Repairing Your Business’s Bad Credit Score

The creditworthiness of your business is measured by its credit score. This number is issued by Dun & Bradstreet, Experian, Equifax, and FICO SBSS, and is an essential reflection of your company’s payment reliability and timeliness.

Why is Your Business Credit Score Important?

Your company’s overall financial health is of key importance to any lenders, creditors, and trade partners with whom you wish to do business. Those partners need to be able to trust in your ability to provide the goods or services that you are promising: to pay back any loans you may apply for. Your financial health can also be a determination of the terms that you are able to negotiate with lenders.

Ultimately, your business credit score is the main way third parties can measure your company’s financial health. It’s typically used by lenders, creditors, and trade partners during various business transactions, such as applying for business loans, leasing, winning contracts, doing business with vendors or suppliers, obtaining net terms with trade partners, and even getting better interest and payment rates for instruments such as business contracts and mortgages.

Businesses in possession of strong credit scores have a much better chance of obtaining the capital that they need to grow compared to those with weak credit scores. Many lenders have minimum credit score requirements in place, and businesses that cannot meet that threshold will be unable to secure the loan that they seek. Even if your business has a credit score that exceeds that threshold, the stronger your credit score, the more advantageous the interest rate or repayment terms you are likely to have extended to you.

Business credit scores are also used as a gauge by suppliers and others who will need to rely on you to pay them in a timely manner. Vendors, landlords, and other stakeholders with whom you will have a financial relationship will look to your past performance with others as an indication of how you are likely to treat them. Have a weak credit score? Even if these trade partners agree to do business with you, they are likely to include terms that will protect their own interests and be less advantageous to you.

How to Interpret Business Credit Scores

Unlike personal FICO credit scores which can reach as high as 850, business credit scores generally only go as high as 100 and can fall as low as 0. As is true in so many other types of grading systems, the higher the score, the better the credit rating is considered to be, though different credit rating agencies have different levels at which they bestow the value judgment of being “good.” For Equifax, a credit score of 90 or above is considered good while Experian considers 7 or above good. Dun & Broadstreet bestows the term “good” on scores of 80 or above, while FICO SBSS (whose highest scoring ranges well above 100) considers a score of 140 or more a good rating.

The higher a business’s credit score, the better their chance of obtaining loans or positive trade terms with vendors and suppliers. This is because the high score reflects a history of making payments on a timely basis rather than being late or delinquent.

Can You Fix A Bad/Thin Business Credit Score?

Having a low business credit score can be a reflection of several possible factors, including having filed for bankruptcy, having liens against your business, having a poor repayment history filled with delinquent payments or non-payments. In addition to having a bad score, businesses that don’t have a significant history of payments have credit scores that are termed “thin.”

When you’re applying for a loan, having either a bad business credit score or a thin credit score can work against you. Lenders are unlikely to provide advantageous terms to businesses with a poor history of repayment. Even if your business is new and doesn’t have much of a record of timely payments or delinquencies, many lenders will be reluctant to lend money to your business. Whichever situation you find yourself in, it will be well worth your time to either build a credit history or repair your poor credit. There are ways to do both. Here are several steps you can take that can have a significant impact.

  1. Keep your Business and Personal Finances Separate

You are not your business and your business is not you. Therefore, you should keep separate accounts for your company and for your personal use. Doing so will not only help you keep track of transactions and obligations for each, but will also help prevent any mistakes that you make (i.e. delinquent payments) from affecting either your business credit score or your personal credit score.

  1. Don’t Fall Behind On Your Bills

When your business makes a purchase or agrees to pay for a service, holding up your end of the bargain and paying in full (and on time) reflects on your business in a number of ways. Early payments will boost your credit score and be welcomed by trade partners, while delinquent payments will negatively impact your business’s credit score and have a negative impact on your reputation in general.

  1. Develop A Strong Relationship With Your Vendors

Keep in mind that your vendors and suppliers are the ones who report on-time or early payments to the credit bureaus as well as late payments. The better your business relationship with those partners, the more likely that they will report your positive actions and the less likely that they will report delinquencies.

