Business Taxes Archives - CironeFriedberg, LLP

Understanding Estimated Taxes and Penalties

May 14, 2022 by David Moseman CPA

The IRS requires taxpayers to pay their taxes for a given year in that year. For taxpayers who are employees of companies, their employers must withhold income tax from each paycheck and report it on a Form W-2 early in the following year. If your employer withholds too much, you get a refund. If it withholds too little, you owe taxes. Either way, you can fine-tune your status by filing a new Form W-4 with your employer, as well as any appropriate state tax form.

Paying Estimated Taxes

Estimated tax payments are used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.

Taxpayers who work freelance, for example, do not have income tax withheld from the income they generate by invoicing clients. They must follow a different route for paying their taxes, and they cannot just wait until April 15 for an accounting of the previous calendar year.

These taxpayers must file their estimated taxes on a quarterly basis: April 15, June 15, September 15, and January 15. (If any of those dates fall on a weekend or a federal holiday, they are due on the first business day after the due date.)

Avoiding Penalties

With some exceptions, failure to have enough taxes withheld could result in a tax penalty. Notes the IRS: “We calculate the penalty separately for each required installment. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.” More details are available on the IRS “Common Penalties” page. Refer to the IRS Fact Sheet on this topic.

Three ways to avoid the estimated tax penalty:

Pay at least 90% of the current year’s tax liability due.
Pay at least 100% of the prior year’s tax liability or 110% if your adjusted gross income (AGI) for the prior year exceeded $150,000. (These amounts may be tweaked in future years.)
Pay at least 90% of the current year’s “annualized income.” Taxpayers who do not receive income evenly over the course of the year, such as snowplow drivers, may use this method by completing Form 2210, Schedule AI.

The penalty may be waived if either of the following occurred:

The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty.
You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

In addition, no penalty is assessed if either of the following occurs:

The total tax shown on your return minus the amount you paid through withholding is less than $1,000.
You had no tax liability in the previous year.

This is just a summary. Tax rules may change. To learn more about estimated taxes and other provisions that may apply visit the IRS site and seek the advice of a qualified tax professional.

For a calendar schedule of due dates for estimated taxes, read our article.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Annual Reviews of Federal Withholding for Employees

May 2, 2022 by David Moseman CPA

The IRS says, “All taxpayers should review their federal withholding each year to make sure they’re not having too little or too much tax withheld.” However, employees may not be aware of the IRS’ suggestion, which is why employers should tell them about it.

Why employees should review their withholding

If they have too little federal income tax withheld, employees may end up owing taxes or being hit with a penalty at tax time. Conversely, if they have too much tax withheld, their paychecks will be smaller — which might hurt them financially, as they must wait until tax time to get a refund.

Employees should submit a new Form W-4 if necessary

All new hires must complete a Form W-4, which helps determine how much federal income tax to withhold from their wages. The employee’s Form W-4 information is driven by a person’s personal and financial situation. If an employee experiences certain life changes during the year, they may need to give you a new Form W-4.

Employees should review their withholding every year if they:

Have a spouse who works as an employee.
Have two or more jobs simultaneously.
Work partially during the year.
Have dependents who are at least 17 years old.
Claim tax credits such as the child tax credit.
Itemized deductions on prior year tax returns.
Earn high incomes.
Have complex tax returns.
Had large refunds or large tax bills for the previous year.

Employees may need to update their W-4 if they experience life changes, such as:

Marriage.
Divorce or legal separation.
Childbirth.
Adoption of a child.
Retirement.
Bankruptcy.
Home purchase.
Starting a new job or stopping a second job.
Their spouse gaining or losing a job.
Adjustments to income, such as student loan income deduction.
Gain of tax credits or itemized deductions, such as medical expenses, donations to charity, education credit and child tax credit.
Gain of dividends, self-employment income, IRA distributions, capital gains, interest income, and other taxable income not subject to withholding.

Although year-end may be a convenient time to review filing and withholding statuses, taxpayers can submit a new Form W-4 anytime. Often, they will see a need to do so after preparing their tax returns each year. Depending on where your employees work, they may also need to review their state and/or local tax withholdings every year.

Direct your employees to the IRS Tax Withholding Estimator

The Tax Withholding Estimator helps employees ensure the correct amount of federal income tax is withheld from their paychecks. Employees can review the Tax Withholding Estimator FAQs if they have questions about using the estimator. Also, they can consult with their CironeFriedberg professional.

2022 Payment Due Dates for Estimated Taxes

April 11, 2022 by David Moseman CPA

The U.S. income tax system is pay-as-you-go, meaning that you pay taxes as you earn income. According to the IRS, sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when they file their tax return.

If you work for a business and are a W-2 employee, taxes are accounted for as withholdings. If you are self-employed as an independent contractor or freelancer, you pay your taxes quarterly.

You file quarterly taxes with Form 1040-ES, Estimated Tax for Individuals. Using your previous year’s annual tax return, you can use the form’s worksheet to determine if you must file quarterly estimated tax and how much.

For more information on estimated taxes and how they might affect you, consult with your CPA or visit the IRS online.

