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About Jared R. Rogers, CPA

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So far Jared R. Rogers, CPA has created 26 blog entries.

The Real Estate Brokers Little Black Tax Book

Your Top Secret Guide To Tax Reduction, Business Success and Solving IRS Debt Problems

As a broker, your primary job is marketing. Marketing yourself, your services, your client’s properties… you get the idea. Once the marketing is done, you then move on to the sales side of the house. You know, getting the clients to fall in love with the property, dealing with objections, bringing them back to reality, and ultimately getting the parties to sign a contact. Once those two things happen, you then move on to the technical part of your job. That is, the actual part of dealing with the real estate transaction itself and wrangling all the other parties that become involved.

Yet what was not obvious in the three roles mentioned above is this: you are also actually running a business. Furthermore, running a business is not what your pre-licensing class trained you to do. Still further, you were not trained on taxes and how they impact your business or your client’s scenario. To that end, it is your accountant’s job to help you understand and navigate these items. So, if you are going to select a partner to help you in this area, would it not make sense to find one who is experienced? Given the above, that is where this book and I enter the picture!

My goal for writing this book is three-fold. First, I want to help you understand how taxes impact you both from the standpoint of being a business owner as well as from the perspective of reducing them. It is important for all taxpayers to understand their responsibilities, the associated rules, and what can be done within those rules to legally reduce their tax liability. Second, like CPAs and other tax professionals, brokers are advisors to their clients. The better equipped you are to help your client as it relates to certain tax aspects of their transaction, the more efficiently you can address problems and close deals. Besides who does not like to close more deals? No broker that I am aware of!

Finally, tax problems are commonplace with those who earn money where no income tax withholding occurs. Think of anyone who is paid via cash (or check) or as an independent contractor (i.e. self-employed): dentists, brokers, attorneys, truck drivers, construction contractors, etc. I have known a fair number of brokers who have tax problems. As a CPA authorized to represent taxpayers before the Internal Revenue Service (IRS), I help them solve those issues. Not only do I assist them in resolving their issues, but also those of their clients so that deals can close. The key thing to know is that no matter how bad it initially seems, I have never been unable to help a client solve their tax debt matter.

Check out the video below to hear more and look below the video on ways that you can place an order.

You can also view this video on our YouTube Channel here.

How To Order Your Copy

Order directly from our office.  You can order via credit card by clicking the “Buy Now” button below.  If you select the “autographed with my custom message” option, you will be contacted post order to obtain your message.  Please note that payment processing is performed via PayPal and if you do not have an account, you can simply select the option to pay with credit or debit card at the bottom.  All orders processed via this method include Illinois sales tax as well as priority shipping via USPS.

Don’t have a credit card or simply want to pay via check?  Then please complete this TREBLBTB Order Form and return it to our office.

Please select author autograph type

Order via Amazon.  If you do not want an autographed copy, or do not want to order via our office, you can order your copy via Amazon.  Simply visit the author page for Jared R. Rogers, CPA  and complete your order that way.  You will have the choice of ordering either the paperback or Kindle edition.

By |2023-05-18T10:13:16-06:00March 18, 2020|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |0 Comments
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Electing S-Corp Status and Late Filing Relief

Filing Form 2553 is CRITICAL to being granted S-Corp status!

Every tax season we encounter some common issues and errors surrounding business owners who desire to be taxed as a S Corporation (S-Corp) by the IRS. What might those issues be? Well, usually one of the following:

  • Failing to make the S-Corp election entirely because they didn’t realize that Form 2553 needed to be filed with the IRS
  • Failing to make the election in a timely manner

In one of our previous posts we discuss the qualifications to become a S-Corp and some of the tax considerations. In this post, we are strictly going to discuss how to make the election and what to do if the deadline is missed.

When to Submit Form 2553

Form 2553 is used to tell the IRS that you want a corporation (or entity eligible to be taxed as a corporation, such as a single member LLC) to be taxed as a S-Corp. It is due:

  • No more than 2 months and 15 days after the beginning of the tax year the election is to take effect,
  • or at any time during the tax year preceding the tax year it is to take effect.

You can file the election at any time after thee above deadlines if your corporation meets the criteria for making a late S-Corp election (which we will discuss next).

It is important to note that the S-Corp election is made with the IRS, not the state. One is NOT changing their entity structure with the state. They are merely asking the IRS to tax the entity in a certain fashion. To help clarify what the election deadlines look like in practice, we’ve provided the following example:

Example 1 – New Corporation. New Corp, operates on a calendar year. It incorporated and began its first tax year on January 7th 2019. The 2-month period ends March 6th and 15 days after that is March 21st. To be a S-Corp beginning with its first tax year, it must file Form 2553 during the period that begins January 7th 2019 and ends March 21st 2019 (i.e. 2 months and 15 days after it incorporated). Because the corporation didn’t exist prior to January 7th, an election requesting an effective date prior to January 7th 2019 won’t be granted by the IRS.

Example 2 – New Corporation With Short Tax Year (less than 2 1/2 months). Short Corp, operates on a calendar year. It incorporated and began its first tax year on November 8th 2019. The 2-month period ends January 7th 2020 and 15 days after that is January 22nd 2020. To be an S corporation beginning with its short tax year, the corporation must file Form 2553 during the period that begins November 8th 2019 and ends January 22nd 2020. Because the corporation didn’t exist prior to November 8th, an election requesting an effective date prior to November 8th 2019 won’t be granted by the IRS.

Example 3 – Established Business. Old Corp, operates on a calendar year. It has been filing Form 1120 as a C corporation but wishes to make the S-Corp election for its next tax year (e.g. 2020) beginning January 1st. The 2-month period ends February 28th (the 29th in leap years) and 15 days after that is March 15th. To be a S-Corp in 2020, the corporation must file Form 2553 during the period that begins the first day (January 1st) of its last year as a C corporation (i.e. 2019) and ends March 15th of the year it wishes to be an S corporation (i.e. 2020). Because the corporation had a prior tax year, it can make the election at any time during 2019 but NO LATER than 2 months and 15 days beyond January 1st 2020 (i.e. the tax year the election is to be effective).

For the specific steps on when, where and how to submit your S-Corp election request, please refer to the Form 2553 Instructions per the IRS.

Requesting Relief for A Late S-Corp Status Election

So what happens if the deadline has passed to make the S-Corp election or you didn’t even know there was a deadline? Lucky for you, the IRS realizes that people makes mistakes and offers you some options to correct the oversight. They basically fall into the categories of:

  • Simply make the election effective for the NEXT year
  • Request relief stating that there was “reasonable cause”
  • Request relief using an IRS Revenue Procedure

Make the election effective next year. For those who miss the deadline, but don’t need it to be effective immediately, they can simply request that if be effective for the next year. For example, if you incorporate in late December 2019, but miss the March 15th 2020 deadline, you can always request that the election be effective for Tax Year 2021 by submitting Form 2553 prior to January 1st 2021.

Request relief on the grounds of reasonable cause. Reasonable cause refers to when a taxpayer didn’t file the forms on time due to a “valid reason” so to speak. In most cases, we’ve found the IRS to be fairly lenient when it comes to granting relief and allowing a corporation to elect S-Corp status in the year intended. Please note that reasonable causes may vary, and the IRS does not publish a list of what it considers to be one that is valid. However, there are numerous court cases that show that certain reasonable causes are “nearly always” allowed. Two of these typically include:

  • The company’s president, chief executive officer or similar responsible person neglected to file the election, or your corporation’s tax professional or accountant neglected to do so.
  • The corporation or its shareholders either did not know of the need to file an election or didn’t know they needed to file the election by a certain date.