  1. Maintain a Low Credit Utilization Ratio

Building credit as a business is done in much the same way as building personal credit: by establishing a history. One of the fastest ways to build a positive business credit report and score is to obtain a business credit card; however, use it sparingly and stay below 33% of your available credit.

  1. Keep Your Eye on Your Numbers

Credit reports change constantly, and it is essential that you keep your eye on it to make sure that it is an accurate reflection of your payment history. If you find a mistake you should act quickly to dispute the error within the framework provided by the bureau that is publishing the mistake.

  1. Add More Credit Options

Businesses that have either thin or bad credit can build their reputation by establishing additional lines of credit through a secured business credit card. These vehicles are backed by a deposit, making them easy to get and an excellent way to improve your business’s history (as long as you make your payments promptly).

Positive Credit Scores for Future Success

Having a solid, positive credit score for your business is more than just a report card. It is what can make a difference in your company’s future opportunities for growth. A business’s credit report should be nurtured, and this can be done by remaining organized and dedicated to making on-time or early payments, but for those who have made mistakes, it is not too late to repair and rebuild. Please contact us if you have any questions.

Understanding Your Annual Social Security Letter

Article Highlights:

  • Medicare B Premiums
  • Medicare D Premiums
  • Modified AGI
  • 2020 Premiums Table
  • Effect of Recreational Gambling
  • Appealing the Social Security Administration’s Decision

If you are receiving Social Security, then you have just recently received your annual letter from the Social Security Administration letting you know that your Social Security benefits for 2020 have increased by 1.6 percent as a result of a rise in the cost of living. The letter also lets you know how much will be withheld from your monthly retirement benefit for Medicare Parts B (medical insurance) and D (Prescription Drug Plan).

Not everyone realizes their Part B and Part D benefits are based upon their modified adjusted gross income (MAGI) from two years prior. This means the premiums for 2020 are actually based on your MAGI for 2018. The MAGI for making the adjustment is the federal AGI plus the following:

  • Tax-exempt interest income
  • United States savings bonds interest used to pay higher-education tuition and fees, if the interest was excluded from income
  • Excluded foreign earned income and housing costs
  • Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands
  • Income from sources within Puerto Rico

 

2020 MEDICARE PREMIUMS
TAXPAYER FILING STATUS Medicare Part B Monthly Premiums Medicare Part D**
Individual* Married Filing Joint MAGI Increase Total Surcharge
2018 MAGI less than or equal to $87,000 2018 MAGI less than or equal to $174,000 $0.00 $144.60 $0.00
2018 MAGI greater than $87,000 and up to $109,000 2018 MAGI greater than $174,000 and up to $218,000 $57.80 $202.40 $12.20
2018 MAGI greater than $109,000 and up to $136,000 2018 MAGI greater than $218,000 and up to $272,000 $144.60 $289.20 $31.50
2018 MAGI greater than $136,000 and up to $163,000 2018 MAGI greater than $272,000 and up to $326,000 $231.40 $376.00 $50.70
2018 MAGI greater than $163,000 and less than $500,000 2018 MAGI greater than $326,000 and less than $750,000 $318.10 $462.70 $70.00
2018 MAGI greater than or equal to $500,000 2018 MAGI greater than or equal to $7500,000 $347.00 $491.60 $76.40

 

*The increases for a married taxpayer who lived with his or her spouse at any time during the year and files a separate return are:

  • If 2018 MAGI was $87,000 or less: no surcharge for either Part B or Part D
  • If 2018 MAGI was $87,001 to $412,999: Part B $462.70 and Part D $70.00
  • If 2018 MAGI was $413,000 or above: Part B $491.60 and Part D $76.40

**The monthly Part D surcharge is in addition to the drug plan’s premium.

You might discover that even though your monthly Social Security benefits increased because of inflation, the net amount you receive may actually be less per month because of increases in Medicare Part B and D premiums. Such increases are attributable to increased MAGI in 2018, but one might encounter a hidden source of income. This applies to recreational gamblers whose winnings are included in their MAGI, but whose losses are an itemized deduction. Thus, even though the overall result may be a loss, the MAGI is increased by the full amount of the gambling winnings, therefore possibly causing increases in the Medicare Part B and D premiums.

