What Is The PPP, How To Apply & Other PPP FAQs

screenshot of the SBA's PPP home page

Last December, Congress passed a stimulus bill that provides small business relief, including Paycheck Protection Program (PPP) loans. The forgiveness applications to cover the new loans are expected to be released soon, with the SBA and Treasury already having released the new PPH Forgiveness Application, which you can use to apply for the forgiveness of your PPP loan. 

Read on to find out important details about PPP loans, including how and when to apply, among others. 

 

What Is the PPP?

In a nutshell, the Paycheck Protection Program is an SBA loan program created by the CARES Act that became law last March. One month later, the President signed the PPP Flexibility Act, and then the Treasury released the new PPP Forgiveness Application and instructions. The goal is to help businesses keep their workforce during the COVID-19 pandemic by providing them with loans. 

The basic PPP premise is that business owners (self-employed or not) can apply for a loan of 2 ½ times their average monthly payroll. As soon as the companies receive the loan, they need to spend the money shortly after getting it on payroll and other approved expenses. Doing so will enable them to apply to receive the full forgiven amount. 

Download the Paycheck Protection Program First Draw Borrower Application Form here. 

 

What’s the Difference Between the First Round (Draw) and Second Round of Funding? 

Here are some key differences between the two rounds (also called draws) of PPP funding:

  • Some businesses can receive a 2nd PPP loan – The most significant change to the second round of PPP is that some businesses that have already received a loan can get a second one as the program distinguishes between 1st and 2nd draws. 
  • Qualifications – The qualifications on a 2nd draw are more stringent than those of the 1st round. This is because the 2nd round targets the small businesses (public traded companies do not qualify) that have been most harmed financially from the COVID-19 pandemic. So, second round loans require that small businesses demonstrate a revenue reduction of 25% or more in one or more of their quarters. Plus, they have to employ no more than 300 employees. For the first round, it is paramount that the business is founded before February 15, 2020, and not be in a prohibited industry. Seasonal businesses that operated between February 15, 2020, and February 15, 2020 for at least 12 weeks are also eligible, provided they all have less than 500 employees. 
  • Funding sums – For the first round, the maximum sum you can borrow is 2 ½ times your monthly payroll, up to $10 million. The second round has the same formula for the amount you can borrow, with the difference that the loan is capped at $2 million. Also, businesses in the foodservice or accommodation industries can borrow up to 3 ½ times their average monthly payroll up to $2 million (you can use NAICS 72 to confirm). 
  • Loan forgiveness – To get full loan forgiveness, the small business needs to spend 60% of their PPP loan on payroll expenditures while also retaining its staff. Nevertheless, they are now able to spend the remaining 40% of their loan on more qualified expenses, such as rent, utilities, software expenditures, fixing property damage from protests, necessary supplier costs, and others. The best news is that they can do so without risking loan forgiveness. Also, Congress has already approved the simplified loan forgiveness form for businesses applying for a loan below $150,000. For 2nd round funding businesses, it is critical to prove they have lost 25% or more of their annual revenue, irrespective of using the simplified form or not. 
  • Tax regulations – Businesses that had received an EIDL Advance grant and a PPP loan had to deduct the sum they received in the grant from their PPP loan sum that could be forgiven. The second round of PPP funding does away with this. 
  • Small business priority – To address an issue that arose from very small business owners who complained about PPP favoring bigger businesses, the second PPP round has set aside funding targeting businesses with less than 10 employees, as well as loans made by community leaders and businesses owned by minority or women. 

Download the Paycheck Protection Program Second Draw Borrower Application Form

 

How to Apply For the PPP Program

The procedure is supposed to work in the following way:

  1. You receive a Paycheck Protection Program loan.
  2. You spend the loan within the specified period on specific items (mainly payroll).
  3. You apply for forgiveness, providing the necessary details and documentation. You will need to work with a lender for this one. 
  4. The lender will respond to your forgiveness request within 60 days. If they agree, you will get the balance forgiven. 
  5. Any not-forgiven balance becomes a loan at 1% for up to 48 months or 60 months if the loan was made after June 5, 2020. 

When it comes to completing your PPP loan application, the process is slightly different, depending on which source you use to apply through. For example, for users that have submitted a PPP loan request via SBA.com’s partner, applying for a PPP loan involves the following steps:

    1. You access your PPP application with an SBA partner – Once you complete the application with the partner and provide all needed documentation and information, it will be finalized and submitted to an approved lender for approval. 
    2. Add business details (or confirm) – These include the business address, business type, business tax ID, loan amount requested, and employee count. 
    3. Add more new business information – This section needs you to fill out your business start date and industry. 
  • Confirm (or enter) ownership.
  1. Confirm (or enter) additional owner information – This applies to businesses with additional owners only (anyone owning 20% or more share in the business). 
  2. Upload documents (or confirm) – You will be asked to provide documentation such as your driver’s license, documents that prove your payroll expenses, and business account bank statements. Self-employed or 1099 Independent Contractors also need to upload (1) income and expense reports for 2019, (2) 1099s, and (3) IRS 1040 Schedule C. Business owners must provide (1) 12 months most recent bank statements, (2) payroll register for the past 12 months, (3) 944 annual tax filings (2019), and (4) 941 quarterly tax filings (2019, 2020 Q1). 

Note: If the lender accepts your application, you will receive a confirmation email with must-read details/requirements. Note that once a lender accepts your application and gets an email with your PPP number, you are instantly entering the US Small Business Administration’s loan system. This means that the only source that can make you a PPP loan is the lender that has accepted your application. 


How and When to Apply For PPP Loan Forgiveness

Now, when it comes to filling out your PPP forgiveness application, things can get quite complicated. It depends on whether you have employees or not. Businesses can use Form 35008EZ. It applies to businesses that have not reduced wages or employee headcount, as well as self-employed with no employees. Or the simplified application form released last October if your business has received no more than $50,000 in PPP funds. Then, you submit the application to your lender and wait for them to process it. This may take up to 60 days.

As already mentioned, to apply for loan forgiveness, you need to fill out a 3508S PPP Loan Forgiveness Application form (if you have borrowed less than $50,000) or the PPP EZ Loan Forgiveness Application form

Filling out the payroll sections is admittedly the most complicated part of filling out the forgiveness application. For that reason, you will probably need the services of a tax professional or accountant. Also, note that you must find a lender that takes forgiveness applications first. Here is a list of lenders you could consider (as of January 2021):

Remember that this is just a reference list. More lenders are being added with each passing week while many are already in line for more information. 

If you are trying to decide when is the best time to apply for a PPP Loan Forgiveness, patience is a virtue. You can submit a loan forgiveness application within 2-5 years from loan origination. So, you have plenty of time to think about your options. And, if you are eligible for a Round 2 PPP loan, you can apply to any lender that accepts Round 2 PPP loan applications, such as Lendio, Fundera, Credibly, and BlueVine. Note, though, that if you have already done business with a lender in the first round, chances are the particular lender will not participate in the second one. Also, take into account that a PPP Round 3 is already out there, so it is worth waiting a bit before you decide when to apply for a PPP loan forgiveness. 

Note that the forgiveness application will need quite a few calculations. You may download or print out the SBA PPH Loan Forgiveness Application before you go through this guide to check it out. Or you could ask your lender to provide the online version of the form. You might also have to reference the Form 3508 Instructions. If you are uncomfortable with the process, you can always seek assistance from an experienced financial advisor or accountant.  

Can the IRS Send Me to Jail?

main in jail

Cheating on your taxes is a crime. No doubt about that. However, a mere 0.002% of all taxpayers are convicted of tax crimes, even though roughly 16% of Americans are found not complying with the tax laws every year, in one way or another. 

As for the number of convictions for tax crimes, it has stayed relatively stable over the most recent 5-year period (less than 1% increase). This means that a person is rarely sent to jail for tax fraud. 

However, there is some fine print you do need to read, as not all cases end up being punished with penalties and fines. Some may as well put you behind bars. This is a topic that we get asked about a lot so we wrote this article to answer some commonly-asked questions.

 

Can You Go to Jail For Lying to The IRS?

The majority of cheating cases comes from tax evasion, which is the deliberate underreporting of income (willful or actual). This is the type of tax crime that is charged the most often. Truth be told, it can be tempting for some taxpayers to fudge the numbers to improve their tax refund. Nevertheless, misrepresenting yourself on your tax return can get you into trouble as it is considered tax fraud. So, you could be (1) audited, (2) fined considerable amounts, or (3) put to jail.

Remember that the IRS knows whether you report all of your income or not as it gets all of the 1099s and W-2s you receive. Your financial activity may also raise some red flags with the IRS (in case you are thinking of hiding income in the form of cash payments). All these may trigger a tax audit, which is an in-depth review of your financial records and taxes to make sure everything has been reported accurately. 

Although there is less than a 1% chance of being audited, most of the time, at least, undergoing an audit is simply not worth the risk as it involves a costly and time-consuming procedure, where you are called to present years of documentation. You may even be called in for multiple in-person interviews. 

Now, whether you go to jail for an IRS audit or not, it all depends on how the IRS finds you – guilty of tax fraud or evasion (so charged with an offense that carries jail time) or not. In general, an incorrect tax return case (i.e., under-reporting your income) comes with late payment penalties, while you may also be charged interest on the underpayment but you will not go to jail for it.

And, don’t fool yourself into thinking that tax fraud or evasion affects high earners only. Everybody should be careful, even those with low income. This is because the IRS does NOT differentiate its cases based on how much you underpaid your taxes or between income amounts. Falsifying any information on a tax return can end up with you being fined up to $250,000. 

 

Can the IRS Put You In Jail?

In a nutshell, no. The IRS cannot send you to jail. However, the court can. When an IRS auditor audits your tax returns and detects possible fraud, they can initiate a criminal investigation. It should be noted that around 3,000 taxpayers are convicted of tax fraud every year. So, lying on your taxes is, indeed, a big deal for the IRS. Overall, though, the IRS rarely charges taxpayers with fraud. Therefore, even if you are investigated, you will probably not face a criminal charge.