If you are going to request relief on the grounds of reasonable cause, make sure that you address the following points within your statement: 

  • What happened that caused the filing to be late and when did it happen?
  • How did these facts and circumstances result in the forms not being filed on time?
  • How did the company handle its financial and tax affairs during this time? Meaning, did they operate as if they were a S-Corp or did they delay individual income tax filings because they were intending to be a S-Corp?
  • What attempt did the company make to correct the situation when they learned they did not make the election correctly?

Request relief using an IRS Revenue Procedure. Rev. Proc. 2013-30 (PDF) facilitates the grant of relief to those who make a late S-Corp election. This procedure provides guidance for relief for late:

  • S corporation elections,
  • Electing Small Business Trust (ESBT) elections,
  • Qualified Subchapter S Trust (QSST) elections,
  • Qualified Subchapter S Subsidiary (QSub) elections, and
  • Corporate classification elections which the entity intended to take effect on the same date that the S corporation election would take effect.

Generally, the relief under the revenue procedure can be granted when the following requirements are met:

  • The entity intended to be classified as an S corporation, is an eligible entity, and failed to qualify as an S corporation solely because the election was not timely;
  • The entity has reasonable cause for its failure to make the election timely;
  • The entity and all shareholders reported their income consistent with an S corporation election in effect for the year the election should have been made and all subsequent years; and
  • Less than 3 years and 75 days have passed since the effective date of the election.

To assist in determining if an entity qualifies for late election relief, Rev. Proc. 2013-30 includes flow charts, as well as specific guidance for each of the five categories listed above.

If an entity does not qualify for relief under Rev. Proc. 2013-30, the entity may request relief by requesting a private letter ruling. The procedural requirements for requesting a letter ruling and the associated fees are described in Rev. Proc. 2019-1 (PDF). For more information on late election relief, check out this page on the IRS’ website.

Need help correcting a late S-Corp election? We’ve helped many companies that thought they filed their election or didn’t know they needed to file by a certain deadline obtain their desired S-Corp status. If you find yourself in this unfortunate predicament, you’re best advised to seek a professional who knows how to address the situation.

To that end, give us a call at 773-239-8850 or shoot us an email via the address contained in the footer of this page. The sooner you put us to work for you, the sooner you can have your election granted to you by the IRS!

By |2020-02-09T17:26:13-06:00February 9, 2020|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , |0 Comments
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What is the IRS Fresh Start Initiative?

Each sunrise is a fresh start, a new day, a brand new pencil on an empty page!

If you you have tax debt, you have undoubtedly heard a lot about the Fresh Start Initiative (FSI) in radio ads, TV advertisements, online and more. Many of these advertisements will make you think that the IRS has some “special program” or that it is some recent change the IRS made. Both of these facts could be further from the truth.

You see, many tax experts and consumer advocates had accused the IRS of failing to assist those who had significant tax debt, but were trying to pay it off. So in 2011 (yes, 8 years ago at the time of this writing), the IRS announced the creation of a new initiative known as the FSI. This was in response to the critics, law makers and the fact that people were still being impacted by the recession.

The primary objective of the FSI was to give taxpayers who owed substantial back taxes the opportunity to consolidate their tax bills and pay them off in a convenient and orderly fashion. The key thing to take away is that the IRS made it easier for one to pay their debt. Contrary to what the advertisements say, the FSI was not:

  • A program to forgive a persons tax debt
  • Some magical bullet to simply give the IRS a fraction of the tax debt or “pennies on the dollar” and call it good
  • A program at all

What Changes Did the IRS Make with the FSI?
The primary provisions of the program included the following:

Tax Lien Changes. The FSI increased the tax debt threshold at which the IRS will file a Notice of Federal Tax Lien (Letter 3172). The threshold amount increased from $5,000 to $10,000. This was a good thing because having a tax lien on your credit report can hinder several things (e.g. ability to get credit, a job, etc). But do keep in mind that the IRS (at its discretion) can still file a tax lien on someone if they have a debt that is below $10,000.

The IRS also made changes regarding the withdrawal of tax liens, which eliminates the Notice of a Tax Lien publicly. Specifically, it made it so a lien could be withdrawn via these situations:

  • The tax debt was paid off in full or the statute of limitations (CSED) was reached. Although IRS liens are generally self-releasing, they don’t always come off. Therefore, a taxpayer could now call the IRS and tell them to release the lien because they met either of the two qualifications.
  • If you have entered into OR converted your regular installment agreement to a Direct Debit installment agreement, the tax lien can be withdrawn if:
    • You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt)
    • You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien)
    • Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
    • You are in full compliance with other filing and payment requirements
    • You have made three consecutive direct debit payments
    • You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement.

Installment Agreement Changes. The FSI increased the threshold for which an individual can qualify for a Streamlined Installment Agreement from $25,000 to $50,000. It also expanded the tax debt amount threshold for small businesses to qualify for a Direct Debit Installment Agreement (DDIA) from $10,000 to $25,000. Furthermore, small businesses can pay down balances above $25,000 in order to qualify for a DDIA. The reason these increases are important is because they:

  • Require minimal, if any, financial disclosure to the IRS;
  • Don’t require an IRS manager to approve the payment terms;
  • Don’t require taxpayers to liquidate assets to pay the IRS; and,
  • Can be set up in one phone call or interaction with the IRS.

Offer in Compromise Changes. If a person qualifies, the OIC program allows a person to settle their debt for a “reduced” amount. The FSI made changes regarding the financial analysis component used to determine which taxpayers qualify for an OIC (or not). Specifically it made the following changes:

  • Lump Sum OIC Payment – The IRS now looks at only one year of future income versus four years (i.e. 12 vs 48 months).
  • Short-Term OIC Periodic Payment – The IRS now looks at two years of future income versus five years (i.e. 24 vs 60 months).

Currently Not Collectible Changes. When a taxpayer is in this IRS status, enforcement actions cease. To get into CNC, generally the taxpayer will need to provide sufficient documentation to justify this status with the IRS. The FSI made the process easier for individuals who owe $10,000 or less to qualify for a CNC by easing the documentation requirements.

Are YOU looking for a fresh start regarding your tax debt?

Look, we know that most with tax debt would love nothing more than for someone to waive a magic wand and make their debt disappear. While we can’t offer that, we can help you make your problem disappear if you engage us! For example, did you know that the IRS only has 10 years to collect on your tax debt? After that, it will vanish!

So take a look at the post above where we offer a flat fee product where we will calculate your CSED. Or, you can visit this page and learn more about our IRS Debt Representation services. In either case, we encourage you to act NOW so that your fresh start can begin as soon as tomorrow!

By |2021-09-29T18:26:58-06:00September 1, 2019|Categories: IRS Talk|Tags: , , , , , , , , , , , , , , , , , , , , |0 Comments
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Solve Your Tax Trouble on National Get Out of The Doghouse Day

Time to get out of the dog house!

If you have “tax problems” then there is no better day to start dealing with them than National Get Out of The Doghouse Day! No, this is not some dreamed up holiday to sell greeting cards and it is actually real. Don’t believe us? Then check out this post over at the National Day calendar and you’ll see that it’s on the third Monday of July. So if you’re not sure how to get out of the dog house with the IRS or the state tax authorities, then here are 5 things you can do:

Open your mail.