On the other hand, if 2017 had been a high-income year and your income in 2018 was substantially less, your 2020 Medicare Part B and D premiums may be less than they were in 2019, resulting in a larger net monthly check.

The letter you received from the Social Security Administration does include an appeal process if you disagree with the Social Security Administration’s decision to increase your premiums. However, this appeal must generally be made within 60 days after receipt of the letter. Unfortunately, an increase in your 2018 MAGI that put you into the surcharge range for 2020 and was a result of capital gains due to a one-time sale of real property or stock, isn’t a valid reason for an appeal.

If you have questions related to your Social Security benefits and their taxation, please contact us. There are often planning strategies that may lessen the tax bite and premium costs.

The 1099-MISC Filing Date Is Just Around the Corner – Are You Ready?

Article Highlights: 

  • Independent Contractors
  • Non-employee Compensation
  • 1099 Filing Requirement
  • Due Dates
  • Penalties
  • Form W-9 and 1099 Worksheet

If your business engages the services of an independent contractor, and you pay them $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC). 

Note: The IRS has cautioned taxpayers who are treating rental activities as a trade or business for purposes of claiming the 20% passthrough deduction, they are required to issue 1099-MISC forms to their services providers who meet the $600 test for those rental activities.

Because so many fraudulent tax returns are filed right after e-filing opens up in January, the IRS requires 1099-MISCs for NEC to be filed by January 31. The IRS will not release refunds for individual income tax returns that include the earned income tax credit until the NEC amounts can be verified. 

Thus, the due date for filing 2019 1099-MISC forms for NEC is January 31, 2020. This is also the same due date for mailing the recipient his or her copy of the 1099-MISC. 

It is not uncommon for a business or rental property owner to have a repairperson go out early in the year, pay him or her less than $600, use his or her services again later in the year, and have the total paid for the year be $600 or more. As a result, the business or landlord may have overlooked getting the needed information from the individual to file the 1099s for the year. Therefore, if you own a business or are a landlord, it is good practice always to have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, then it would be a good idea going forward to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you. 

The government provides IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to file the 1099s accurately. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 before engaging in business with them. The W-9 is for your use only. You do not submit this to the IRS. 

The penalty for failure to file a required information return due in 2020, such as the 1099-MISC, is $270 per information return. The penalty is reduced to $50 if a correct but late information return is filed no later than the 30th day after the required filing date of January 31, 2020, and it is reduced to $110 for returns filed after the 30th day but no later than August 1, 2020. If you are required to file 250 or more information returns, you must file them electronically. 

In order to avoid a penalty, copies of the 1099-MISCs you’ve issued for 2019 need to be sent to the IRS by January 31, 2020. The forms must be submitted on magnetic media or on optically scannable forms (OCR forms). 

Note: Form 1099-MISC is also used to report other types of payments, including rent and royalties. Payments to independent contractors are reported in box 7 of the 1099-MISC, and the dates mentioned in this article apply when box seven has been used. When the 1099-MISC is used to report income other than that in box 7, the due date to the form’s recipient is January 31, 2020, while the copy to the government is due by February 28, 2020. 

If you have any questions, please contact us. This firm prepares 1099s for submission to the IRS along with recipient copies and file copies for your records. 

Congress Passes Last-Minute Tax Changes

Article Highlights: 

  • Discharge of Qualified Principal Residence Indebtedness
  • Mortgage Insurance Premiums
  • Above-the-Line Deduction for Qualified Tuition and Related Expenses
  • Medical AGI Limits
  • Residential Energy (Efficient) Property Credit
  • Employer Credit for Paid Family and Medical Leave
  • Maximum Age Limit for Traditional IRA Contributions
  • Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption
  • Increase in Age for Required Minimum Pension Distributions
  • Difficulty of Care Payments Qualifying for IRA Contributions
  • Expansion of Sec. 529 Plan Uses
  • Required Distributions Modified for Inherited IRAs and Retirement Plans
  • Increase in Penalty for Failure to File
  • Major Change to Kiddie Tax Rules

Congress, at almost the last minute, has passed a large number of tax changes, including retirement plan issues that will become effective in 2020, as well as extensions through 2020 of several tax provisions that had expired or were about to end. The list of changes is quite large, so we have only included those that are most likely to affect individual tax returns. Here is a run-down on some of the new tax provisions: 

TAX EXTENDERS 

The tax changes retroactively revive several provisions that had previously expired or were going to at the end of 2019 and extend them through 2020. So, review them carefully to see if any of them provide you with an opportunity to amend your return for a refund. 