That being said, though, lying on a tax return carries potentially severe consequences that are just not worth the risk; you may end up having to pay way more than the sum you are attempting to hide. 

 

How Much Taxes Do You Have to Owe To Be Sent to Jail?

As already mentioned, the chances of facing criminal fraud penalties are very slim. In the overwhelming majority of cases (at least 98%), the IRS punishes this type of fraud with CIVIL penalties. This simply means that you will be called to pay a 75% fine that will be added to the tax due, plus interest on both the fraud penalty and the tax. So, if you owe $10,000 from tax fraud, you will have to pay an extra $7,500 as a penalty. 

Things change dramatically, though, when the IRS suspects that you have gone too far. In this case, it may call the CID (Criminal Investigation Department) to investigate your situation. The CID then has two options: (1) recommend that the Justice Department prosecute you or (2) drop it forever, depending on its findings. The good news is that the CID does not usually recommend prosecution except in very rare cases. 

Of course, the larger the sum you tried to hide, the more likely CID agents will recommend prosecution. In criminal cases, the typical amount of taxes owed is at least $70,000 and usually refers to tax cheating activities over a three-year time span (or more). 

To sum up, the IRS itself can NOT prosecute you, but the CID can recommend prosecution. If  it does, and you get convicted by the Justice Department, you may be fined, put on probation, imprisoned, or all three. The bad news is that if you are brought to court, there is more than an 80% chance of getting convicted and a high chance of going to prison even if you have a spotless criminal record. 

 

Tax Crimes That CAN Put You In Jail

Individuals that are recommended prosecution by a CID agent are typically charged with one of the following three crimes: (1) failing to file a tax return, (2) filing a false return, or (3) tax evasion. Here are some details about each:

Failing to file a tax return. This is the least serious tax crime of the three and is defined as not filing a return intentionally. So, if you must file tax returns and you do not, the maximum prison time you can get is 12 months and/or a $25,000 fine for each year you have not filed. However, most non-filers only get civil penalties and are rarely prosecuted criminally.

Filing a false return. This is the case where you file a tax return that contains a material misstatement. This is less serious than tax evasion and can get you behind bars for up to 36 months. Also, according to the Internal Revenue Code §7206 (1), you will be fined a maximum of $100,000. 

Tax evasion or fraud. This is the most serious thing you can be charged with as it is considered a felony rather than a misdemeanor, which is the case with the two situations mentioned above. Tax fraud or evasion is when you try to defeat the income tax laws intentionally, and carries a maximum prison sentence of five years. The fine you will also be called to pay per the Internal Revenue Code §7201 is up to $100,000. 

Important Note: The CID can also recommend prosecution for filing false claims against the IRS and for money laundering. Although these are not tax crimes in a technical sense, they tend to be charged in the same case as a tax crime against the same taxpayer (entity or individual). 

 

When Can the IRS Send You to Jail?

The truth is that failing to pay your taxes can eventually initiate a process to send you to prison. But, the IRS does not have the power to put you behind bars or file criminal charges against you if you have not paid your taxes, as already explained. Nevertheless, some exceptions apply. 

It all depends on the reason for not paying the due amount. If you can’t because you do not have the money, you are in the clear. But, if you intentionally try to deceive the IRS or lie on your tax return, this is regarded as tax fraud, and you could end up serving jail time. 

Let’s take things from the beginning, though. Bear in mind that most tax crimes are NOT criminal cases; they are considered civil cases. This is because the IRS understands that taxes can be confusing, and you could fill out your return incorrectly due to the complexity revolving around filing tax returns. So, if you get confused or forget to include an important document on your tax return, the IRS will most likely send you a letter asking you to address your mistakes and amend them. 

If you made a more serious error, the IRS will probably audit you and place a civil judgment against you. Again, this will NOT put you in jail as it is NOT a criminal act. It is simply a notice that you need to change your tax return and pay back your unpaid taxes. 

This is not the case when you intentionally change your taxes or file fraudulent taxes or fail to file. If the IRS thinks that you are failing to file your return altogether or intentionally fill out your tax return incorrectly (which is tax evasion in any case), you may face jail time. 

 

Should You Be Concerned That the IRS Is Going to Send You to Jail?

Generally speaking, it is extremely rare for the IRS to charge a person with a tax crime and attempt to send them to jail.  So for the most part, you don’t have to worry about the IRS sending you to jail.

But with that said, not filing your tax return or trying to hide income from the IRS is not worth it in the long run, as you will probably end up paying much more than the taxes you want to evade. And, if you are in a tight financial situation where you cannot meet your tax obligations, there are several tax relief strategies to help you get out of it. Feel free to contact us and we’ll help you find the best solution to your problem. 

Do I Have To File Taxes?

older couple filing taxes

Filing taxes can be burdensome, especially considering the complexity of filing a tax return. With tax laws changing almost overnight sometimes, it goes without saying that taxpayers often find themselves midst a tax storm that they do not know how to handle. 

Questions like ‘Do I need to file taxes if I collect Social Security?” “What about the case when I get Disability benefits?” “Do I file a tax return if I am retired?” are very common. Hopefully, this guide will help you figure some basics out and answer commonly asked questions about filing taxes. 

 

Do I Have To File Taxes If I Collect Social Security?

In general, individuals must file taxes if (1) they are unmarried, (2) their gross income is at least $14,050 or (3) are below 65 years of age. However, those that live exclusively on Social Security benefits have no gross income, which means that they do not have to file a federal income tax return. Also, you do not need to include your Social Security benefits in your gross income if your only source of income is your Social Security benefits. 

Things change if you earn additional, not tax-exempt income. In this case, you need to determine whether your annual gross income exceeds the $14,050 threshold. Beginning in 2018, tax exemptions are no longer considered part of your taxable income. So, you must use only your standard deduction. For the 2020 tax year, your Social Security benefits are regarded as gross income if:

  • You are married and file a separate tax return with your spouse. In this case, 85% of your Social Security benefits are regarded as gross income, which means that you may need to file a tax return. 
  • You are married filing jointly, and the sum of 50% of your Social Security plus any tax-exempt interest and other income is higher than $32,000. 
  • Half your Social Security plus other income is higher than $25,000, irrespective of your filing status. 

Note: For senior citizens (over 65 years of age) collecting Social Security benefits, the law is more gentle and flexible as it enables them to reduce the tax amount they must pay on their taxable income. As long as their income is not high (not including Social Security funds), they can lower their tax bill on a dollar-for-dollar basis using a special tax credit called Credit for the elderly or disabled (aka Schedule R).

 

Do I Have To File Taxes If I Did Not Work? 

In general, unemployment checks from the state are taxable. So, it depends on the collected unemployment. The current tax law wants individuals collecting or earning at least $8,000 to file taxes. Another important aspect to consider before answering this question is whether tax was withheld on the unemployment check payment or not. 

It should be noted that unemployment benefits are not free money. In fact, you need to take proper measures today to avoid unwanted surprises in the future when you receive your tax bills the following year. This is because unemployment money is taxable income. So, although you don’t need to pay Medicare or Social Security taxes, you will need to pay state and federal taxes in some jurisdictions while receiving unemployment benefits. 

Of course, some states, such as Virginia, Pennsylvania, Oregon, New Jersey, Montana, or California, waive this particular type of income. This means that if you live in any of these states, your unemployment benefits are tax-free. On the other hand, seven states (so far) do not impose any state income taxes. These include Washington, Texas, South Dakota, Nevada, Florida, and Alaska. 

Tip: The best course of action is to have taxes withheld from your unemployment benefits check, especially if you have earned income this year. The same applies to when you expect to be employed or hired again shortly, which will put you in a higher tax bracket. This, in turn, may make you ineligible for as many credits to offset your earnings. 

How to request the withholding:

  • Fill out form W-4V either online or via the benefits portal (depends on your state).  The Labor Department mentions that you can withhold a flat federal tax rate of 10% of the paid benefits from every payment. 
  • Request a W-4V from your state’s unemployment office if you are already collecting unemployment and then change your withholding. 
  • Take the money out of your checking account, and put it in a little envelope, or put it in a savings account. 

A key factor to bear in mind is your earned income tax credit (EITC) if you are currently unemployed and are worried about how this kind of money will affect your taxes. Depending on your income and whether you have any dependents (and how many), the EITC can provide you  between $538 and $6,660 in tax credits. Those eligible for it can use the tax credit to offset the amount they owe on their tax bill. The 2020 EITC income limit is $15,820 for single individuals or married couples with no children and $21,710 for married couples that file jointly. 

 

Do I Have To File Taxes If I’m Retired?

In short, yes. Your retirement taxes are determined by how much retirement income you draw every year and the sources of your retirement income. And, the kind of money you need to live on is directly related to your taxes. This may sound a paradox, but, in reality, the government never collects taxes on your Social Security money during your working years. The logic is that it simply holds onto it for you. Let’s look into an example to make things a bit clearer:

Suppose you get paid $5,000 every month as an employee. Your employer withholds the 6.2% Social Security tax rate (so, around $310) from your pay every month while contributing that 6.2% on your behalf to the federal government. They pay no tax on that sum, though. Then, when you turn 62 or older, the government gives back the money that went toward Social Security when you file a Social Security retirement benefits claim. Until that moment, nobody has paid taxes for that money.

So, will you owe taxes on your Social Security benefits in the end, and how much? According to the Social Security Administration, one in every four retirees will be called to pay income taxes on their Social Security benefits. For more details, check out the table below: 

Combined* Income Individual Return Married, Separate Return Married, Joint Return
$0-$24,999 No tax
$25,000-$34,000 Up to 50% of Social Security may be taxable
> $34,000 Up to 85% of Social Security may be taxable
$0-$31,999 No tax
$32,000-$44,000 Up to 50% of Social Security may be taxable
> $44,000 Up to 85% of Social Security may be taxable
$0+ Up to 85% of Social Security may be taxable

 

* This refers to half of your Social Security benefits, your nontaxable income, and your adjusted gross interest income, which is your total income minus income adjustments. Adjustments to gross income can be contributions to self-employment retirement plans, alimony paid, student loan interest deduction, and more.