When clients come to us to tackle their back taxes, many will often have several if not a dozen (or two) unopened letters. These may be from the Internal Revenue Service (IRS) of their state department of revenue. While many feel that not opening the letters keeps the problem at bay, it can actually make things worse. Did you know that many times when the IRS is attempting to assess a tax to someone, that they have to give them a chance to disagree? But there often comes a time where they give you a window, say 90 days, before what they propose becomes reality. If you fail to respond, you can get stuck with something that isn’t actually reality.

So the single best thing you can do to solve your tax problem is open your mail AND read it. What the letter says is actually not as bad as you think. Plus, there is no way that opening your mail is going to make the situation worse!

Address any unfiled tax returns.

One of the biggest tax cases that we worked on involved a taxpayer who had not filed since 1999. It was 2014 when we were getting involved with their matter. That’s 15 years of unfiled taxes! But don’t worry, according to the IRS Data Book SOI Tax Stats, there were over 13.1 million taxpayers with unfiled returns. So if you have unfiled returns, then know that you are not alone.

People fall behind on filing their tax returns for many reasons. Health issues, death of a loved one, fear, procrastination all have a place in keeping people from filing. But the one thing we see come up routinely is “I did’t file because I know I owe and I can’t pay it.” While this may be a true statement, it shouldn’t stop one from filing. Filing on time is best, but filing late is better than not filing. Similarly, not paying your taxes isn’t good, but paying late is better than not paying at all. There are penalties for not filling and not paying, but they are only calculated ONCE YOU FILE. And if you can’t pay what you owe? We’ll the IRS is always willing to set up a payment plan (installment agreement) with you to settle up.

If you have unfiled returns, you might want to talk to a tax advisor (see last point) prior to filing. While it may seem “correct” to file all of the unfiled tax returns, it may not be needed. While the IRS can “technically” ask for the last 10 years of unfiled returns, it often doesn’t. Furthermore, if you are owed a refund on any of those unfiled returns, the IRS will only issue it for the last 3 years. Anything older than that will be refortified due to the statute of limitations. As such, a tax advisor can help you determine what returns need to be filed to help you get back into the good graces of the IRS or the state.

Identify the root cause of your problem and face it head on.

We’ve all heard that insanity is doing the same thing over and over expecting to get a different result. Well, if you keep finding yourself in tax trouble, maybe you should figure out what is not working and change it. For example:

  • Have more taxes withheld from your check by decreasing your withholdings on your W4
  • Don’t claim “exempt” on your W4 unless you ARE actually exempt from paying income taxes (hint – most people aren’t exempt)
  • Start paying estimated taxes if you are self employed or your income is reported to you on a Form 1099-MISC or Form 1099-K
  • Withhold from your retirement income or social security if you are retired and constantly find yourself owing the government
  • Make sure that you are claiming all the deductions and credits you are entitled to
  • Review your filing status and make sure that you are using the one that is most advantageous to your situation (e.g. Head of Household if you are a single parent)

Reach out to the tax authorities.

Putting your head in the sand is not going to solve the issue. If you contact the IRS, they can tell you the current status of your account as well as what they want you to do to solve your tax matter. For example, they can tell you want years they want you to file and even give you copies of the tax records you need to file them if you’ve lost your records (it’s called a Wage & Income Transcript).

To reach out to the IRS, start with the last notice that you’ve received. It will have an address on the top left hand corner and a contact name and/or phone number in the top right hand corner. This will be the best contact to use because the folks at that number will understand what’s going on with your account as of now.

But if you’ve lost the notice or you have other issues, you can call the IRS at 1-800-829-1040, Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time. If you’re calling about a business tax account, call 1-800-829-4933, Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time. If you have a hearing impairment, call 1-800-829-4059 (TDD), Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time.

Find a qualified tax advisor if needed.

Many people (approximately 40%) use software to prepare their tax returns. But if you get into tax trouble, a qualified tax advisor can be well worth their weight in gold. We don’t recommend that you shop for one based on price, but we do recommend that you find a person/firm that is open AFTER April 15th. Remember, the IRS doesn’t typically contact you during tax season and the notices associated with their matching program typically are sent between March and October following the year the return was due (e.g. 2019 for TY 2017 returns that were due in calendar year 2018).

To that end, you want to find someone who:

  • understands tax (i.e. filing returns), tax debt issues and has experience resolving YOUR particular situation
  • has the credentials to represent you before the IRS so you don’t have to ever speak to them (e.g. EA, CPA, JD)
  • has a good personality fit with you as the two of you will have to work closely with one another

Need tax help?

We routinely help taxpayers get current and compliant and enter into resolution options with the IRS or state. Do you need help? Feel free to check out this page of our site then shoot us an email or give us a call. The sooner you do, the sooner you can but your tax nightmares behind you and get out of the doghouse!

By |2019-07-14T21:12:21-06:00July 14, 2019|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |0 Comments
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What does my IRS notice mean?

You go to the mailbox and one of the letters has a return address that sends chills down your spine: IRS. While most people don’t like being contacted by the IRS, many of their letters are no cause for panic because they are not audit related.  However, they should also not be ignored as some of them are time bound and require a response. This post will discuss some of the common notices the IRS sends and how to interpret what it means.

IRS notice types

The IRS sends notices for many reasons: bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of a pending deadline, etc. When the IRS sends a letter via certified mail, it’s giving you legal notice that they intend to levy you, file a lien against you, or that they will examine or audit you or your business.  The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

The very bottom of this post list some of the many notices that the IRS sends and provides you with a brief explanation. If you click on the green notice number, you will be taken to the IRS site where you can read some further details about that particular notice. If you want to see examples of the notices listed, then click this link and sort the notices by name to find the one your’re looking for.

What IRS notices are particularly important?

Any of the notices that deal with collections, should be “handled with care” so to speak. Why? Because if one doesn’t address them, they could find themselves on the wrong side of the IRS pretty quick. What are these notices?

CP503We have not heard from you and you still have an unpaid balance on one of your tax accounts.
CP504You have an unpaid amount due on your account. If you do not pay the amount due immediately, the IRS will seize (levy) your state income tax refund and apply it to pay the amount you owe.
CP504BYou have an unpaid amount due on your account. If you do not pay the amount due immediately, the IRS will seize (levy) certain property or rights to property and apply it to pay the amount you owe.
Letter 1058
We haven’t received your payment for overdue taxes. We intend to seize your property or rights to property (levy). You must contact us immediately.

What if you still don’t understand the notice after reading it?

We can help via our notice evaluation service. For a flat fee we will analyze your notice and provide you with a detailed explanation (in plain English) of what it means. We’ll also review your IRS account (with your consent and the filing of some paperwork) if you have debt and even provide your IRS CSED (the date your IRS debt will expire). Check out this post to learn more.

Call us at (773) 239-8850 or click our email address at the bottom of this screen to get started.