Discharge of Qualified Principal Residence Indebtedness – When an individual loses his or her principal residence to foreclosure, abandonment, short sale, or has a portion of their loan forgiven under the HAMP mortgage-reduction plan, they will generally end up with cancellation-of-debt (COD) income. COD income is equal to the amount of debt on the home that is forgiven by the lender. To the extent that the mortgage debt becomes COD income, it is taxable income unless the taxpayer can exclude it based on specific provisions in the tax code. 

After the housing market crashed a few years back, Congress added the qualified principal residence COD exclusion. The COD exclusion allowed taxpayers to exclude up to $2 million ($1 million if married filing separately) of COD income, to the extent it was discharged debt used to acquire the home, termed acquisition debt. Equity debt was not eligible for the exclusion. However, equity debt is deemed to be released first, thus limiting the exclusion if both equity and acquisition debt is involved in the transaction. 

This COD exclusion that was temporarily added in 2007 was extended and then expired at the end of 2017. Under the current legislation, the exclusion for qualified principal residence indebtedness is retroactively extended through 2020. Thus, if you paid taxes on primary residence COD income in 2018, be sure to call attention to that fact so your return can be amended for a refund. 

Mortgage Insurance Premiums – For tax years 2007 through 2017, taxpayers could deduct the cost of premiums for mortgage insurance on a qualified personal residence as an itemized deduction. The premiums were deducted as home mortgage interest on Schedule A. To be deductible: 

  • The premiums must have been paid in connection with acquisition debt (note: acquisition debt includes refinanced acquisition debt).
  •  The mortgage insurance contract must have been issued after December 31, 2006.
  • It must be for a qualified residence (first and second homes).
  • The deductible amount of the premiums phases out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000).
  • Qualified mortgage insurance means mortgage insurance provided by the: 
  • Dept. of Veterans Affairs (VA),
  • Federal Housing Administration (FHA)
  • Rural Housing Services (RHS)
  • Private mortgage insurance.

This deduction was previously allowed through 2017 and has retroactively been extended through 2020. 

Above-the-Line Deduction for Qualified Tuition and Related Expenses – An above-the-line deduction for qualified tuition and related expenses for higher education has been available since 2002 and was previously extended through 2017. For purposes of the higher education expense deduction, “qualified tuition and related expenses,” has the same definition as for the American Opportunity and Lifetime Learning credits for higher education expenses – that is, with certain exceptions, tuition, and fees paid for an eligible student (the taxpayer, the taxpayer’s spouse, or a dependent) at an eligible higher education institution. The deduction – up to $2,000 or $4,000, depending on AGI – is not allowed for joint filers with an AGI of $160,000 or more ($80,000 for other filing statuses), except no deduction is allowed for taxpayers using the married filing separate status. The phase-out amounts are not inflation-adjusted. The same expenses can’t be used for both an education credit and the tuition and fees deduction. 

This deduction was previously allowed through 2017 and has retroactively been extended through 2020. 

Medical AGI Limits – For 2017 and 2018, individuals could claim an itemized deduction for unreimbursed medical expenses, to the extent that such costs exceeded 7.5% of their AGI. For the post-2018 years, the percent of AGI increased to 10%. The provision retroactively extends the lower threshold of 7.5% through 2020. 

Residential Energy (Efficient) Property Credit – This non-refundable credit has been available in one form or another since 2006 through 2017, with credit amounts varying from 10% to 30% and the maximum credit ranging from $500 to $1,500. Most recently, the credit percentage was 10%, with a lifetime credit amount limited to $500. This credit is best described as an energy-saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy-efficient. Generally, it applies to insulation, storm windows and doors, certain types of energy-efficient roofing materials, energy-efficient central air-conditioning systems, water heaters, heat pumps, hot water systems, circulating fans, etc.