Tip: To avoid paying taxes when you are a retiree, take note of the income you receive. If it is low enough, you won’t get taxed for it. Check the tax bracket into which your taxable income falls after calculating your earned and unearned taxable income. This will help determine whether you will need to pay income taxes or not. Your retirement tax bracket determines the exact way your taxable income is determined when you are in your working/productive years. As soon as you add up your taxable income sources, subtract your itemized or standard deduction, and apply any tax credits you may qualify for. Then form 1040SR or 1040. 

Below is a table showing the standard deduction for taxpayers over 65 years of age for the 2020 tax year. 

Filing Status Standard Deduction Senior Bonus Total Deduction
Head of household $18,650 $1,650 $20,300
Married filing jointly  $24,800 $1,300 per senior spouse $26,100 
Married filing separately $12,400 $1,300 $13,700
Single $12,400 $1,650 $14,050

 

 

Do I Have To File Taxes If I Collect Disability? 

Again, it depends on the income you receive and whether your spouse also gets an income (or not). If you are single and your Social Security Disability benefits are your sole income source, you don’t need to file taxes. For total incomes that exceed $25,000, it is paramount (and required by law) to file a federal tax return as an individual. The same applies to joint filers if their total combined income is more than $32,000. 

However, note that you will NOT be asked to pay taxes on the entire sum you receive from Social Security Disability if you fall within any of the brackets mentioned above. You usually need to file a federal tax return in the following situations:

    • You earn between $25,000-$34,000 as an individual – You might pay income tax on 50% of the sum you received from the Social Security Administration. 
    • You earn >$34,000 as an individual – You will probably need to pay taxes up to 85% of your SSD (Social Security Disability) benefits. 
    • You file jointly with your spouse and have a combined income between $32,000-$44,000 – You might have to pay taxes on 50% of your SSD benefits. The sum goes up to 85% of your SSD benefits if your income is over $44,000 (always referring to your combined sum). 
  • You also have a pension.
  • You collect short-term disability that is being provided by your employer. 

In general, though, if you have paid for your own disability policy, you won’t need to file a tax return. 

 

Do I Have To File Taxes On A Summer Job?

The majority of taxpayers are allowed to earn a specific amount of income every year without having to file a federal tax return or pay taxes. But, if you are obliged by law to file a tax return, it is critical that you have your earned income reported by your summer employer on a W-2

Full-time students may not need to file a return if they work for just a couple of months in the summertime. Nevertheless, if you qualify for a tax refund for taxes withheld from your paychecks, it is advised to file a return so you can claim that refund. Take note that if you show as a dependent on your parents’ tax return, though, you will have to file a tax return if you received more than $1,100 of unearned income (i.e., dividends and other non-employment income), irrespective of other earnings you may have. The same applies if your total earnings are higher than the standard deduction set for dependents.

 

Do I Have To File Taxes If I’m Married But Don’t Work?

You can choose to file separately or jointly on your income tax returns, with the first option being the most beneficial for you, most of the time, at least. This is because the IRS provides larger standard deductions to joint filers every year, which enables them to deduct more money from their income than those filing separately. For example, married couples filing jointly receive a $24,800 deduction while those filing separately only receive a standard deduction of $12,400. 

Plus, you are eligible for more tax credits, such as the Earned Income Tax Credit and the Child and Dependent Care Tax Credit. On top of that, joint filers earn a larger amount of income due to the higher income threshold for specific deductions and taxes while they may also qualify for certain tax breaks. 

There are, of course, some rare cases when filing separately is more preferred than filing jointly. You can contact us and give us the details of your case. Our tax relief professionals will then suggest the filing status that gives you the biggest tax savings

How a 1099-C Affects Your Taxes

form 1099-C Cancellation of Debt

If your debt has become too overwhelming for you to repay, you could contact your lender and negotiate debt forgiveness. Unfortunately, you will probably be called to deal with a huge tax bill if the lender eventually decides to delete your debt and send you a Form 1099-C. This is because you are required by law to report the sum to the IRS by filling out the 1099-C form as taxable income.

We will give you all the details you need to know about a 1099-C Cancellation of Debt so you have an idea of what is involved and how to deal with any tax issues that may come along. 

 

What Is a 1099-C?

If you can no longer afford to pay off a loan or another debt and you have, somehow, managed to get your lender to cancel or write off your debt, the IRS will consider it income for you. Cancellations for more than $600 should be reported on a Form 1099-C Cancellation of Debt. Of course, some exceptions apply, usually in cases of foreclosed homes and bankruptcy (we will also talk about these in a subsequent section). 

Yes, it probably sounds unfair that a debt you have successfully negotiated away or canceled to return as taxable income, haunting your days. Sadly, it is, indeed, classified as income because the IRS sees it as you receiving a benefit without paying for it. This is because when you first borrowed money from the lender, you were bound by a contract to repay it. Therefore, you were not obliged to pay tax on the sum you got. Now that you got yourself a debt cancellation, the contract is no longer in effect, which means that you can do whatever you want with the money you borrowed. So, it looks like you have received money for free – money that you must pay back. This makes it taxable income. 

You can receive a Form 1099-C from a lender that discharged, forgave, or canceled your debt for the:

  • Modification of a loan on your principal residence.
  • Abandonment of property.
  • Return of property to a lender.
  • Foreclosure 
  • Repossession

 

What Is the 1099-C Tax Rate?

The amount of federal tax you will be asked to pay depends on several factors, such as your tax bracket. Taxpayers whose income is less than $35,000 are probably in the 15% tax bracket, which means that you pay 15% of every extra dollar of income on your return. This sum climbs to around $70,000 for married individuals filing jointly. However, your adjusted gross income affects things like phase-out ranges, deductions, and credits you might have. 

You may use the IRS Withholding Calculator to estimate the right amount of tax withheld and the best way to fill out your Form W-4. Or, you can ask an accountant for assistance. Note that any tax liability occurs when the loan obligation is released and not when 1099-C is issued. Failing to report this liability can lead you to be penalized for it (25% underreporting penalty). At the same time, your audit period increases from three to six years. That being said, though, the IRS will not impose penalties for underpayment of tax. The only exception is if you owe more than $1,000 when your return is filed. 

 

Where Does a 1099-C Go On a Tax Return?

You must enter the total sum of your 1099-C on Line 21 of Form 1040. This applies to 1099-C issued for a personal debt (Form 1040 is the Individual Income Tax Return form). If this is about a farm or business debt, you need to use either Schedule F or Schedule C (profit or loss from farming or business). Given that the original 1099-C has gone to the IRS, you do not need to send a copy of it with your return. Just don’t forget to include any interest you may qualify to deduct. 

Now, if you do not file a return that includes canceled debt as income on a 1099-C form, you must be able to prove that the sum is not taxable. This can be done by:

  • Attaching a statement of liabilities & assets or bankruptcy discharge forms to support your claim (in case of bankruptcy). 
  • Complete a Form 982.
  • Attach a letter to your return explaining your situation in detail (i.e., insolvency or bankruptcy). 

 

What’s the Difference Between a 1099-A and 1099-C?

Selling real estate comes with various tax forms that need to be filed, including 1099-A and 1099-C, which create a lot of confusion for everybody involved. Let’s help untangle this knot. 

When real estate property is either transferred or sold, you must notify the IRS using Form 1099-S (Proceeds From Real Estate Transactions). The seller receives this form to report the sale and help show whether there is a loss or gain on the property sale. The seller also receives this form in a deed of lieu of foreclosure and short sale. Nevertheless, when dealing with a foreclosure, the sale is involuntary, which is why no 1099-S is issued to determine whether there is loss or gain on the property sale. Instead, you (the seller) must report the property transfer via a 1099-A (Acquisition or Abandonment of Secured Property), which reports things like the:

  • Balance of principal outstanding on the transfer date.
  • Fair market value on the transfer date. 
  • Date of the transfer. 

Note that selling a property in a foreclosure auction is NOT always tied to zero capital gain. In certain situations, adjustments to cost basis may lead to a capital gain on such property sales, which may result in added tax liability that you might be unable to pay. 

Now, if a lender cancels or forgives a debt, be it a foreclosure, deed in lieu of foreclosure, or a short sale, it may involve the issuance of a 1099-C to report the cancellation of debt. Beware as the tax consequences are exactly the same for the cancellation of debt income, irrespective of where it is generated from (I.e., a foreclosure, deed in lieu of foreclosure, or short sale), as long as the forgiven debt is $600 or more. Certain exclusions apply that can eliminate or reduce the 1099-C sum from taxable income, such as:

  • Relief pursuant to the Mortgage Forgiveness Debt Relief Act – if the seller qualifies for it. 
  • Insolvency of the seller before having their debt canceled or forgiven.
  • Discharge of the debt in bankruptcy.

Do not hesitate to use our expertise and experienced tax professionals to help report these transactions on your tax return correctly. 

 

You May Be Able to Avoid Paying Tax on Canceled Debt

You may qualify for one of the many exclusions that enable you to reduce your taxable income from debts that have been forgiven or canceled. Here are some of the most sweeping ones:

  • Debts canceled when you were broke (IRS refers to this as being insolvent). It applies to the sum by which you are insolvent. 
  • Discharged debts in bankruptcy if you filed for bankruptcy protection.
  • Forgiven student loans after having worked for a period of time.
  • Canceled interest that would have been otherwise deductible (i.e., on business debt). 
  • The debt was canceled as a gift (usually from friends or family members).
  • Farm and business real estate-related debt that was canceled when you owned more than how much your property was worth at that time.   

It is paramount to let an experienced tax preparer handle this type of activity for you. If any of these exclusions apply to your case, you will probably need to file a Form 982 on top of the 1099-C. 

 

The Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act (MFDRA) was passed in 2007 in an attempt to tackle the huge collapse of the real estate market that began in 2007. Congress decided that you may exclude up to $2 million for calendar years 2007 through 2020. This applies exclusively to forgiven mortgage debt, of course. The sum mentioned above relates to married individuals filing jointly. For other filing statuses, the amount that can be excluded is no more than $1 million. 