Common IRS notices

Notice NumberDescription
CP01HYou received a CP 01H notice because we were unable to process your tax return. The IRS has locked your account because the Social Security Administration informed us that the Social Security number (SSN) of the primary or secondary taxpayer on the return belongs to someone who was deceased prior to the current tax year.
CP04Our records show that you or your spouse served in a combat zone, a qualified contingency operation, or a hazardous duty station during the tax year specified on your notice. As a result, you may be eligible for tax deferment.
CP08You may qualify for the Additional Child Tax Credit and be entitled to some additional money.
CP09We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return.
CP10We made a change(s) to your return because we believe there’s a miscalculation. This change(s) affected the estimated tax payment you wanted applied to your taxes for next year.
CP10AWe made a change(s) to your return because we believe there’s a miscalculation involving your Earned Income Credit. This change(s) affected the estimated tax payment you wanted applied to your taxes for next year.
CP11We made changes to your return because we believe there’s a miscalculation. You owe money on your taxes as a result of these changes.
CP11AWe made changes to your return because we believe there’s a miscalculation involving your Earned Income Credit. You owe money on your taxes as a result of these changes.
CP12
We issue a CP12 Notice when we correct one or more mistakes on your tax return, and a payment becomes an overpayment, or an original overpayment amount has changed.
CP12AWe made changes to correct the Earned Income Credit (EIC) claimed on your tax return.
CP12EWe made changes to correct a miscalculation on your return.
CP13We made changes to your return because we believe there’s a miscalculation. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.
CP13AWe made changes to your return because we found an error involving your Earned Income Credit. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.
CP14We sent you this notice because you owe money on unpaid taxes.
CP14IYou owe taxes and penalties because you didn’t take out the minimum amount you had to from your traditional individual retirement arrangement (IRA). Or, you put into a tax-sheltered account more than you can legally.
CP16We sent you this notice to tell you about changes we made to your return that affect your refund. We made these changes because we believe there was a miscalculation. Our records show you owe other tax debts and we applied all or part of your refund to them.
CP19We have increased the amount of tax you owe because we believe you incorrectly claimed one or more deductions or credits.
CP20We believe you incorrectly claimed one or more deductions or credits. As a result, your refund is less than you expected.
CP21AWe made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).
CP21BWe made the change(s) you requested to your tax return for the tax year specified on the notice. You should receive your refund within 2-3 weeks of your notice.
CP21CWe made the change(s) you requested to your tax return for the tax year specified on the notice. You’re not due a refund nor do you owe any additional amount. Your account balance for this tax form and tax year is zero.
CP21EAs a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes.
CP21IWe made changes to your tax return for the tax year specified on the notice for Individual Retirement Arrangement (IRA) taxes. You owe money on your taxes as a result of these changes.
CP22AWe made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).
CP22EAs a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes.
CP22IWe made changes to your tax return for the tax year specified on the notice for Individual Retirement Arrangement (IRA) taxes. You owe money on your taxes as a result of these changes.
CP23We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a balance due because of these changes.
CP24We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a potential overpayment credit because of these changes.
CP24EWe made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a potential overpayment credit because of these changes.
CP25We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.
CP27We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return.
CP30We charged you a penalty for not pre-paying enough of your tax either by having taxes withheld from your income, or by making timely estimated tax payments.
CP30AWe reduced or removed the penalty for underpayment of estimated tax reported on your tax return.
CP32We sent you a replacement refund check.
CP32ACall us to request your refund check.
CP39We used a refund from your spouse or former spouse to pay your past due tax debt. You may still owe money.
CP42The amount of your refund has changed because we used it to pay your spouse’s past due tax debt.
CP45We were unable to apply your overpayment to your estimated tax as you requested.
CP49We sent you this notice to tell you we used all or part of your refund to pay a tax debt.
CP51AWe computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes.
CP51BWe computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes.
CP51CWe computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes.
CP53We can’t provide your refund through direct deposit, so we’re sending you a refund check by mail.
CP59We sent you this notice because we have no record that you filed your prior personal tax return or returns.
CP60We removed a payment erroneously applied to your account.
CP62We applied a payment to your account.
CP63We are holding your refund because you have not filed one or more tax returns and we believe you will owe tax.
CP71You received this notice to remind you of the amount you owe in tax, penalty and interest.
CP71AYou received this notice to remind you of the amount you owe in tax, penalty and interest.
CP71CYou received this notice to remind you of the amount you owe in tax, penalty and interest.
CP71DYou received this notice to remind you of the amount you owe in tax, penalty and interest.
CP88We are holding your refund because you have not filed one or more tax returns and we believe you will owe tax.
CP90CWe levied you for unpaid taxes. You have the right to a Collection Due Process hearing.
CP120You need to send us documentation of your tax-exempt status.
CP130Your tax return filing requirements may have changed: You may no longer need to pay the Alternative Minimum Tax.
CP152We have received your return.
CP153We can’t provide you with your refund through a direct deposit, so we’re sending you a refund check/credit payment by mail.
CP166We were unable to process your monthly payment because there were insufficient funds in your bank account.
CP178Your tax return filing requirements may have changed: You may no longer owe excise tax.
CP180/CP181We sent you this notice because your tax return is missing a schedule or form.
CP231Your refund or credit payment was returned to us and we need you to update your current address.
CP259We’ve sent you this notice because our records indicate you didn’t file the required business tax return identified in the notice.
CP297CWe levied you for unpaid taxes. You have the right to a Collection Due Process hearing.
CP501You have a balance due (money you owe the IRS) on one of your tax accounts.
CP521This notice is to remind you that you have an installment agreement payment due. Please send your payment immediately.
CP523This notice informs you of our intent to terminate your installment agreement and seize (levy) your assets. You have defaulted on your agreement.
CP565We gave you an Individual Taxpayer Identification Number (ITIN).
CP566We need more information to process your application for an Individual Taxpayer Identification Number (ITIN). You may have sent us an incomplete form. You may have sent us the wrong documents.
CP2005We accepted the information you sent us. We’re not going to change your tax return. We’ve closed our review of it.
CP2006We received your information. We’ll look at it and let you know what we’re going to do.
CP2057You need to file an amended return. We’ve received information not reported on your tax return.
CP2501You need to contact us. We’ve received information not reported on your tax return.
By |2021-09-29T18:29:13-06:00June 29, 2019|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |0 Comments
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8 Ways To Deal With A IRS Notice

Most people tend to panic when they receive a notice from the IRS. Many, many people think that by stuffing that notice under the mattress, the problem will go away. Unfortunately, it doesn’t work like that. The best way to address a notice from the IRS is to deal with it immediately and head on. Here are some tips for what to do when you receive an IRS notice.

1. Don’t panic, and don’t shred it. Most IRS notices can be dealt with pretty simply. Not quickly, but simply.

2. Be sure you understand WHAT the notice is for. The IRS sends all sorts of notices — bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of a pending deadline, etc. When the IRS sends a letter via certified mail, it’s giving you legal notice that they intend to levy you, file a lien against you, or that they will examine or audit you or your business.  The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

3. Every notice from the IRS will explain what you need to do with it. If they want extra information from you, it will explain what information they need. If it’s a bill, well, then they just want your money.

4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.

5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due. The IRS will just “fix” the issue and then send you a bill (if one is needed).

6. If you do not agree with the correction the IRS made, it is important that you respond as requested. IRS notices are typically time bound and failing to respond in time can cause you to forfeit some of your rights/options. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days (sometimes it can take up to 90 days) for a response from the IRS.

7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.

8. Keep copies of any correspondence with your tax records. Also keep record of who you talk to, including their IRS employee ID number (they’re required to give it to you), and detailed notes of your conversation.

Don’t understand your notice?

If you receive a notice that you don’t understand or don’t agree with, then obviously consider speaking to a professional (such as ourselves). Feel free to email us via the address below in the footer. We can review a copy of your IRS notice, tell you what it means, and tell what you need to do about it, in simple terms.