The recent legislation extends this credit through 2020, with a lifetime credit cap of $500. 

Caution: The lifetime credit extends to returns going back to 2006. 

Employer Credit for Paid Family and Medical Leave – This credit provides an employer with credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The maximum amount of family and medical leave that may be taken into account for any qualifying employee is 12 weeks per taxable year. The credit is variable and only applies if the leave wages are at least 50% of the individual’s normal wages. The credit percentage is 12.5% and increases by 0.5%, up to a maximum of 25%, for each percentage point that the payment rate exceeds 50%. 

The credit was originally only for 2018 and 2019 but has been extended through 2020. 

RETIREMENT PLAN AND IRA CHANGES 

Maximum Age Limit for Traditional IRA Contributions – The legislation repeals the maximum age for making traditional IRA contributions, which prior to this legislation, prohibited traditional IRA contributions after an individual reached the age of 70½. The provision is effective for contributions made for taxable years beginning after December 31, 2019. 

Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption – The legislation allows a penalty-free but taxable distribution of up to $5,000 from a qualified plan made within one year of birth. Or, in the case of a finalized adoption of an individual aged 18 or younger, or an individual who is physically or mentally incapable of self-support. You can repay distributions later to avoid the tax on the distribution. 

Increase in Age for RMDs – For decades, individuals were required to begin taking distributions from their traditional IRAs and qualified plans once they reached age 70½. These distributions, commonly referred to as a required minimum distribution or RMD, have never been adjusted to account for increases in life expectancy. The legislation changes the required beginning date for mandatory distributions to age 72, effective for distributions required to be made after December 31, 2019, with respect to individuals who attain the age of 72 after this date. 

Special Rule – Difficulty of Care Payments – Many home health-care workers do not have a taxable income because their only compensation comes from “difficulty of care” payments that are exempt from taxation under Code Section 131. Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA. This provision will allow home health-care workers to contribute to a qualified plan or IRA by amending the tax code so that tax-exempt difficulty of care payments are treated as compensation, for purposes of calculating the contribution limits to defined contribution plans and IRAs. This is effective for plan years after December 31, 2015, and IRA contributions after the act’s date of enactment (December 20, 2019). 

Sec. 529 Plan Modifications – Sec. 529 plans (also referred to as qualified state tuition plans) were originally created to allow tax-free accumulation saving accounts for a child’s education but generally limited the funds’ use to post-secondary education tuition and certain college fees. Since then, Congress has continued to expand the use of funds to include supplies, books, equipment, and reasonable room and board expenses for attending college. With the passage of the tax reform at the end of 2017, Congress allowed up to $10,000 a year to be used for elementary and secondary school tuition expenses. This new legislation adds the following to the list of qualified expenses: 

  • Qualified higher-education expenses associated with registered apprenticeship programs certified by the Secretary of Labor under Sec. 1 of the National Apprenticeship Act 
  • Payment of education loans, up to a maximum of $10,000 (reduced by the amount of distributions so treated for all prior taxable years), including those for siblings

These changes are effective for distributions made after December 31, 2018. 

RMDs for Designated Beneficiaries – The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the account owner’s death. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than ten years younger than the employee (or IRA owner), or a child of the employee (or IRA owner) who has not reached the age of majority must generally be distributed by the end of the tenth calendar year following the year of the employee’s or IRA owner’s death. A special rule for children requires any remaining undistributed funds to be distributed within ten years after they reach the age of maturity. 

This is a significant change since beneficiaries previously had options to take certain lifetime payouts. This will require careful planning to minimize the tax on the distributions. The change applies to distributions for employees or IRA owners who die after December 31, 2019.

Penalty for Failure to File – The legislation increased the minimum penalty for failure to file a tax return within 60 days of the return’s due date to $435, up from $330, for returns with a due date (including extensions) after December 31, 2019. Thus, the $435 penalty will apply to 2019 returns and will be inflation-adjusted for future years. 