Note that you may benefit from the MFDRA for debt that was discharged in 2021. The only prerequisite is that you enter into a written agreement in 2020. This exclusion also covers mortgage debt that has been canceled in connection with a foreclosure or via a mortgage restructuring. 

 

Avoiding Tax Debt After Insolvency and Bankruptcy 

You might still be able to avoid taxation in case you have had your debt canceled, even if you receive a Form 1099-C if your debt was discharged in a Chapter 13, Chapter 7, or another Title 11 bankruptcy proceeding. This means that if your case falls under this category, you won’t have to pay taxes for your forgiven debt. 

Similarly, you can avoid taxes on canceled debt if you can show the IRS that you were broke (insolvent) when your debt was forgiven. 

Are you eligible for tax debt relief? Can you reduce or even eliminate your tax obligations after a 1099-C is issued to you? Give us a call or contact us for a free tax consultation and let’s discuss your options so that you can finally be relieved of your tax problems.  

Truck Driver Tax Deductions

truck driver owner-operator

Understanding how you and your trucking business are taxed is one of the biggest challenges for any owner-operator and truck driver. Using good planning and record-keeping all year round, though, can help you avoid any headaches in April. This guide will shed some light on truck driver taxes, deductions, and more.

 

How Much Tax Does a Truck Driver Pay?

Being an owner-operator means that you need to pay taxes yourself. This can be a major hurdle for those that were company employees before as they are now called to calculate and pay taxes that were once automatically withdrawn from their paycheck and then pay them to Federal and State agencies themselves. This involves making quarterly estimated tax payments that often range between 20-30% of their net income (the one earned per quarter). Doing so enables you to minimize any tax bill surprises while also avoiding tax penalties before Tax Day (usually in mid-April). In a nutshell, truck drivers need to pay three major types of taxes:

The first two are calculated on your tax return. If you are an employee, these taxes are being withheld from your check. Owner-operators will have to estimate and pay these taxes themselves. You can refer to >Tax-brackets.org to check cross-state tax brackets.

Now, when it comes to estimated tax payments, you will need to make quarterly payments if you owe more than $1,000 in taxes. This sum is, of course, the final amount you get after subtracting withholding and credits.

Note that owner-operators can show deductions or even file a tax return at the end of the year. So, estimating your business profit will show you (1) the required estimated tax payments you need to make, and (2) the due taxes when you file Form 1040. Your net profit is calculated with this equation:

Net profit = Gross pay (what’s on your 1099-MISC) minus allowable business-related expenses.

If you don’t file a tax return or show deductions, the IRS will determine what you owe in taxes without taking into account any potential deductions. This instantly means that the required tax amount will be significantly higher than if you had shown deductions or filed a tax return.

Are you a truck driver or owner-operator with tax debt?

We’ve helped many individuals just like you. Visit our Truck Driver Tax Help page to see how we can help you resolve your tax debt once and for all.

 

What Expenses Can a Truck Driver Write Off?

Let’s begin with Per Diem expenses, which refers to the assumed tax-deductible sum you spend on beverages, meals, and tips when on an overnight (always business-related) trip away from home. This one is deductible on IRS Schedule C for owner-operators and lowers your income and self-employment taxes owed on the return directly. Per Diem expenses are used by the majority of over-the-road truckers that are away from their home base most of the time as it saves them more money than gathering meal receipts. The only prerequisite is that you spend the night away from home.

Note, though, that you won’t be able to deduct your total Per Diem dollar for dollar. So, ensure you are familiar with the IRS regulations, though, as the laws and amounts change almost annually. According to the current rules, you can take 80% of the Per Diem expenses as a tax deduction.

Other accepted deductions are those referred to as ordinary and necessary business expenses. In general, these include:

  • Truck maintenance and supplies – You might be able to deduct these costs if you pay for them out of your own pocket (i.e., cleaning supplies, washer fluids, new tires, and oil changes). Note that if your employer reimburses you, you won’t be able to double-dip (hence, deduct these expenses).
  • Sleeper berth – Many truck drivers are not aware that they can deduct items from using a sleeper berth. These include first aid supplies, mini refrigerator, alarm clock, cab curtains, and bedding.
  • Electronic devices – You can deduct costs related to your cell phone from your tax return if you use it exclusively for work. CB radios and GPS units are also deductible costs.
  • Travel expenses – Besides overnight stay-associated expenses (including per diem and hotel rooms), you may also consider the standard meal allowance. This may vary per location, but the amount is higher for truckers due to the Hours of Service regulations. For the current amounts, check out IRS Publication 1542.
  • Professional association or union fees – Feel free to deduct fees you pay at a trucking industry organization or union from your taxable income.
  • Uniforms – If you need to wear a uniform and it is not paid for by your employer, then you can deduct the related costs. These include goggles, protective gloves, boots, and other specialized work gear. Also, when away from home, you may deduct cleaning expenses for your clothing.
  • Office supplies – These are deductible only if you use office supplies to keep track of your day or route and include from staples and maps to writing supplies, clipboards, and logbooks.
  • Depreciation – You can deduct specific property as expense (i.e., your truck(s)) if you use that property in service, per Section 179. Always consult a tax professional before determining how to deduct these expenses if you are an owner-operator, though. Deciding how to use the leveraged deduction when filing your taxes can be challenging. The standard (aka straight-line) depreciation for a new Class 8 truck either uses the accelerated depreciation or the multi-year formula.
  • Truck lease – The entire leasing amount of your monthly payments can be deducted. Note that you will probably see a higher deduction in the first 48 months due to depreciation. After three years or so, the truck purchaser will have little depreciation, which means that you will be able to see the reduced tax benefit. For the owner-operator who buys the truck, the tax delay is the net effect. In this case, the tax is not eliminated by depreciation – it is paid in the following years.
  • Other costs – These include expenses such as DOT physical exams, drug testing fees, driver license renewal fees, and sleep apnea costs.

 

Other Truck Driver Tax Write-Offs That You May Qualify For:

  • Lifetime Learning and American Opportunity tax credits – If you, your child, or spouse are attending college, you may qualify for partial reimbursement of the fees and tuition you pay for college provided that you have not received any scholarship or grant.
  • Child tax credit You may claim up to $1,000 for every offspring that is below 17 as long as the child lives with you (at least most of the time), and you cover at least 50% of their living expenses.
  • Child & dependent care – You may receive compensation for some of the costs tied to dependent or child care if you have children below 13 years of age. In the case of disabled spouses and offspring, though, the age limit does not apply (eligible regardless of age).
  • Earned income tax credit – This is a refundable credit that is based on your income and covers low- and middle-income individuals and families. You could get $6,000 or more in reduced tax credit with this one.

 

What Tax Forms Should Truck Drivers Use?

Filing a Form 1099-MISC (Miscellaneous Income) is the responsibility of self-employed truck drivers. You need to report that income, along with any expenses, on the IRS Schedule C (Profit and Loss from Business). You will also have to report your self-employment taxes and report them on your form 1040 if your net earnings are at least $400.

You should have received a Form W-2 for your job if you are a truck driver/employee and none of your job-related costs are deductible. In detail, the forms you will need to file your taxes are as follows:

  • Schedule C form – For statutory and self-employed drivers. It determines your business profit and loss.
  • W2 – For agents or commission drivers. Your Statutory Driver box in your W2 may have been checked. This form is also received by company truck drivers with a report of income and wages of the driver.
  • Form 1099 – To report miscellaneous income and applies to truck drivers working as independent contractors for a company.
  • Form 1040 or 1040A – This reports your individual income tax return. It is the standard federal income tax form.
  • Other forms for reporting your income if you are owner-operator – It depends on your records.

 

Tips for Filing Truck Driver Taxes

Here are some more details and tips for filing your taxes:

  • Don’t throw away your receipts. Hold on to them for at least five years.
  • Know the specifics related to your truck driver-associated deductions. Ask a tax professional to review your accounts if you need extra help, so you don’t over-claim or miss out on these deductions.
  • Be diligent about record-keeping to avoid penalties.
  • You can visit the IRS Publication 583 page for information about record keeping and kinds of records that you may not have been aware of that you need to keep.
  • You may also find useful information at the >IRS Trucking Tax Center.
  • Try to minimize your taxes contributing to a SEP, IRA, or 401(k) frequently, tracking personal vehicle miles, and benefiting from the available credits and deductions. Of course, getting assistance from a tax professional with experience helping truck drivers will help relieve some of the headaches and burdens.

 

Understanding the IRS Statute of Limitations

You have probably been bombarded with tips from your tax professional to hang onto copies of your tax returns and any relevant receipts and forms after you file every single year. The question that arises is, “Just how long do you need to save these copies and receipts?”. With a statute of limitations, you can now have a definite answer.

In a nutshell, this means that the IRS cannot look at your old tax returns after a certain number of years have passed. Hence, you cannot be audited after that time frame has passed. Unfortunately, the statute of limitations is largely dependent on whether you have indeed filed the return and whether you have included fraudulent information on it.

To help you better understand the details of the IRS Statute of Limitations, we have prepared this guide. Note, though, that this is basic information. For an in-depth assessment of your case, please contact our tax experts.

 

What Is A Statute of Limitations?

In tax law, a statute of limitations is one of the most critical deadlines for the assessment of tax. It gives the IRS an X-year window to assess your tax files and attempt to collect your unpaid taxes. Just how many years back can the IRS go to assess these files depends on several factors. The truth is, though, that once the given time period is up, the IRS is obliged to stop its collection efforts.

Nevertheless, there are several exceptions to the general rule (see below for details) according to varying federal laws. This means that, under certain circumstances, like, for example, failure to file a tax return, the assessing period is extended. In some cases, it never starts to run and remains “open” perpetually.

It is, therefore, crucial that you familiarize yourself with the current exceptions, so you know what to expect and what your rights and obligations as a taxpayer, in each case, are.

 

How Long Is the IRS Statute of Limitations?

The general rule dictates that the IRS has the right to go through your tax files up to 10 years from the time of debt assessment which is the date your tax return is processed (not filed or received). In other words, the IRS can legally try to collect unpaid tax debt for up to 10 years from when your tax return was assessed. After the end of this ten-year period, the IRS must cease its collection attempts.