By |2019-02-03T18:16:31-06:00February 3, 2019|Categories: Tax Talk|Tags: , , , , , , , , , , , , |0 Comments
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Understanding The “New” Form 1040

—Update 01/01/2020-The IRS modified some of these schedules effective with the 2019 Form 1040. Forms that only apply to tax year 2018 will link to the 2018 form only. —

So, when lawmakers vowed in 2017 to simplify the tax code, one of their targets was the good ‘ol IRS Form 1040 pictured above. There was much hoopla about making it so taxpayers could file their taxes on something about as big as a post card. Well, the new Form 1040 is smaller than it’s predecessors. But will it make the filing process more simplified? We don’t think so. Read on to see why.

More Schedules. The new Form 1040 replaces the former Form 1040 as well as the Form 1040A and the Form 1040EZ. The new Form 1040 uses a “building block” approach, in which the tax return is reduced to a simple form. That form can be supplemented with additional schedules if needed. Taxpayers with straightforward tax situations would only need to file this new 1040 with no additional schedules. But what if you do need one of the additional schedules? Well, just know that there are six new schedules to accommodate this approach. What are these new schedules?

Schedule 1 Additional Income and Adjustments to Income. This schedule is used to report all of the income that was reported on lines 10 and 21 of the 2017 form. This includes income from Schedule C (business income), Schedule D (capital gains and losses), Schedule E (supplemental income and loss from rental real estate) and Schedule F (farm and ranch income). It also includes the reductions to income that that were formerly reported on lines 23 to 35 of the 2017 form.

Schedule 2 Tax. This schedule reports lines 45 to 47 of the 2017 form 1040, including the tax, alternative minimum tax and any excess premium tax credit.

Schedule 3 Non-Refundable Credits. This schedule contains lines 48 to 55 of the 2017 form, including education expenses, child and dependent care credit, foreign tax credit, retirement savings plan credit and child tax credit.

Schedule 4 Other Taxes. This schedule contains lines 57 to 63 of the 2017 form, including self-employment tax, additional tax on IRA and retirement plan withdraws, household employment tax and the individual responsibility payment for not having health care.

Schedule 5 Other Payments and Refundable Credits. This schedule contains lines 65 to 74 of the 2017 form, including estimated tax payments and amounts applied to the next year’s return, earned income credit, additional child tax credit, American opportunity credit (the amount of the education credit that is refundable), amount paid with a request for extension and several other credits.

Schedule 6 Foreign Address and Third-Party Designee. This schedule is used to report your foreign address or if you would like the IRS to be able to discuss the return with a third party (e.g. your paid preparer).

Why Was This Done? Keeping politics out of the conversation, we believe that this switch was done to fulfill a campaign promises. Why so?

  • The new building block approach doesn’t actually simplify anything. If anything, it makes one have to look at additional forms/pages when one only had to formerly look at a two page document (i.e. the old “long form” 1040) to see it all.
  • Only around 13% of tax returns are file via paper as opposed to being e-filed according to the IRS statistics. With that being said, who really cares if the Form 1040 is the size of a postcard? Most people who file are using software!
  • Schedules 1 through 6 are additional to the ones that existed prior to 2018 (e.g. Schedules A, C, D, E, F, H, SE and 8812). While taxpayers can ignore them if they don’t have any lines on those schedules to fill out, they still might have to review them to determine if they are required. Simplification? We’re not so sure.

The Result? While the new form is shorter, we can’t say that it will be easier for taxpayers to understand. We have already started preparing 2018 returns and we can say that it makes it “slightly” more challenging to review. Most professional software has a view/comparison mode/worksheet that allows us to analyze variances to ensure nothing is missed. But we can say that the building block scheme takes a little extra work.

To that end, don’t expect it to cost you any less to have your “simplified” tax return prepared when compared to years past. Most paid preparers, if anything, are actually raising their prices to accommodate the extra forms and other changes such as the 20% QBI deduction.

By |2020-09-21T12:46:30-06:00January 27, 2019|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , |0 Comments
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Should I Hire a Tax Professional For My Small Business?

Do I really need a tax professional?

For taxpayers with the simplest income tax returns, do-it-yourself software and websites often seem like the way to go.  These individuals often have only one source of income (i.e. W2 from their employer),  may have a home mortgage with interest, some student loan debt and maybe some childcare credits.  But for those with more complex situations, such as revenue from businesses, income from interest and dividends, capital gains on a home sale or foreign assets, seeking the expertise of a professional can save time, money and potential legal complications.

For small business owners, and many other taxpayers, there are several reasons why seeking a tax professional might be better than going it alone.  In this post, we’ll discuss some of the most common and influential drivers that typically signal it’s time to make the switch.

Types of Tax Advisors
The first thing to know is that anyone can claim to be a tax expert.  Furthermore, there is no requirement that people who prepare tax returns have to be licensed by the IRS.  With that being said, note that there are (generally) three designations when it comes to tax professionals:

  • Enrolled agent (EA).  An EA is licensed by the IRS and has either passed a difficult test or has at least five years of experience working for the IRS.  EAs are “generally” the least expensive of the tax pros and often offer bookkeeping and accounting assistance.
  • Certified public accountant (CPA) and other accountants.  CPAs are licensed and regulated by each state.  They perform sophisticated accounting and business-related tax work and prepare tax returns.  Larger businesses or businesses with complex business tax returns often use CPAs. The larger CPA firms (e.g. The Big 4) are expensive.  Smaller CPA firms and practitioners can be less expensive and may be better suited for the typical small business.
  • Tax Attorneys.   Tax Attorneys are lawyers with a special tax law degree (called an L.L.M. in taxation) or a tax specialization certification from a state bar association.  Tax attorneys can be expensive, but you should consult one if you have a tax problem, are in criminal trouble with the IRS, need legal representation in court, or need business and estate planning.

Reasons to Hire A Tax Professional
So when is the right time to hire one of the individuals listed above? Typically, it’s once one of the following items below occurs:

  • Your tax situation exceeds your expertise or your software.  Even what may seem like a “straightforward” situation can quickly turn into more than one bargained for.  For example, let’s say that you drive for one of those ride share companies.  At tax time, you receive a Form 1099-K, a Form 1099-MISC and a Yearly Summary.  Some of the documents include numbers from one of the other documents, and some documents appear to have totally different numbers.  Some have fees that “may be deductible” but you aren’t sure which ones to include.  Do you add them all?  Do you only include some?  What if you leave a number off that should have been reported?  A tax professional can help ensure everything is reported correctly and that you don’t wind up getting an IRS Automated Adjustment Notice for under reporting your income.
  • Your time is valuable and you’re spending too much of it preparing your return.  While you may be able to prepare your taxes yourself for $100 or less online, many do-it-yourself filers spend an enormous amount of time when doing so.  According to the 2018 Form 1040 Instructions per the IRS, the average taxpayer will spend 11 hours preparing their return. 
    Average Taxpayer Burden for Individuals
    Average Time (Hours)
    Type of TaxpayerPercentage
    of Returns    		Total
    Time    		Record
    Keeping
    		Tax
    Planning
    		Form
    Completion &
    Submission    		All
    Other
    		Average
    Cost
    (Dollars)
    All taxpayers100%115241$200
    Nonbusiness70%72131$110
    Business30%1910351$400
    Estimated Average Taxpayer Burden for Individuals by Activity per 2018 Form 1040 Instructions
    This number jumps to 19 hours if you have a business!  Hiring a professional can reduce that to the time it takes to gather your tax documents and forward them to their office, go over a few items with them and then review the final return for accuracy.  If your time is better spent closing sales deals, running your business or spending it with family and friends, then hiring a tax professional can make perfect cents (pun intended).
  • You could be missing out on valuable deductions.  In addition to saving you countless hours of painfully boring and costly tax guessing, experienced preparers know the deductions that you may qualify for, and which items are tax deductible if you own a business.  They can also easily tell you if it’s more beneficial to itemize or take the standard deduction.  Even if you just earn only a little income on the side, a professional may be able to find you deductions or credits that will more than pay for their services and keep more of your hard earned money out of the pockets of Uncle Sam.  Lastly, the cost of having your taxes prepared by a professional can also be tax deductible as a professional fee if you have a business.
  • The tax law is constantly changing.  Adding to the complexity, new tax laws are enacted every year that affect virtually everyone, making it tough to keep up with changes and how they might affect you.  For example, the new 20% Qualified Business Income Deduction will no doubt cause some frustration for those this tax year (especially if you in the “phase in” range for a partial deduction).  For small businesses that have to manage income tax withholding and reporting for their employees, taxes are even more complex.  While tax software can help, an experienced professional that “has seen it all before,” and also keeps up with tax law changes through educational courses, can make the process easy peasy lemon squeezy!
  • A mistake was made in the past.  If you do your taxes yourself, you are much more likely to make a mistake.  Mistakes happen, but when they happen to you, it may feel like they are costing you big time.  A simple math error can cause a return to be inaccurate, leaving you liable for unpaid taxes and interest.  For errors the IRS believes are not accidental, such as failing to report income, taxpayers can also face large fines and even criminal prosecution.  A skilled tax professional can not only help ensure that your returns are accurately prepared, but they often can help you rectify a past mistake.
  • You want peace of mind.  The only people that look forward to an IRS audit are IRS auditors!  The best way to avoid their scrutiny is to make sure your tax return is in compliance with the tax laws.  To do that, why not hire a professional who lives, works and breathes taxes every day (or at least a lot more frequently than you do)?  There is still a chance than any taxpayer will get audited, but if you use the services of a professional CPA, Enrolled Agent or Tax Attorney, and your return is selected for further inspection by the IRS, those professionals can typically help represent you on your behalf before the IRS.  Don’t go before a court without a lawyer, and don’t go before the IRS without a professional.

How much does it cost to hire a tax professional? 
According to the 2018 survey by the National Society of Accountants, the average federal tax return in the U.S., including the tax return for the person’s state of residence, cost $294 for a professional preparer to handle if the taxpayer itemizes and $188 if they don’t.  If you own a business that needs to file a Schedule C (for business income and expenses) that will tack on $187 more.  But as outlined above, there are numerous reasons why this cost can be well worth it.

Do you need help with your business taxes this year?
If you don’t want to deal with the hassle and headache of navigating the new tax law, or simply don’t have the time, we’d be happy to assist you!  Call the office now to schedule your appointment or request your complementary tax situation analysis (valued at $197 but free if you mention this blog post).  We are a year round practice and can even help you file your state taxes no matter where you are located.

By |2019-02-17T16:11:38-06:00January 13, 2019|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , , , |0 Comments
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What is the 20% QBI Deduction?

In late 2017 with the passage of the Tax Cuts and Jobs Act (TCJA), a new 20% deduction for pass through businesses was created.  This deduction is also known as the section 199A deduction, the deduction for qualified business income (QBI), the 20% deduction and the pass-through deduction.  In this post, we’ll discuss who can take the deduction, how it is calculated and provide some examples to aid in ones understanding.

Who may take the section 199A deduction? Generally speaking, individuals, trusts and estates with QBI, qualified REIT dividends or qualified publicly traded partnership (PTP) income may qualify for the deduction.  This income must be derived from a qualified trade or business operated directly or through a pass-through entity.  From an “entity” standpoint, the following are those that may be able to take the deduction:

  • Partnerships
  • S-Corporations
  • Sole proprietorship’s (i.e. Schedule C filers)
  • LLCs
  • Real estate investors
  • Trusts, estates, REITs and qualified cooperatives

So as you can see, the deduction is intended for those entities that are not classified as C-Corporations.  Why?  We’ll since the TCJA cut the corporate income tax rate to a flat 21%, this was the way to replicate a similar treatment for those entities that were not structured as such.

What is QBI?  QBI is the net amount of qualified income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.

What is not QBI?  QBI is not items used in determining net long-term capital gain or loss, dividends, interest income, reasonable compensation, guaranteed payments or amount paid or incurred by a partnership to a partner who is acting other than in his or her capacity as a partner for services

What is a qualified trade or business?   It is any trade or business other than one of the following:

  • One that is defined as a specified service trade or business (SSTB), which includes those that involve the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees.
  • One that involved performing services as an employee (i.e. one in which you receive a W2)

What information should my K1 have on it for me to take the QBI deduction?  If a K1 fails to report any item below, the IRS will presume that the QBI, W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of qualified property are equal to zero:

  1. Whether the business is an SSTB.
  2. Whether there is more than one trade or business.
  3. QBI for each trade or business.
  4. W-2 wages and UBIA of qualified property.
  5. Any REIT dividends.
  6. Any PTP income.

How is the deduction for QBI calculated?  Now this is where things “can” get complicated.  In the simplest application, the deduction is equal to 20% of domestic QBI from a qualified trade or business.   The deduction is taken on an individuals personal return and “below the line.” Thus, it reduces taxable income and not adjusted gross income (AGI).  The following 199A Calculator will give you a quick idea of how it works and what a QBI deduction might look like for your situation.

The calculation itself, is dependent on the taxable income reflected on the taxpayers return:

Below threshold:  If a taxpayer’s taxable income is below $315,000 for a married couple filing a joint return and $157,500 for all other taxpayers; the deduction is the lesser of:

  1. 20% of the taxpayer’s QBI, plus 20 percent of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified PTP income or
  2. 20% percent of the taxpayer’s taxable income minus net capital gains.

So basically, the deduction will never be greater than 20% of the taxpayers QBI or their taxable income. Now what happens if the income is above the amounts specified above?

Between threshold:  If the taxpayer’s taxable income is between thresholds (i.e., between $315,000 and $415,000 for married taxpayers filing jointly; between $157,500 and $207,500 for others), the QBI deductible amount for the business is subject to a limitation based on W-2 wages and/or UBIA.  In these instances, the deduction is calculated as:

  1. 20% of QBI for that trade or business less,
  2. An amount equal to the reduction ratio multiplied by the excess amount.
    • The “reduction ratio” is calculated as (Taxable income – $315,000)/$100,000 for those filing MFJ and (Taxable income – $157,500)/$50,000 for all other taxpayers
    • The “excess amount” is the amount by which 20% of QBI exceeds the greater of:
      • 50% of Form W-2 wages paid by the business, or
      • 25% of Form W-2 wages paid by the business plus 2.5% of the UBIA

Above threshold:  If the taxpayer’s taxable income is above the thresholds (i.e., $415,000 for married taxpayers filing jointly and $207,500 for others), the deduction is:

  1. the lesser of
    • 20% of QBI for that trade or business OR
  2. the greater of
    • 50% of W-2 wages for that trade or business OR
    • 25% of W-2 wages for that trade or business PLUS 2.5% of the UBIA of all qualified property

I have income from a SSTB. How does that affect my deduction?   Your ability to take the deduction will depend on your taxable income and will be calculated as follows:

  • The limitation does not apply to any taxpayer whose taxable income is below the $315,000/$157,500 threshold amounts.
  • For taxpayers whose taxable income is within the phase-in range ($315,000 to $415,000 for joint filers and $157,500 to $207,500 for all other filing statuses), the taxpayer’s share of QBI, W-2 wages and UBIA of qualified property related to the SSTB may be limited/reduced (see Example 5  below)
  • If the taxpayer’s taxable income exceeds the phase-in range (i.e. greater than $415,000 for joint filers and $207,500 for all other filing statuses), no deduction is allowed with respect to any SSTB.