Kiddie Tax – The tax reform enacted late in 2017 changed how the income of dependent children is taxed, causing a child’s unearned income to be taxed at fiduciary rates that very quickly reach the maximum tax rate of 37%. That change created an unintentional tax increase for survivors of service members and first responders who died in the line duty. This last-minute change reverts the kiddie tax computation to the pre-tax reform method for years beginning in 2020. It also allows taxpayers to choose whichever method provides the lowest tax for 2018 and 2019. Taxpayers can amend their 2018 return if doing so will provide a better outcome. 

The changes are extensive and, in many cases, open the door to amending prior years’ returns. If you have any questions or think any of these changes might benefit you for a prior year, please contact us

How to Clean Up QuickBooks for 2020

The new year is here, and you may still have a lengthy to-do list full of tasks from 2019. There’s one task, or rather, a series of tasks that you should definitely add to that list: QuickBooks cleanup for 2020. Following the guidelines provided here will do three things. It will: 

  • Ensure that you’ve processed every 2019 transaction (or that you know why you can’t).
  • Give you a sense of closure, knowing that you’ve dealt with all your 2019 financial data.
  • Allow you to start your 2020 QuickBooks activities with as clean of a slate as possible.

First Things First 

Before you start looking at transactions and running reports, check to make sure that your last fiscal year is recorded correctly in QuickBooks. Open the Company menu and select My Company. Click the pencil icon in the upper right to open the Company Information window, then click Report Information in the tabs to the left. This window opens: 

Is your company’s last fiscal year recorded correctly in QuickBooks? If not, please contact us

Account For All Of Your Income 

You certainly want to have received all the money owed to you from 2019. So, run a report to see which customers have outstanding, overdue balances. Open the Reports menu and select Customers & Receivables | A/R Aging Summary

The first column here will read Current. You don’t have to worry about these customers. It’s the next four columns that will require follow-up. If your default payment terms are 30 days, you’ll see columns for 1-30, 31-60, 61-90, and >90. Customers with dollar amounts in those columns have not met their obligations and are past due by those date ranges. 

Note: If your default terms are different (like 15 days), you’ll need to customize the report. In the toolbar at the top, you’ll see a field labeled Interval (days). Change it to reflect your own default terms and click Refresh in the upper right corner. 

If your report contains only a sea of zeroes in those four columns, everyone is paid up. If not, you can send statements to anyone who is at least one day past due to remind them of what they owe. Open the Customers menu and select Create Statements to see this window: 

Partial view of the Create Statements window

Make sure the Statement Date is correct since QuickBooks will use this to calculate aging. Then you can either enter a specific Statement Period or request All open transactions as of Statement Date. If you choose the latter, you’ll most likely want to limit the statements to customers whose payments are overdue. So, you’d click in the box in front of Include only transactions over [your number here] days past the due date

Below these options, you’ll be able to indicate which customers should receive statements. The most common choice is All Customers (who fall into the group you just defined), but you can also send to one or multiple customers.  For example, QuickBooks will display a list if you select one of these. The right pane of this window contains several additional options that you can check or uncheck. When you’re satisfied, you can Preview, Print, or E-mail the statements. 

Pay Outstanding Bills 

If you have not done so yet, you should also try to settle your Accounts Payable for 2019. Open the Reports menu and select Vendors & Payables | A/P Aging Summary. Look for dollar amounts in the columns that show aging beyond the first column. You can also run the Unpaid Bills Detail report and look at the Aging column, as pictured here: 

Look in the aging column of this report to see which bills are past due and by how many days.

Note: QuickBooks has multiple Preferences that relate to reports and aging. We can go over these with you if you haven’t explored them.

If you need assistance reconciling accounts, running year-end reports, or clearing any deposits that remain in the Undeposited Funds account for 2019, please contact us. We can help you make sure your QuickBooks accounts are cleared up for the new year. 

Did You Just Get an IRS Notice of Deficiency? Here’s What to Do Next

Nobody likes getting mail from the IRS, especially when it’s something you weren’t expecting. 