Now, here comes the confusion. The IRC (Internal Revenue Code) that governs federal tax laws in the USA was also published under the U.S. Code Title 26. So, don’t be surprised if you often see IRC statutes being referred to as statutes of limitations (i.e., the IRC § 6501 and 26 U.S. Code § 6501 share, more or less, the same details).

Irrespective of the format, the regulations established by both sets of code affect millions of taxpayers, including recording the taxpayer’s tax liability, the deadline for assessing tax, and other statutes of limitations.

26 U.S. Code § 6501(a), in particular, mentions that the IRS shall assess a taxpayer that owes taxes within three years after the filing of the return, regardless of when the return was filed (on or after the prescribed date). The exceptions referenced in this code are set forth under 26 U.S. Code § 6501(c), and give the Internal Revenue Service extra time to assess taxes in the following cases:

  • Up to 6 years – If there has been a significant omission of items, like, for example, an omission of a sum over $5,000. Also, if a taxpayer does not share specific details regarding their personal holding company return.
  • Unlimited amount of time – In case of tax evasion (a willful or deliberate attempt on behalf of the taxpayer to evade taxes). Acting with a lack of due care and negligence are two cases when this time extension does not apply. The rule also applies when the taxpayer files inaccurate or false tax returns (intentionally to evade taxes) or when they fail to file a tax return.

It becomes apparent that the federal law gives the IRS all the time they need to assess tax (even decades) when a taxpayer engages in fraudulent or intentional acts (i.e., reporting untruthful information on their income tax return). For that reason, it is crucial that you understand that, say, lying to an IRS civil auditor or even worse, an IRS Criminal Investigation agent about the prior tax fraud or tax evasion (in cases where tax evasion or fraud is suspected) gives the IRS and IRS Criminal Investigation Division unlimited time to prosecute you, especially when the last affirmative act of tax evasion took place in the 5- 6-year criminal statute.

Important Note: Depending on the specific criminal tax statute, the IRS can criminally prosecute income tax evasion in the following 5-6 years after the tax evasion attempt has occurred. This is a major consideration as the IRS won’t be simply civilly assessing additional tax that has no statute of limitations after tax fraud has been identified.

 

When Does the IRS Statute of Limitations Begin and End?

The clock of the statute of limitations begins to tick on the date your tax return is assessed (NOT when it’s sent or received) or of your account’s last activity, which is usually the date you last used your account or the date you last made a payment. Nevertheless, it may also include the date you entered a payment agreement, made a promise to pay, or acknowledged debt liability.

However, take note that you may hear from a debt collector even after the expiration of the statute of limitations. According to law, they can file a lawsuit against you at any given time. In case you are being sued for old tax debt, your tax attorney can try to avoid a judgment being entered against you by using the expired statute of limitations as your defense mechanism.

So, if you have an old debt, knowing whether the statute of limitations has expired or not will help you decide whether to leave that old debt alone or pay it off. This involves being aware of when your tax debt was assessed/processed (NOT when you sent your tax return or when it was received) – you will need to have your tax transcripts pulled to know these details.

 

Tolling Events — Events That Pause the Clock on the Statute of Limitations

Under certain circumstances, the statute of limitations can be tolled. This means that the running of the time period stops until a law-specific event occurs. When that happens, the taxpayer gets a time extension since the period of time set forth by the statute of limitations is either being delayed or paused/suspended.

However, it’s important to note that the length of time the statute of limitations was paused for the tolling event will extend the statute of limitations expiration date. So tolling events simply pause the statute of limitations but don’t actually shorten it.

Examples of tolling events are:

Filing for Bankruptcy

According to Chapter 3, the taxpayer gets a 3-month pause while Chapter 13 gives them 3 to 5 years.

Requesting an Offer in Compromise

This one adds about 12 months. However, the extra time is added to the original statute of limitations expiration date.

Lack of Legal Capacity

It applies when one of the parties involved is under a legal disability (i.e., mental illness) that does not allow them to initiate a legal action on their own behalf at the time the cause of action accrues. Once the disability is removed, the statute of limitations will begin to run again and will not be affected by subsequent disability unless the statute specifies otherwise.

Unconditional Promise to Pay

Either a debt acknowledgment or an unconditional promise to pay the due debt may toll the statute of limitations for obligation or debt. You will have to wait until the payment established by the acknowledgment or promise to pay has arrived before the suspension of the lawsuit that enforces payment of the debt. The period of limitations will begin again upon that due date.

Cause of Action Has Been Concealed (Fraudulently)

In this case, the statute is suspended until the action is discovered via the exercise of due diligence.

Note: Mere ignorance, failure, or silence to disclose the existence of a cause of action does not generally toll the statute of limitations. This is particularly true in cases when the facts could have been earned by diligence or inquiry. The statute of limitations is also NOT tolled (unless otherwise provided by the statute) if the taxpayer is absent from the jurisdiction.

 

How to Use the Statute of Limitations To Your Advantage

Sometimes the best way to take advantage of the statute of limitations is to simply let it run its course. We’ll use an example to illustrate.

Let’s say you’re a truck driver and back in 2006 you received a 1099 for the amount of $200,000 but only netted $50,000 because of the high costs associated with driving a truck. You avoided filing your taxes for that year and so the IRS eventually sends you a tax bill based on the entire $200,000. In reality, you should only have to pay tax on $50,000. But because the IRS filed for you with NO tax deductions and due to added penalties and fees, your tax debt is now $70k–more than you even made that year!

So you do what most people do–you go to a local tax filing company and they file an amended tax return and get your tax debt reduced to a certain extent. But you also still have IRS penalties and fees to deal with. However, if you had simply allowed the statute of limitations to run its course, you would have ended up owing the IRS nothing.

The key, of course, is to know exactly when the statute of limitations began. You or a tax expert would need to pull your tax transcripts to know that information.

You could also file for what’s called “Currently Non-Collectible Status” or get set up on a Partial Payment Installment Agreement (PPIA) based on a hardship status and make, for example, $25-$50 a month payments to the IRS until the statute of limitations expires. However, we should tell you that it’s very very difficult for an individual to get set up on a PPIA dealing directly with the IRS; it’s something that you will need the help of a tax expert to do.

Irrespective of your particular case, it is strongly advised to be represented by knowledgeable IRS tax experts with experience in statute of limitations cases and ways to make the most of them. So if you are facing IRS tax debt and collection, contact us and we will be happy to provide you with a free initial consultation, answer any questions that have been troubling you, and help you get out of this undesirable circumstance you have found yourself in.

Tax Planning for the Self-Employed

old tax returns and tax debt

Being self-employed gives you a unique opportunity to be your own boss. However, this level of freedom comes with great responsibility. For starters, you are called to take charge of your own retirement plan and, of course, pay your own FICA taxes (Social Security and Medicare). This means that you must understand and comply with your federal tax responsibilities.  This guide will help you get a pretty good idea of what tax planning should look like for you. We will also share valuable insights and tips to help you minimize your tax obligations. 

 

What is the Self-Employment Tax?

In a nutshell, it is the way the federal government funds Medicare and Social Security benefits. The only case you are not obliged to pay this tax is when you have a minimal amount of self-employment income. The way your self-employment income is calculated varies depending on your business structure. For instance, if you are a sole proprietor, statutory employee, or independent contractor and file Schedule C, your self-employed tax is the net profit listed on your Schedule C (or C-EZ). This must be included on your Schedule SE. 

 

Minimizing your Tax Obligations

1. Choose the Best Business Structure

As it has already become apparent, identifying what business structure best suits your needs is important for the self-employed. This decision will not only determine how much you pay in taxes, but also affect (1) the personal liability you face, (2) the amount of paperwork required, and (3) your ability to raise money. Your individual circumstances will pinpoint the structure that makes the most sense, though. You can choose among the following business entities:

  • Partnership – You share the losses and profits of a business with two or more people. This means that you don’t bear the benefit of losses-profits or the tax burden of profits all by yourself. During tax time, each business partner files a Schedule K-1 form that indicates their share of income from the business, tax credits, and deductions. As for the losses, these are passed through to the partners, who report them on their individual tax reruns. On the flip side, each partner is personally liable for the business’ financial obligations. Plus, partnerships require more extensive accounting and legal services than sole proprietorships. Hence, they are costlier to establish. 
  • Sole Proprietorship – The most common business structure. It offers the owner complete managerial control and is very easy to form. Nevertheless, the owner is held responsible for all their business financial obligations. Tax-wise, a sole proprietorship business owner includes income and expenses from the business on form 1040 (their personal income tax return). The losses and profits are recorded on Schedule C (a tax form) that is then filed along with their 1040. Finally, the Schedule C “bottom-line amount” is transferred to their personal tax return. Worth noting is the fact that your business earnings are taxed once
  • LLC (Limited Liability Company) –  It is a hybrid form of partnership that enables business owners to benefit from the advantages of both the Partnership and Corporation forms of business (i.e., owners bear no personal liability, losses and profits are passed through to owners without taxation of the business). LLCs are great entities for tax purposes as they enable owners to enjoy liability protection skipping the double taxation of corporations. They also offer more attractions to business owners than S-Corps (i.e., no shareholder limitations. However, they usually dissolve after 30-40 years.
  • C-Corporation (or C-Corp) – It is a legal entity that is separate from the individuals that found the business. A corporation is taxed and held liable for its actions pretty much like a person (liability protection for the owners). This is perhaps the biggest advantage of going for a Corporation business structure – the owner does not have any personal liability. The extensive record-keeping required, alongside the cost to form a corporation, though, are the primary disadvantages. Plus, corporation owners pay a double tax on the earnings of the business. 
  • S-Corporation (or S-Corp) – You may choose the S-Corp (aka Subchapter corporation) structure that enables losses and income to be passed on individual tax returns (single-level federal tax to be paid). Usually, an S-Corp structure is offered to companies with no more than 75 shareholder returns and provides business owners with the liability protection of a corporation. 

