). This means that you will always receive written notice concerning your balance due as well as collection actions and any requests for payment plans or settling your account.

However, if you haven’t received further notification concerning what you owe, you may be able to ride out the little-known statute of limitations on tax debt collections, which is 10 years.

What the 10-Year Statute of Limitations Entails

Your tax debt can actually be canceled in 10 years if the IRS makes no efforts to collect on your account – and if you also don’t contact the IRS. However, it’s not as simple as just waiting a decade without ever paying the taxes you owe. There are conditions that must be satisfied. The first is that this 10-year time frame doesn’t begin when you filed that tax return with a balance due or when you realized you owed taxes you couldn’t pay.

The official statute of limitations date begins once you receive written notice from the IRS concerning what you owe. You may receive a notice of deficiency with an actual tax bill or a substitute tax return if you didn’t file by the due date. So, if you filed your tax return on June 15, 2019, and got a notice in the mail dated September 1, your statutory period would begin September 1, not June 15. This date is called the CSED (Collection Statute Expiration Date), and if you make it to September 1, 2029, without further collection actions, then you can actually get your entire tax bill from this period canceled. (Note: Future tax bills, such as next year’s taxes you also can’t afford to pay on the due date, do not count toward this.)

However, the IRS will not notify you of this. While the date of assessment is also generally when that notice is received, the IRS has argued over when the assessment date actually was. Some situations can also delay the CSED by halting the clock on the 10-year time frame, such as:

  • Filing for bankruptcy
  • Being outside the U.S. for at least six months
  • Military deferment
  • Submitting an offer in compromise to settle back taxes
  • Filing a lawsuit against the IRS
  • Having your assets held in court custody due to divorce, judgments against you, etc.

It takes six months after bankruptcy cases settle to get the clock restarted on the CSED, so this means the IRS has more time to take collection actions against you, and the IRS will tend to ramp up these efforts before the statute of limitations expires.

State Tax Debt

Unlike the IRS, state tax departments do not have reciprocity with the RRA or the Taxpayer Bill of Rights. Taxpayers who are subject to state income tax need to find out what options, if any, are offered by their state tax department. State tax departments may actually take harsher collection actions since they don’t have to have oversight committees and the option for taxpayers to settle back taxes or make payment plans, and they do not have a statute of limitations on collections. The IRS tends to get a bad rap in movies and on TV, but it’s actually the state tax departments that are more likely to show up unannounced or issue liens a lot sooner.

It’s very rare than anyone rides out the statute of limitations, and it’s usually due to extenuating circumstances like disability or a debilitating business closure. If enough time has passed that you think you might be able to go the whole 10 years without payments or responses to collection actions, you must keep fastidious records of all correspondence with the IRS. If the IRS sent you little or no mail in the time period after the time you think the CSED kicked off, you may qualify for the statute of limitations but should not intentionally try to ride it out without the guidance of a tax professional specializing in tax relief and resolution issues.

If you have any questions about the statute of limitations on unpaid taxes, please contact us.

How Business Owners Can Improve Cash Flow By Thinking Profit First

Entrepreneurs don’t necessarily need to be ‘numbers people’ in order to succeed. You need drive, passion, the ability and will to follow things through, and the hustler’s spirit that enables you to constantly try new things or relentlessly chase big opportunities.

Whether you’re a serial entrepreneur or simply looking to grow your small business to a sustainable level to reassess your goals, it’s crucial to have an understanding of your venture’s financial results. While small businesses don’t require the same horsepower in their accounting department as large companies and quickly-growing startups, it’s still integral for entrepreneurs of all calibers to have an iron grip on their financial controls, processes, and results to prevent roadblocks.

The profitability of your business is not solely reliant on how much revenue the company has brought in stacked up against your expenses, or how many strategic maneuvers can be deployed to minimize your business tax burden. Understanding your key ratios, terminology, and the stories behind your numbers, and having the right accountants and advisors who can help you interpret them, will take you from simple compliance to long-term stabilization and growing your business.

Where Is Your Money Coming From? And Where Is It Going?

It can seem like operations are running smoothly because cash is regularly deposited, the bills are paid, and imminent tax filings don’t feel like a shakedown where you have to scramble to get the funds together. But while your bottom line might look good on your next attempt to raise capital, you could find yourself in hot water if it turns out that only one revenue stream and/or client constitutes most of your revenue. If that client goes out of business or otherwise decides to stop or reduce their payments, it could be significantly harder to pay back the loan you took out or demonstrate to your investor that you’re worth going past seed stage.

Demonstrating that you can make a profit is important for raising capital, but raising capital isn’t an end-all be-all. The time that you spend trying to qualify for loans, grants, and outside investments might be better spent getting more clients, users, views, income-producing property, or other important revenue drivers first. This could prove to be even more important than trying to keep your burn rate, or cash outflow, under control. Constrained cash flow is usually why most companies fold within the first two to three years of operation, and often gets overlooked by busy entrepreneurs focusing primarily on raising funds or posting an impressive profit.

Financial Transparency — More Than Just Compliance

In your quest for capital, your focus is likely to be directed toward the numbers investors are going to pay attention to: margins, profit generated relative to the capital you already invested, and how many users you have. But in being transparent about your finances, you’re not just being compliant with the law. You’re also giving a more accurate picture of where your business currently is and where you expect it to go. Early stage companies are more likely to get investments when they show promise with their product and sturdy business model. Banks, on the other hand, have stricter requirements for loan repayment and will be more stringent concerning financial compliance. They will want to see a proven track record and put more emphasis on your profit than growth potential, especially if you’re not a very capital-intensive business with significant collateral such as vehicles or real estate to secure the loan.

Improve Cash Flow Management by Putting Profit First

Regardless of whether your business decides to take dynamic risks through investor funding, or a more predictable repayment process with a business loan, all external capital sources will want to see proof of proper cash management even more than having stellar revenue numbers.

The ability to adequately control your cash inflows and outflows is what will help your company weather any storm. One train of thought to help drive profits, is to look at concepts like Mike Michalowicz’s “Profit First” model that changes the Revenue – Expenses = Profit expression into Sales – Profit = Expenses. While this is not an official figure to report on financial statements, it’s an excellent cash flow management mindset that helps business owners prioritize their personal and business savings so that operating expenses, expansion, taxes, and personal income are always being paid.

By “paying yourself” first, it ensures that your financial results are based on having enough cash on hand before you pay any expenses.

Any small business accountant is required to furnish a cash flow statement to most investors and some banks, but you shouldn’t wait until you have one at the end of the month, quarter, or year. It’s a good idea to go over your cash flow every week. In addition to expenses that could be cut or revenues that could be added or bolstered, you might have bottlenecks in your cash collection processes that could be eliminated and you hadn’t even realized it. If you have questions about managing your cash flow, please contact us.