One minute, you’re minding your own business and aren’t even thinking about that return you filed months ago. The next minute you open your mailbox and see something called a “Notice of Deficiency” — and your anxiety immediately goes through the roof. 

At this point, the most important thing you can do is relax. Getting a Notice of Deficiency from the IRS in the mail doesn’t automatically mean you’re about to be audited, and in fact, it may not mean anything bad at all. It does, however, require you to keep a few key things in mind to make sure that you respond in the right way. 

What Is an IRS Notice of Deficiency? 

Formally known as the CP3219A notice, a Notice of Deficiency is exactly what it sounds like, an indication that the IRS has recently received information that is different from what you originally reported when you filed your tax return for the year in question. 

To put it another way, something that you put on your return doesn’t match with a piece of information that a third party provided to the IRS. The discrepancy could be as simple as a difference between your self-reported income and income reported on a Form 1099. 

Now, despite how intimidating it may sound, this isn’t necessarily a bad thing. Depending on the situation, it could just as easily result in a decrease in the amount of tax that you owe as it could result in an increase. 

The note itself will explain exactly how the amount was calculated, so the first thing you’re going to want to do is read it to make sure that you understand.

Moving Beyond the Notice of Deficiency 

If you agree with the changes as outlined by the Notice of Deficiency, then this process is almost over. All you have to do is sign the enclosed form (which should be Form 5564) and mail it to the address that is printed on the notice itself. This is called the Notice of Deficiency Waiver, and it just means that you agree to either pay the new amount that you owe or, in a perfect world, agree that you would like the IRS to send you some money that you didn’t know you had coming. 

If you don’t agree with the changes, however, note that you do have the right to challenge them by filing a petition with the United States Tax Court, but you have to do so by absolutely no later than the date shown on the notice itself. The court will not consider your petition if you file beyond this deadline. 

If you don’t agree with the changes and you have additional information that can help clear up any confusion, mail all of the supplementary documentation along with the aforementioned Form 5564 to the address on the notice. But keep in mind that doing this does not extend the amount of time you have to file your petition. 

You should also be aware that if the mistake is something that happened because of identity theft that you suffered, there are additional options available to you. The most immediate involves filling out Form 14039, otherwise known as the Identity Theft Affidavit. You should then call the IRS, speak to a representative, explain your situation and get advice about what they want you to do next. 

You could also contact the third party that gave the IRS the information that triggered the discrepancy in the first place. If the mistake is theirs, you can ask them to correct it or provide you with more information to help you make your case. 

If the mistake was a legitimate one on your end, you’ll also probably want to go over any other returns that you filed to make sure they don’t have the same issue, thus causing even more tax problems down the road. At the very least, you’ll want to file an amended tax return to include any additional information that you received (like more 1099s) after you filed your original one earlier in the year. 

If you owe additional taxes and can’t afford to pay right now, don’t worry. You could always set up a payment plan or make other arrangements with the IRS. Depending on the situation, you could also make an Offer in Compromise and settle your bill for far less than you originally owed. 

Resolving a Notice of Deficiency can be very overwhelming, and if not handled properly, you could end up with an even larger problem than you started with. For more assistance and to get help with your CP3219A notice, contact us today. 

The IRS Is Hot on the Trail of Unreported Virtual Currency

Back in 2018, Coinbase, a company handling virtual currency (also referred to as cryptocurrency) transactions, released the data of 14,000 of its users to the IRS after the information was subpoenaed, and virtual currency traders held their breath about what the IRS would do with the information related to those 14,000 users. 

Although it took some time, after analyzing the Coinbase data, the IRS recently issued letters to more than 10,000 taxpayers whom they suspect have not been properly reporting their virtual currency transactions, and not all of the letters were the same. In fact, one letter was quite frightening. The following is a synopsis of each of the three letters: 

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

  • Letter 6174 – This was a “soft notice” that did not require a response, and the IRS says it won’t be following up on it. However, the notice also warns that the taxpayer will be in hot water if they had virtual currency gains and fail to amend their return or continue to be noncompliant on future returns despite receiving the letter.

  • Letter 6174-A – The taxpayer isn’t required to respond to the letter but does need to correct their prior returns in which virtual currency transactions were 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 virtual currency gains.