The type of business format that best suits your requirements will primarily depend on the following three factors

(1) Record-keeping – How much paperwork is required? Are you up to it? Can you bear the cost of paperwork and record-keeping, along with the costs related to incorporation? Remember that administrative requirements like that can eat up your time, which can, consequently, create costs for the company. But, if you are benefiting from protection from liability and tax implications, a corporation is a good option. In any other case, you would be better off with a sole proprietorship, especially if you own 100% of the business. 

(2) Taxation – There are much fewer tax options available to partnership and proprietorship than to corporations. For example, a self-employed that receives a 1099 pays an additional self-employment tax. Those that do not make much is best to choose a sole proprietor business entity. As for those making at least $50,000 and are 1099’d, it would be better to create a corporation business structure, depending on the number of employees, business owners, and the size of the business. 

(3) Liability – To what extent do you need to be held legally liable for potential losses related to your business? Can you afford the risk of the potential liability? If not, then a partnership or sole proprietorship may best be avoided. 

2. Make Your Estimated Tax Payments on Time

This is a major consideration as it will help you avoid penalties. Ensure you (1) set up estimated tax payments and (2) make the required quarterly estimated tax payments (using Form 1040-ES) to cover both your self-employment tax and income tax liability. Note that you may also need to make estimated tax payments to avoid getting penalties and receiving a big tax bill at the end of the fiscal year. And, don’t forget your periodic tax responsibilities if you have employees (see IRS Publication 15 for more information). The IRS has an automated payment system called EFTPS that you can use for your payments. We strongly advise you to opt for monthly payments as it is easier to stay current than with quarterly payments. This also helps prevent the IRS from penalizing you for not paying your due (quarterly) tax on time. 

Tip: You can save taxes by employing family members (not minors), which allows you to shift income to your relative. That way, the business takes a deduction for employee compensation (ensure it is a reasonable amount), which reduces the business taxable income that flows to you. 

3. Establish an Employer-Sponsored Retirement Plan 

This will not only allow you to take care of your own retirement needs but also provide you with several tax benefits by enabling your business to be eligible for an immediate federal income tax deduction (expenses to fund the plan). Such employer-sponsored retirement plans worth considering are SIMPLE IRA, SEP, SIMPLE 401(K), Keogh plan, and Solo (or one participant or individual) 401(k). Note that until you withdraw earnings and contributed funds, you will not need to pay any federal income tax. IRS Publication 560 has more details about these schemes. You may, however, call us and let us guide you appropriately. 

4. Take Advantage of Business Deductions

Your business is entitled to deductions that reduce your taxable income. Make sure you use every single one of the offered deductions to deduct business expenses, including equipment costs, utilities, office expenses, and rent. Just ensure your business expenses are considered necessary, common, and accepted in your business or trade. Also, using the cash method of accounting allows self-employed taxpayers for greater maneuverability at the end of the year. 

Tip: You may also deduct self-employed healthcare-related expenses (up to 100% of the health insurance cost you provide for yourself, your dependents, and your spouse). Note that your contributions to HSA (health savings account) are also deductible. 

 

Two Effective Ways to Sidestep the 13.25% Self-Employment Tax

1. Become  a Partnership. 

The first would be to become a partner and make K1 distributions (aka guaranteed payments) to yourself.

2. Become an S-Corp.

The second option is to become an S-Corp. Whichever business structure you choose will enable you to sidestep the self-employment tax.

Here’s a savings example to get an idea of what we are proposing here:

Let’s assume that you make $100K and write $50K for business expenses. According to the current federal tax laws, you will be called to pay around 20% tax PLUS the 13.25% self-employment tax. As an S-Corp, though, you will NOT have to pay the 13.25% tax – the profit would be a K1 distribution. 

Important notes:

  • You must file an 1120-S. 
  • Ownership pulls must be consistent (for example, $5K every month).
  • The IRS wants to see one or more W2, which could be yourself. 

 

Make Sure You Do Your Bookkeeping

You may either want to outsource bookkeeping or use platforms like QuickBooks. When it comes to calculating estimated payments and paying the right tax amount on time, bookkeeping with the help of a software or by trusting a reliable and experienced tax accountant makes things far easier. 

As you can see, there are legitimate (aka legal) ways to save money on your taxes while being self-employed.  It’s simply a matter of planning well, staying on top of things and taking advantage of all possible tax savings strategies.

 

What Is An IRS Revenue Officer & What Do They Do?

IRS Revenue Officer on the way to visit a business

Dealing with an IRS Revenue Office can be a challenging and, sometimes, even nerve-racking experience, especially when one shows up at your business or house doorstep unannounced. However, most of the time, these feelings of anxiety and stress are misplaced.

This guide will shed some light on the details surrounding IRS Revenue Officers, what exactly they do, and what to do if one contacts you. We also dispel some common myths and share some handy tips and information so you can use the acquired knowledge to your best advantage. 

 

What Does an IRS Revenue Officer Do?

Often confused with an IRS Revenue Agent, an IRS Revenue Officer is responsible for collecting money (taxes). They are civil employees employed by the IRS Field Collection office and collect taxes by interviewing taxpayers and running asset checks. If they cannot make contact with a taxpayer, they will work with third parties to gather the information they need. 

The general powers of an IRS Revenue Officer include:

  • Finding liens against you.
  • Interviewing 3rd parties about you.
  • Summoning records.
  • Issuing levies. 
  • Commencing seizure proceedings against you without needing a court order (see notes below). 
  • Referring you to the IRS CID if required. 
  • Levying any receivable accounts, bank accounts, subpoena documents, wages, or retirement funds. 

Remember that an IRS Revenue Officer is assigned to specific cases, not just any tax-debt-related case. In the overwhelming majority of cases, an IRS Revenue Officer will visit you if:

(1) The tax issue is associated with your business.

(2) Your tax debt is from older tax years.

(3) Your tax debt exceeds $100,000. 

 

Things to Know:

  • IRS Revenue Officers (1) do NOT carry weapons, (2) can NOT investigate you criminally, and (3) have absolutely NO right/authority to arrest you. 
  • Their badge is usually a plastic lanyard as opposed to that of an IRS Criminal Investigation Divisions (CID) officer, which is golden. 
  • An IRS Revenue Officer has a limited ability when it comes to seizing a taxpayer’s home, thanks to the Revenue and Reform Act of 1998. 
  • Anybody with a 4-year degree (not necessarily with a financial-related background) can get a job as a Revenue Officer. Before one visits you, though, they undergo months of (initial) training, and then ongoing training. 

 

What’s the Difference Between an IRS Revenue Officer and a Revenue Agent?

As already mentioned before, an IRS Revenue Officer collects taxes. Interestingly, they are not graded based on the sums they collect rather than how quickly they close cases. Although this is not always in the taxpayer’s favor, there may be cases when a taxpayer and a Revenue Officer have common goals and aspirations – for the case to be over and done with. 

IRS Revenue Agents, on the other hand, are assigned a different task – that of auditing taxpayers. So, the person that will collect taxes from you is NOT the same individual as the one who performs the audit

How Things Work – The Drill

As soon as the IRS assesses the tax, you will be called to pay the due amount (i.e., withholdings and unpaid employee taxes for business owners). If you cannot pay, the IRS will send out several notices. Then, the IRS will make contact with you to identify who is to blame for the underpayment. In doing so (most of the time, at least) an IRS Revenue Officer will visit your business and seek to assess the TFRP (Trust Fund Recovery Penalty), which is another word for the taxes, against as many taxpayers as possible. 

Therefore, you can understand that it is not just you, the business owner, who is at risk for a TFRP assessment – it includes everybody else also managing the finances of the company. It is worth noting that many times, these assessments reveal employees embezzling money from the business.  

Note: Depending on the amount of due tax, your collection case may as well stay with the ACS (Automated Collections System). This also happens when a taxpayer owes money to the IRS. In this case, you may never see an IRS Revenue Officer coming your way. Instead, you will be sent notifications of past due balance. If these are ignored, the IRS will try to collect the owed money via wage garnishments, bank levies, and liens. 

 

What To Do If an IRS Revenue Officer Contacts You

Nine out of ten times, the IRS Revenue Officer will try to determine your ability to pay. That aside, though, they may even investigate you for a TFRP assessment that you have not paid (this usually happens when you have unpaid employee taxes). No matter the reason why an IRS Revenue Officer shows up at your business, we strongly recommend ensuring you get the best representation possible. This can come from an individual that is helping you with this tax matter. You may, however, need a more robust representation, such as a lawyer or tax attorney (many taxpayers seek legal advice before giving an IRS employee any testimony). 

Keep in mind that things are usually fairly serious, especially considering that the IRS has half the field officers they used to have ten years ago. So, there must be a very important reason why you were assigned an IRS Revenue Officer. And, don’t think even for a second that the IRS will take it easy on you. 

When a Revenue Officer visits you for the first time, they should identify themselves by showing their ID (remember, badge carriers are usually from the Criminal Investigation Department). If you are certain that you don’t have fraudsters in front of you, you can sit down with the Revenue Officer and hear the “collection alternative” (i.e., Offer in Compromise) they have to offer you. If you agree to the proposed terms (meaning, a reasonable agreement is presented to you), you put everything behind you. If not, refer to the next section for the appropriate course of action.

In any case, you may want to consult with your tax professional before the IRS Revenue Officer pays their visit. Experienced tax representatives can be of significant assistance to you as they will:

  • Help you figure out your options.
  • Come to the negotiation table with the IRS agent knowing what to do. 
  • Deal with your IRS Revenue Officer and get a better agreement for you (than you). 

Tips:

  • Be honest with your Revenue Officer. You don’t want to annoy them by doing things like incurring a lot of new liabilities or hiding your assets while dealing with them. Just work with them. 
  • Cooperating with an IRS Revenue Officer does NOT mean that you must push yourself into something without considering the “aftermath” and consulting a tax professional. 