I am a visual person.  Do you have a flowchat to illustrate what all of the above means?
Ask and you shall receive.  Take a look at the graphic below (absent some of the calculations).

Calculation examples using various ranges and business types.  On August 8, 2018, the IRS released proposed regulations on §199A, providing guidance on their interpretation of provisions regarding the new 20% deduction for pass-through entities. The proposed regulations span 184 pages and provide numerous definitions, examples, and anti-abuse provisions.  As such, it’s a good idea to review the examples in the link (see page 114/184) as the IRS has outlined computations for many scenarios.

The examples shown below are designed to help you gain a general understanding of how the information presented above comes into play.

Income below threshold examples

Example 1  In 2018, Pilar, an unmarried individual, operated an accounting and tax business (a SSTB) as a sole proprietor and earned a net Schedule C income of $100,000. She did not have any capital gains or losses. She claimed the standard deduction of $12,000 so her taxable income was equal to $88,000.

Pilar’s QBI deduction is $17,600, the lesser of 20% of her QBI ($100,000 x 20% = $20,000) or her taxable income minus long-term capital gain ($88,000 x 20% = $17,600). Because she is in the lowest range, the fact that she operates SSTB is irrelevant.

Example 2  Assume the same facts as above except that Pilar had $7,000 in long term capital gains.  Pilar’s QBI deduction is $16,200, the lesser of 20% of her QBI ($100,000 x 20% = $20,000) or her taxable income minus long-term capital gain ($88,000 – 7,000 = $81,000 x 20% = $16,200).

Example 3  Popeye and Olive Oyl are married and file a joint individual income tax return.  Popeye earned $300,000 in wages as an employee for the Department of Defense in 2018. Olive Oyl owns 100% of the shares of Alessi, an S corporation that manufactures olive oil.  Alessi generated $100,000 in net income from operations in 2018.  Alessi paid Olive Oyl $150,000 in wages in 2018.  Neither Popeye or Olive Oyl have any capital gains or losses. After allowable deductions not related to Alessi (i.e. personal itemized deductions) , Popeye and Olive Oyl’s total taxable income for 2018 is $300,000.

Popeye and Olive Oyl’s wages are not considered to be income from a trade or business for purposes of the QBI deduction.  Because Alessi is an S corporation, its QBI is determined at the S corporation level.  Alessi’s QBI is $100,000, the net amount of its qualified items of income, gain, deduction, and loss. The wages paid by Alessi to Olive Oyl are considered to be a qualified
item of deduction for purposes of determining Alessi’s QBI.

The QBI deduction with respect to Alessi’s QBI is then determined by Olive Oyl, Alessi’s sole shareholder, and is claimed on the joint return filed by Popeye and Olive Oyl.  Their QBI deduction is equal to $20,000, the lesser of 20% of Olive Oyl’s QBI from the business ($100,000 x 20% = $20,000) or 20% of Popeye and Olive Oyl’s total taxable income for the year ($300,000 x 20% = $60,000).

Income within threshold examples

These limitations are phased in for joint filers with taxable income between $315,000 and $415,000, and all other taxpayers with taxable income between $157,500 and $207,500.

Example 4  Bonnie and Clyde are married and file a joint individual income tax return. Bonnie is a shareholder in Public Enemy, an entity taxed as an S corporation for Federal income tax
purposes that conducts a single trade or business (freight operations). Public Enemy holds no qualified property.

Bonnie’s share of Public Enemy’s QBI is $300,000 in 2018.  Bonnie’s share of the W-2 wages from Public Enemy in 2018 is $40,000. Clyde earns wage income from employment by an unrelated company.  After allowable deductions unrelated to Public Enemy, Bonnie and Clyde’s taxable income for 2018 is $375,000.  Bonnie and Clyde are within the phase-in range because their taxable income exceeds the applicable threshold amount, $315,000, but does not exceed the threshold, or $415,000.  Consequently, the QBI component of Bonnie and Clyde’s QBI deduction may be limited by the W-2 wage and UBIA limitations but the limitations will be phased in.

The UBIA of qualified property limitation amount is zero because Public Enemy does not hold
qualified property.  Bonnie and Clyde must apply the W-2 wage limitation by first determining
20% of Bonnie’s share of Public Enemy’s QBI.  This amount equals $60,000 ($300,000 x 20%). Next, Bonnie and Clyde must determine 50% of Bonnie’s share of Public Enemy ’s W-2 wages. This amount is $20,000 ($40,000 x 50%).

Because 50% of Bonnie’s share of Public Enemy’s W-2 wages ($20,000) is less than 20% of her share of Public Enemy’s QBI ($60,000), Bonnie and Clyde must determine the QBI component of deduction by reducing 20% of Bonnie’s share of Public Enemy’s QBI by the reduction amount.

Bonnie and Clyde are 60% through the phase-in range (that is, their taxable income of $375,000 exceeds the threshold amount by $60,000 and their phase-in range is $100,000). Bonnie and Clyde must determine the excess amount, which is the excess of 20% of Bonnie’s share of Public Enemy’s QBI, or $60,000, over 50% of Bonnie’s share of Public Enemy’s W-2 wages, or $20,000. Thus, the excess amount is $40,000.  The reduction amount is equal to 60% of the excess amount, or $24,000 ($40,000 x 60%).

Thus, the QBI component of Bonnie and Clyde’s  deduction is equal to $36,000, 20% of Bonnie’s $300,000 share Public Enemy’s QBI (that is, $60,000), reduced by $24,000. Bonnie and Clyde’s QBI deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($36,000) or (ii) 20% of Bonnie and Clyde’s taxable income ($375,000 x 20% = $75,000). Therefore, Bonnie and Clyde’s  deduction is $36,000 for 2018.

Example 5  Assume the same facts as in Example 4, except that Public Enemy was engaged in a SSTB (consulting). Because Bonnie and Clyde  are within the phase-in range, Bonnie must reduce the QBI and W-2 wages allocable to Bonnie from Public Enemy to the applicable percentage of those items as a proportion to the phase out range.  Furthermore, she must apply a reduction amount to the calculation.

The applicable percentage equals 100% minus the percentage obtained by dividing (a) the pre-QBI deduction taxable income of the taxpayer in excess of the applicable threshold amount by (b) $100,000 for joint-return filers or $50,000 for other filers.  Reduction amount means, the excess amount multiplied by the applicable percentage.  It is calculated as 20 percent of QBI over the greater of 50 percent of W-2 wages or the sum of 25 percent of W-2 wages plus 2.5 percent of the UBIA of qualified property.

For Bonnie and Clyde’s applicable percentage, their taxable income ($375,000) exceeds their threshold amount ($315,000) by $60,000.  A ratio of 60% (i.e. $60,000/$100,000) is what is used to find their applicable percentage of 40% (i.e. 100% – 60% = 40%).  Accordingly, in computing the QBI deduction, the couple would only be allowed to take into account 40% of the QBI, W-2 wages, and qualified property with respect to the trade or business.