Of course, Coinbase is not the only company handling virtual currency transactions, so others are not on the IRS’s radar – at least, not yet. The draft of the 2019 Form 1040 tax return was recently released, and it includes a new question… 

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtually currency? Yes or No.”

And for those who have not read the fine print in the signature area of the 1040, it reads as follows: 

“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”

Those taxpayers who have virtual currency transactions and fail to answer the question or answer “no” have committed perjury and can be subject to some very serious penalties. As you can see, the IRS is definitely ramping up its compliance efforts.

Virtual currency is treated as property, so whenever it is sold, traded, or used to pay for services or to make a purchase, it constitutes a reportable tax transaction, just like selling a stock, where a gain or loss must be determined for each transaction. 

Example: The taxpayer buys Bitcoin (BTC) so he can use it to 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 (BTC was trading at $2,500 when 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 of 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 when the goods were purchased.

Bitcoin is the most well-known of the over 4,000 variations of virtual currency, and although its value fluctuates, Bitcoin’s value has increased about 14 times in value from September 2016 to October 15, 2019. Many have purchased virtual currencies as a long-term investment, have never sold or traded their investment, and thus have no tax-reporting requirements. However, those who have acquired and then sold or exchanged virtual currency need to report their transactions to avoid some substantial penalties. 

Using virtual currency to pay for goods and services in a business creates additional tax reporting issues, all of which include substantial penalties for non-compliance. 

Paying Employees – The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax (Social Security and Medicare A), and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. Of course, these amounts are to be reported in U.S. dollars. 

Independent Contractor Payments – The fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to self-employment tax. 

Information Reporting – A payment made using virtual currency is subject to information reporting, to the same extent as any other payment made in property. For example, a person who, in the course of a trade or business, makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. 

New Guidance from the IRS – The IRS recently released new guidance about virtual currency – the first in 5 years –which mainly dealt with whether taxpayers have gross income from two cryptocurrency events: hard forks of cryptocurrency the taxpayer owns and an airdrop of a new cryptocurrency following a hard fork, if the taxpayer receives units of new cryptocurrency. If you own virtual currency, no matter whether these terms sound like a foreign language to you or you are familiar with them, you may need to account for these events on your tax return for the year when they occur. 

If you have unreported virtual currency transactions or need assistance understanding the new IRS guidance, you are encouraged to contact us as soon as possible so that you might bring your virtual currency transactions into tax compliance before you hear from the IRS.

Tax Benefits for People with Disabilities

Individuals with disabilities as well as parents of disabled children are eligible for a number of income tax benefits. This article explains some of these tax breaks. 

ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life. The 2017 tax reform, known as the Tax Cuts and Jobs Act (TCJA), added some additional features to the ABLE accounts. 

The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contract with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $15,000, can be made to an ABLE account each year.  Furthermore, distributions are tax-free if used to pay qualified disability expenses. 

Beginning in 2018 and through 2025, a TCJA provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of: 

  • The beneficiary’s taxable compensation for the year, or

  • The prior year’s poverty level ($12,140 for 2019) for a one-person household.

However, the extra contribution isn’t allowed if the beneficiary’s employer contributes to a qualified retirement plan on the beneficiary’s behalf. 

The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000. 

Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent who is physically or mentally unable to care for him/herself, and has lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,200 or more (2019) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals. 

Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 10% of his or her adjusted gross income. Eligible expenses include: 

  • Prostheses

  • Vision Aids – Contact lenses and eyeglasses

  • Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing

  • Wheelchair – Costs and maintenance

  • Service Dog – Costs and care of a guide dog or service animal

  • Transportation – Modifications or special equipment added to vehicles to accommodate a disability

  • Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense. If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.

  • Learning Disability – Tuition fees paid to a special needs school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend a special needs school. Fees for tutoring recommended by a doctor from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included.

  • Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap in order to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school as well as the costs of meals and lodging supplied by the school are also included as medical expenses.

  • Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing/grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.

If you have questions about any of the disability-related tax benefits discussed in this article, or if you have questions concerning potential medical expenses not discussed above, please contact us.