 

What To Do If You’re Getting Nowhere With the Revenue Officer

If the IRS Revenue Officer is being unfair or things show that you two will not see eye to eye anytime soon, you could:

  • Speak with their Group Manager (but do not keep your hopes up that they will take your side).
  • Address the Territory Manager (a step above the Group Manager). In this case, ensure you can prove that the IRS Revenue Officer did not act correctly. Otherwise, it may get you into deeper waters. 
  • Wait until you receive a Notice of Federal Tax Lien, Notice of Levy, or a notice proposing a levy and request for a CDP (Collection Due Process) hearing. Then, you or your tax representative can negotiate a better deal with a settlement officer. This action also puts the brakes on the revenue officer, who can do nothing while you appeal. 

Note:

  • It is required by law an IRS Revenue Officer makes their first contact in person, so do not expect a heads-up phone call. 
  • An IRS Revenue Agent will most likely notify you that you are under examination by sending notices to you before a field agent schedules their visit to your business or home. 
  • If you are being visited by an IRS CID officer, call a tax attorney immediately. 
  • If an IRS Revenue Officer or field agent leaves a note or business card on your door, use the contact information on the card and have your representative (i.e., tax or law firm) get in touch with the Revenue Officer. You are either being assessed for (probably) an underpayment of employee withholding or have a tax debt. 

 

The Best Course of Action to Take with a Revenue Officer

Your best bet when an IRS Revenue Officer visits you is to hire a tax professional or tax attorney to help you with your tax issue. Unlike what many people think, this does NOT make you look “guilty” in the eyes of the IRS agent. In fact, most of the time, IRS Revenue Officers admit being glad the taxpayer hired a tax or legal representative because they, as government employees, are not allowed to give any advice (legal or otherwise) that could help resolve your case in an instance. Indeed, the best IRS Revenue Officers want you to be well taken care of and represented. 

But, even if an IRS agent tells you that it is a waste of money and time to hire representation (“You could use the money you pay the tax prep company to repay your taxes”), you definitely need somebody that is 100% on your side. No matter how great a guy an IRS Revenue Officer is, they are still far from being your advocates – their position does not give them such liberty. Nor can they offer tax-related or legal advice. Plus, you will most likely be visited by a government employee that enjoys mowing over taxpayers. It is always good to know that you can get some control back into your own hands with the help of tax experts or legal representation. Plus, you can likely save a great deal of money!

 

Finally, remember that…

IRS Revenue Officers and Agents are ordinary people like the rest of us. This means that they, too, have good and bad days. They also have a significant workload they are called to manage every single day. This can force them to make decisions and offer agreements that may not be of your best interest.

Without a doubt, though, having to handle the stress and anxiety that comes with back taxes and the presence of an IRS Revenue Officer at your premises can lead to even more trouble and problems. For that reason, it is best to ensure you have a tax professional to help you resolve your issue and have your rights as a taxpayer well protected. 

 

The Differences Between Tax Attorneys, CPAs, and IRS Enrolled Agents

team of tax professionals

With tax season usually being a challenging time for most businesses and individuals, you definitely need all the help you can get, whether you have let years of tax debt add up or are about to file complex taxes for the first time. Irrespective of your tax case, it is paramount to entrust the right tax professional, especially if you are called to cope with tax debt. 

Fortunately, in this “battle”, you are not alone. In fact, you have plenty of options, with the most popular ones being tax attorneys, certified public accountants (CPAs), and enrolled agents. Although they all help taxpayers, each has a different role. The status of your case with the IRS (Internal Revenue Service), as well as your unique goals and needs, will determine which tax expert you need to partner with. Read on to figure everything out so you can make the most informed decision. 


What Is a Tax Attorney and What Do They Do?

A tax attorney is a legal professional that has passed the state bar exam. They are law degree holders and specialize in tax law. Therefore, a tax attorney is the better choice if you are in trouble with tax authorities (i.e., you face levies or tax liens or owe thousands in back taxes) and need to deal with the legal aspect of tax preparation

A tax attorney will represent your best interest in IRS communication, pretty much in the same way a CPA (Certified Public Accountant) and Enrolled Agent (EA) will. However, tax attorneys have undergone many years of training and education in fields like dispute resolution and tax controversy, and know not only how to represent their clients during IRS proceedings, but also how to go up against the IRS when adverse tax actions take place. Plus, they are uniquely equipped to undo property liens, halt wage garnishments, come up with compromises with the IRS, help with unfiled returns, settle back taxes, and handle all legal tax matters you might be dealing with. 

Note: It is best to find a tax attorney that specializes in the specific type of tax help you need (i.e., tax attorneys with expert knowledge on estates and trusts). 

 

What Is a CPA and What Do They Do?

A Certified Public Accountant (CPA) has:

(1) 150+ hours of education, 

(2) a 5-year business degree, and 

(3) passed the intensive CPA exam.*

* The CPA exam consists of four sections (1) Regulation, (2) Financial Accounting & Reporting, (3) Business Environment and Concepts, and (4) Auditing & Attestation), totaling 1,000 questions. 

CPAs are more experienced and knowledgeable in tax preparation rather than a tax professional you would see for simple things. So, a CPA makes a good fit if your tax situation is complicated (i.e., you have high net worth investments, have children, are divorced, and own a business). Allowing a CPA to prepare your taxes, in such cases, is probably the best course of action you can take, especially if you have a lot of money coming in and out. Also, tasks like undergoing audits, creating a financial plan, and paying quarterly taxes are easier with a CPA, who can:

  • Assist you with monthly and yearly accounting services. 
  • Come up with a long-term tax plan.
  • Help you carry it through. 

At the end of the day, a CPA will make the tax process simpler for you year after year, especially if you develop an ongoing relationship with one.

Let’s also note that a CPA is required to complete 120+ hours of continuing education every three years while the average tax preparation professional has undergone between 60-80 hours of training. Plus, CPAs know how to comply with the federal laws and still maximize benefits while minimizing your tax liability. 

 

What Is an IRS Enrolled Agent and What Do They Do?

An IRS Enrolled Agent (EA) is a tax professional that can help you with your personal and business tax returns, except for Tax Court, where you need a tax attorney to represent you before the IRS.   A registered agent knows the ins and outs of the IRS because they are required to have worked for the IRS for a minimum of 5 years.

An enrolled agent’s role is pretty similar to tax attorneys and CPAs. Back in 1913, the responsibilities of an Enrolled Agent included claims for monetary relief for taxpayers with inequitable taxes. Over the years, the sources of tax collections (i.e., gift, estate tax, income tax, etc.) became even more complex, which gave additional duties to EAs, including tax preparation and taxpayer advocacy. 

Given that an IRS enrolled agent’s enrollment is a federal designation, Enrolled Agents have the right to work across state borders – something that tax attorneys and CPAs cannot do without meeting the desired state’s reciprocity requirements. 

To become an IRS Enrolled Agent, one needs to pass a 3-part comprehensive IRS test* that covers business and individual tax returns. This test is significantly different from the one CPAs sit, as it is on tax law. On the other hand, the CPA exam is almost exclusively on auditing procedures and rules, as well as accounting and designed to make the interpretation of financial statements easier. This interpretation, though, does not refer to how taxes are calculated rather than how to present tax obligations in the financial statement.  

Nevertheless, prior experience as an IRS employee can also earn them Enrolled Agent status. Once they become classified as IRS Enrolled Agents, they need to complete 72 hours of a continuing education course every 36 months. Finally, all IRS Enrolled Agent candidates are subject to being thrown out (disbarred) from practice before the IRS if they have been found to perform illegal acts. For that reason, background checks are performed on Enrolled Agents on a regular basis. An Enrolled Agent can also be removed from their duties if they fail to meet the continuing education requirements. 

Note: IRS Enrolled Agents cannot perform all kinds of audits. According to regulations, they are not allowed to express an unqualified type of opinion (i.e., when a public company files their financial statements with the SEC – Securities & Exchange Commission). Also, EAs are not required to have prior knowledge of tax preparation. It is up to them if they will be preparing tax returns or not. 

*An EAs exam consists of (1) Tax Code for Individuals, (2) Tax Code for Businesses, and (3) Representation, Practice and Procedures (100 questions each).  

 

What’s the Difference Between a Tax Attorney, a CPA, and an Enrolled Agent?

As already mentioned above:

  • Certified Public Accountants (CPAs) are accounting experts, with one of their specialties being tax matters. They are fully capable of doing basic tax returns, provided no extensive legal analysis is required. 
  • Enrolled Agents (EAs) are particularly skilled tax practitioners authorized by the federal government and empowered to represent their clients before the IRS. They can handle tax audits, tax appeals, tax collections, and relevant matters, and are a great option for basic W2 tax preparation. 
  • Tax Attorneys are law specialists who can represent in court (but not always deal with the IRS). They are the best choice if you need assistance with complex tax-related matters (i.e., you are being audited or receive an IRS notice). 

All in all, your particular tax matter will help determine whether it would be best to hire a tax attorney, enrolled agent, or a certified public accountant. 

Seek the assistance of a CPA if:

  • You are called to figure your way through minimizing your tax liability while dealing with complex business or personal taxes. 
  • Need basic tax preparation. 
  • Want to be represented for a state or federal issue in any of the 50 states (for IRS representation and tax resolution). 
  • Want a qualified tax professional to handle highly complex financial statements.
  • Wish to get your audited financial statements and accounts in order. 
  • You are NOT focused purely on taxes. 

Seek the assistance of a tax attorney if:

  • You are involved in a tax controversy issue or are receiving debt collection notices or are, in any way, in trouble with the IRS.
  • You are a breath away from receiving a levy on your wages or bank accounts. You should be able to know this if your case has been assigned a revenue officer by the IRS. In this case, do turn to a tax lawyer to get valuable advice (and professional help) on how to protect your rights and stay out of trouble. 
  • You face tax fraud allegations or owe taxes. This is when you definitely need legal representation in discussions and negotiations with the IRS by a tax attorney. 
  • You have been contacted by the Criminal Investigation Division and are facing tax-related criminal charges, such as evasion or fraud. 