Thus Bonnie’s QBI is “adjusted” to $120,000 ($300,000 x 40%) and her share of W-2 wages is “adjusted” to $16,000 ($40,000 x 40%).  These “adjusted”  numbers must then be used to determine how Bonnie’s QBI deduction is limited.  The deduction will be limited to the lesser of:

  • (i) 20% of Bonnie’s share of Public Enemy’s QBI or
  • (ii) the greater of the W-2 wage or UBIA of qualified property limitations.
  1. Twenty percent of Bonnie’s share of QBI of $120,000 is $24,000.
  2. The W-2 wage limitation equals 50% of Bonnie’s share of Public Enemy’s wages ($16,000 x 50%) or $8,000.
  3. The UBIA of qualified property limitation equals $0

To calculate the reduction amount Bonnie and Clyde must first determine the excess amount.  This is calculated as the excess of 20% of Bonnie’s share of Public Enemy’s QBI, as adjusted ($24,000), over 50% of Bonnie’s share of Public Enemy’s W-2 wages, as adjusted ($8,000). Thus, the excess amount is $16,000. The reduction amount is equal to 60% of the excess amount or $9,600. Thus, the QBI component of Bonnie and Clyde’s QBI deduction is equal to $14,400 ($24,000 – $9,600).

As Bonnie and Clyde’s QBI deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($14,400) or 20% of Bonnie’s and Clyde’s taxable income ($375,000 x 20% = $75,000), their QBI deduction is $14,400 for 2018.

Income above threshold examples

Example 6   Ernie, an unmarried individual, is a 30% owner of Bert LLC, which is classified as a partnership for Federal income tax purposes. In 2018, Bert LLC has a single trade or business (landscaping) and reported QBI of $3,000,000.  Bert LLC paid total W-2 wages of $1,000,000, and its total UBIA of qualified property is $100,000.  Ernie is allocated 30% of all items of the partnership.  For the 2018 taxable year, Ernie reports $900,000 of QBI ($3,000,000 x 30%) from Bert LLC . After allowable deductions unrelated to Bert LLC (i.e. personal itemized deductions), Ernie’s taxable income is $880,000.

Because Ernie’s taxable income is above the threshold amount, the QBI component of Ernie’s QBI deduction will be limited to the lesser of:

  • (i) 20% of Ernie’s share of Bert LLC’s QBI or
  • (ii) the greater of the W-2 wage or UBIA of qualified property limitations.

So while it might not be clear, there are three calculations related to the two bullets above:

  1. Twenty percent of Ernie’s share of QBI of $900,000 is $180,000.
  2. The W-2 wage limitation equals 50% of Ernie’s share of Bert LLC’s wages ($1,000,000 x 30% = $300,000 x 50%) or $150,000.
  3. The UBIA of qualified property limitation equals $75,750, the sum of:
    • (i) 25% of Ernie’s share of Bert LLC’s wages ($1,000,000 x 30% = $300,000 x 25%) or $75,000 plus
    • (ii) 2.5% of Ernie’s share of UBIA of qualified property ($100,000 x 30% = $30,000 x 2.5%) or $750.

For items 2 and 3 above, the greater of the limitation amounts ($150,000 and $75,750) is $150,000.

The QBI component of Ernie’s QBI deduction is thus limited to $150,000, the lesser of (i) 20% of QBI ($180,000) and (ii) the greater of the limitations amounts ($150,000).  Ernie’s QBI deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($150,000) or (ii) 20% of Ernie’s taxable income ($880,000 x 20% = $176,000). Therefore, Ernie’s QBI deduction is $150,000 for 2018.

Ready to get help?  As you can tell, the computations involved in taking the deduction get more complicated depending on the taxpayers income.  If you don’t want to go through the mechanics of calculating your QBID and ensuring it is correct, why not let a professional do the work?  Feel free to give us a call or drop us an email and we’d be happy to assist you ensure that everything is done correctly.  Plus, you won’t have to spend the time doing it!

By |2019-01-13T15:39:16-06:00December 23, 2018|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , , , , , |Comments Off on What is the 20% QBI Deduction?
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IRS “Expanded” Installment Agreement

Complete this form to set up your IRS payment plan!

When a person owes the IRS money that they can’t pay in full, they typically will qualify to deal with the debt via a payment plan.  This payment plan is called an “installment agreement” in IRS terminology.  Simply stated, an installment agreement is a contract with the IRS to pay the taxes you owe within an extended time frame.  There are many types of installment agreements, but two of the most common are the guaranteed and streamlined variety.

Guaranteed & Streamlined Installment Agreements
We discuss the guaranteed installment agreement at length in this blog post.  But what exactly is a streamlined installment agreement?  For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest of $50,000 or less, they can enter into an installment agreement with “relaxed” criteria.  Basically, they don’t have to go through as many hoops or submit as much documentation.  The following criteria apply to those who wish to apply for a streamlined installment agreement:

  • Payment Terms  Up to 72 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration Date (CSED), whichever is less
  • Collection Information Statement (financials) Not required.
  • Payment Method Direct debit payments or payroll deduction is preferred, but not required.
  • Notice of Federal Tax Lien
    • Determination not required for assessed balances up to $25,000.
    • Determination is not required for assessed balances of $25,001 – $50,000 with the use of direct debit or payroll deduction agreement.  If taxpayer does not agree to direct debit or payroll deduction, then they still qualify for Streamlined IA over $25,000, but a Notice of Federal Tax Lien determination will be made.

The criteria discussed above also apply to business taxpayers, but only for income tax debts up to $25,000.

So what if you owe more than $50,000 as an individual or $25,000 as a business?  Well, this is where the “expanded installment agreement” comes into play.

Expanded Installment Agreements
From late 2016 through late Fall of 2018, the IRS tested “expanded” criteria for the streamlined processing of taxpayer requests for installment agreements.  During the test, taxpayers who owed more than $50,001 but less than $100,000 were allowed to use most of the criteria outlined under the streamlined installment agreement.  Well, based on test results, the expanded criteria for streamlined processing of installment agreement requests were made permanent.  If you are a practitioner, you can find the “new” criteria in IRM 5.19.1.6.4 under item “11” (09-26-18 update).

So, for individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest between $50,001 and $100,000, you can use the following criteria to apply for an expanded installment agreement:

  • Payment Terms Up to 84 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration date, whichever is less
  • Collection Information Statement (financials) Not required if the taxpayer agrees to make payment by direct debit or payroll deduction
  • Payment Method Direct debit payments or payroll deduction is not required; however, if one of these methods is not used, then a Collection Information Statement is required.
  • Notice of Federal Tax Lien
    • Determination is required.

The criteria discussed above also applies to all out of business sole-proprietorship debts between $50,001 and  $100,000.

Do you owe the IRS and need to enter into a resolution option?
Check out this page of our website where you can receive our special report entitled 5 Questions To Ask Any Tax Resolution Firm Before Paying Them A Dime, a comprehensive 30-minute Tax Debt Settlement Analysis AND your personalized Tax Resolution Plan (a package valued at $175, but FREE to you for a limited time).  You can also visit this page to read about how you can find out the date (i.e. CSED) the IRS will write off your tax debt!

By |2019-10-19T09:54:10-06:00November 26, 2018|Categories: IRS Talk|Tags: , , , , , , , , , , , , , , , , |Comments Off on IRS “Expanded” Installment Agreement
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