Seek the assistance of an IRS Enrolled Agent if:

  • You need basic tax preparation.
  • Want the most cost-effective solution. 
  • You are not involved in a tax dispute.
  • Need cross-state representation. 
  • Need a simple IRS status check.
  • You want a tax professional for routine matters, such as miscellaneous tax filings and tax planning
  • Need representation before any administrative level of BOE, IRS, CDTFA, FTB, EDD tax agencies. 
  • Want a tax professional to handle issues like IRS appeals, delinquent unfiled tax returns, back tax settlements, employment 941 payroll, liens, garnishments, levies, collections, and tax audits. 

 

So What is Innovative Tax Relief?

Most tax professionals fall into one of the three above categories. Our team at Innovative Tax Relief, however, includes all three! We are an IRS Enrolled Agent and have on staff tax attorneys and CPAs. So regardless of the tax issues you’re dealing with, we can help you.  

Get in touch with us for a free consultation with one of our tax experts and start finding some relief from your tax problems today.

Understanding Tax Returns

tax return

The tax return season usually causes headaches to many individuals, self-employed and corporations alike. Buzz words like tax returns, Form 1040, Form 1040X, Form 1120S, and Schedule A only come to confuse things some more. This comprehensive guide sheds light to key must-knows so you begin to have a clearer idea of tax preparation, tax returns, and what is required from you. 

 

What Is a Tax Return?

A tax return or income tax return is a document that you need to file with either the state tax board or the IRS (Internal Revenue Service) which reports your income, as well as your deductions (i.e., your business profits and losses) and other details about your tax liability or tax refund. A tax return allows you to:

  • Request a refund for tax overpayment.
  • Schedule tax payments.
  • Calculate your tax liability

Tax returns are filed annually for any business or individual with capital gains, interest, wages, and other reportable income/profits for the previous year, with the deadline being April 15. A tax return has the following three major sections:

  1. Income – It lists all your income sources. You need to report royalties, self-employment income, dividends, and wages, usually using a W-2 form. 
  2. Deductions – Things like interest deductions on specific loans, alimony paid, and contributions to retirement plans are typical examples of deductions that decrease tax liability. The final list, though, varies among jurisdictions. In general, the majority of business operations-related expenses are deductible (for business owners). You can also choose to itemize your deductions instead of using the standard deduction for your filing status.  
  3. Tax credits – These refer to the sum of the owed taxes or the amounts that reduce tax liabilities. More than often, education, pensions, and the care of dependent seniors and children are also attributed tax credits. However, they, too, vary among jurisdictions. 

At the end of the fiscal year and after filing your tax return, you will be able to tell whether you owe taxes or have overpaid taxes (hence, need to be refunded). If you choose not to get your overpaid taxes amount back, it will roll into the next tax year. Now, if you owe taxes, you can pay your debt in monthly (or quarterly) installments or as a single payment. As for self-employed individuals, most of them can reduce their tax burden by making advance payments every quarter

 

What Types of Tax Returns Are There? 

Of the many federal income tax return forms, the most commonly used ones are:

Form 1040 (for Individuals) 

Form 1040 is a long form, which means additional paperwork needs to be filed due to the many tax credits that show up only there. You can consider choosing this form if you (1) itemize deductions, (2) have other income to report, (3) have more complex investments to report, and (4) your earnings are larger. Nevertheless, this extra work that needs to be done with Form 1040 is offset by the extra savings specific credits can produce for you (i.e., taxes paid on a foreign country). Plus, you have a wealth of deductions ready to be claimed directly on the form (no adjustment needed) which enables you to reduce your gross income (i.e., alimony payments, incurred moving expenses, and self-employment taxes). This, in turn, can help you lower the income sum that will be eventually taxed. 

You should file Form 1040 if:

  • You have received income from a property sale.
  • You are self-employed.
  • You itemize deductions. 
  • Your combined incomes (for joint filers) or your personal income is over $100,000.

Important note: If your current situation is different from that of the previous year(s) (i.e., you can make itemizing more profitable for you because you now have more deductions), you will probably need to file a different form. There is no obligation to continue using a particular income tax form just because it suited you in the past. 

Form 1040X (for Individuals)

This is a form you need to file if you (1) found out that you qualify for credits or deductions you didn’t take or (2) have spotted an error on a tax return or (3) your tax return is missing some income. In other words, Form 1040X can be considered your formal claim for a refund. 

Preparing a Form 1040X does not necessarily require the completion of a new tax return. You only need to update the numbers that should be altered. Remember that you can amend your taxes if you have prepared your original tax return using Form 1040, 1040-SR, 1040A,1040NR-EZ, 1040NR, 1040EZ-T or 1040EZ. For business owners with net operating losses in one of the next two tax years, Form 1040X can help carry back these losses. Any refunds will show after 8-12 weeks from the time you made the amendment. 

To prepare Form 1040X, you need any documentation that relates you to the changes you have made (i.e., proof of payment for a newly claimed deduction) and a copy of your original tax return (the one you wish to amend). Beware, though, that you can file an amended tax return either within 24 months of actually paying the tax for that year or within 36 months of the original filing deadline. Depending on the circumstances, you may have more than three years, though (i.e., incapacitated individuals). 

Form 1040EZ (for Individuals)

The Form 1040EZ is the simplest IRS form (a single page), but limits your options when it comes to ways you can save on your tax bill as it restricts you to claiming the tax break called EITC (earned income tax credit), which has been designed to help out individuals with a low income. That being said, you should file it if:

  • Your interest income is below $1,500.
  • Your combined incomes (if a joint filer) or single income is no more than $100,000.
  • You are married but filing jointly, or single.
  • You have no dependents.
  • You are younger than 65. Note that in case you file a joint return, your spouse should also be below 65 years old. 
  • You are not legally bound during the previous tax year (this applies to your spouse, as well, if filing jointly). 

Form 1120 (for C-Corporations)

C corporations, as well as LLCs that file as corporations need to file their income taxes via the Form 1120. After successfully completing Form 1120, you will have a pretty good idea of how much the corporation will be called to pay in taxes. Remember that you will be required to pay quarterly estimated taxes rather than all the money in one lump sum. 

To file Form 1120, you need to enter:

  • Your total income.
  • The date you incorporated.
  • Your EIN (Employer Identification Number).
  • Your capital gains and earned royalties. 
  • The COGS (Cost of Goods Sold).
  • The gross receipts.
  • The total assets held by your corporation.
  • Any interest and dividends earned.
  • Your tax deductions
  • The business tax credits for which you want to apply. 

Form 1120-S (for S-Corporations)

If you are a corporation with an elected S status, you need to file a Form 1120-S tax return annually. In this case, the reported income usually flows through directly to you, the business owner. This means that these companies do not need to pay tax at the corporate level since any reported income is taxed on the business owner’s Form 1040 tax returns. For that reason, the individual does not pay additional taxes on their Form 1040 returns. 

Form 1065 (for Partnerships) 

This is typically filed by partnerships once a year and contains information related to their income, credits, deductions, losses, and more. The particularity of Form 1065 is that it has no federal tax (most of the time, at least). This is because the partners report income flows on their personal tax returns. 

 

What is a 1040 Schedule A?

Those considering to itemize their taxes will need to attach an IRS Schedule A to their Form 1040 so they can claim itemized deductions on their tax returns. For those not familiar with what itemizing taxes is, let’s say that instead of taking the flat-dollar standard deduction, you can choose from the many individual tax deductions out there at tax time. If the amount of your itemized deductions exceeds the standard deduction sum, you save money. for your reference, the standard deductions for 2020 tax year were as follows:

  • Single filing status ($12,400).
  • Married or filing jointly ($24,800).
  • Married or filing separately ($12,400)
  • Head of household ($18,650)

Schedule A is divided into the following sections (each having several subsections):

  • Medical and dental expenses.
  • Casualty and theft losses (in a disaster area declared as such by the federal government or of certain property that produces income).
  • Gifts to charity.
  • Interest you paid.
  • Taxes you paid.
  • Other itemized deductions (i.e., gambling losses, amortizable bond premiums, etc.).
  • Total itemized deductions.

As soon as you have tallied the itemized deductions you wish to claim, you should enter them (the total sum) on your Form 1040. Also, expect to be asked to provide:

  • Form 1098 to show the interest you paid for the year (ask your mortgage lender for it).
  • Your sales tax records.
  • Your state income tax records.
  • Your property tax bills.
  • Any charitable donations records.
  • Receipts for medical expenses that have not been reimbursed. 

 

What is a Schedule C? 

An IRS Schedule C (headlined Profit or Loss From Business (Sole Proprietorship)) is usually filed by self-employed individuals who need to report how much money they lost or made in their business. Schedule C must be completed and then attached to your income tax return. In the majority of cases, you will also be required to fill out Schedule SE (Self-Employment Tax) along with the five-part Schedule C. 

Note that sole proprietorships are companies that do not have a Partnership or Corporation status. They are small businesses operated and controlled by their owners rather than a legal business entity. It does not matter if you have employees or not (or even an office). As long as you get paid for work that you do, you run a sole proprietorship, provided that you earn at least $400 of net profit annually. 

 

What is a Schedule E? 

Schedule E is prepared by those that have income reported on a Schedule K-1 from an S corporation or partnership, receive royalties, build their own home, or earn rental income. You will need to report both your personal tax return and the gross income and losses from these activities. Depending on the type of activity you do, you should include different things. 

For example, for rental income, you need to report prorated rents when you bought the property, the refunds you have received for utilities, and the rental income. As for some of the expenses, these can include marketing and advertising costs (i.e., the cost to advertise on certain publications or sites), travel costs needed to maintain your rentals, cleaning and maintenance costs, repairs, depreciation expenses, and more. 

 

How Long Should You Keep Your Tax Returns? 

According to the IRS, just how long you need to keep your tax returns depends on several factors, such as the event, the type of expense, and the action the document records. Generally speaking, it is best to maintain a record of your tax returns for three years after you filed the return or, at least, until the period of limitations for the particular tax return (the item of credit, deduction income shown on the tax return) ends. 

However, we strongly advise taxpayers to keep records of their tax returns indefinitely if they have filed a fraudulent return or do not file a return at all. That being said, keeping copies of your filed tax returns will make preparing future tax returns much easier for you, in case you want to file an amended return.