2022 Payment Due Dates for Estimated Taxes

April 18, 2022

June 15, 2022

September 15, 2022

January 17. 2023*

* If you file your 2022 tax return by January 31, 2023, and pay the entire balance due with your return, you do not have to make the January 17 payment.

Deducting Business Expenses: Separating Fact from Myth

February 6, 2022 by Jeffrey Silverberg CPA

When you’re filing your tax returns, what expenses can you deduct from business income? It’s a complex question. To start with, a business expense must be both ordinary and necessary to be deductible, according to the IRS. An ordinary expense is one that’s common and accepted in your trade or business.

A necessary expense is one that’s helpful and appropriate for your trade or business; it doesn’t always mean an indispensable cost. Since only business expenses are deductible, they must be separated from other types of expenses: those that are included in the cost of goods sold, capital expenses and personal expenses.

The cost of goods sold is figured by valuing inventory at the beginning and end of each tax year. The total value is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

Such expenses as the cost of products or raw materials, freight, storage, and direct labor costs including contributions to pensions or annuities for workers who produce the products and factory overhead all go into figuring the cost of goods sold.

You must capitalize some costs rather than deduct them. These costs, part of your investment in your business, are called capital expenses and are considered assets in your business. Generally, there are three types of costs that you should capitalize:

Startup costs.
Assets.
Improvements.

Note that you can decide to deduct or amortize some business startup costs.

You cannot deduct personal, living or family expenses. But if you have an expense for something used partly for business and partly for personal purposes, divide the total cost between the business and personal parts and then deduct the business part.

What if you use part of your home for business? You may be able to deduct expenses for the business use of your home. These may include mortgage interest, insurance, utilities, repairs and depreciation. If you use your car for your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

Other common business expenses include:

Employees’ pay — You can generally deduct the pay you give your employees for services they perform within your business.
Retirement plans — Retirement plans are savings plans offering tax advantages to set aside money for your and your employees’ retirement funds.
Rent expenses — Rent is any amount you pay for the use of property you don’t own. You can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in the title to the property, the rent is not deductible.
Interest — Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes — You can deduct various federal, state, local and foreign taxes directly attributable to your trade or business as business expenses.
Insurance — Generally, you can deduct the ordinary and necessary cost of insurance as a business expense if it’s for your trade, business or profession.

This is just an introduction to a technical topic. Be sure to work closely with a qualified tax professional.

Insurers Must Now Cover COVID-19 Tests

February 2, 2022 by Teri Pough

According to a statement on the website of the Centers for Medicare & Medicaid Services, most consumers with private health coverage can go online or to a pharmacy or store, buy a test, and have their health plan pay for it, either upfront or after they submit a claim. “This requirement incentivizes insurers to cover these costs up front and ensures individuals do not need an order from their health care provider to access these tests for free.”

The policy’s effective date is January 15, 2022. The full details of the policy are available on the CMS website.

The government says it is “strongly incentivizing” insurers to set up networks of pharmacies and other retailers where people with private health coverage will be able to order online or walk in and pick up at-home, over-the-counter COVID-19 tests for free rather than go through the process of having to submit claims for reimbursement. Consumers are advised to check with their plan.

What are the maximums?

If a plan has not set up a network of retailers at which consumers can obtain a test with no out-of-pocket expense, consumers will be reimbursed the amount of the cost of the test. “For example, if you buy a two-pack of tests for $34, the plan or insurer would reimburse $34.” If the plan has set up such a network from which consumers can obtain a test with no out-of-pocket expense, they can still obtain tests from other retailers outside that network. In that situation, the maximum reimbursement is only $12, so it pays to find an in-network supplier if the insurer has one.

Insurers must cover eight free over-the-counter, at-home tests per covered individual per month. Consumers may buy all eight at once each month or one at a time. However, there is no limit on the number of tests, including at-home tests, that are covered if ordered or administered by a health care provider following an individualized clinical assessment, including for those who may need them due to underlying medical conditions.

In addition to making the announcement, the CMS has provided FAQs that clarify the new policy.

Can I Deduct That Business Meal?

January 19, 2022 by Jeffrey Silverberg CPA

Many changes have occurred with regard to meal and entertainment deductibility since the Tax Cuts and Jobs Act of 2017 (TCJA) and continuing with the Consolidated Appropriations Act of 2021 (CAA) signed into law on December 27, 2020.

In an effort to help the struggling restaurant industry during the COVID-19 pandemic, changes were made to allow a 100% deduction for business meal expenses incurred after December 31, 2020 through December 31, 2022. If meals are not provided by a restaurant, the deduction is still limited to 50%. On April 8, 2021, the IRS issued Notice 2021-25 to provide further guidance that a restaurant does not include businesses that primarily sell pre-packaged food or beverages not for immediate consumption.

On November 16, 2021, the IRS issued Notice 2021-63 to indicate that a taxpayer that properly applies the rules of Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance as being attributable to food or beverages provided by a restaurant.

What is Per Diem and how do we apply Rev. Proc. 2019-48?

A per diem allowance is an amount a business pays for lodging, meals, and incidental expenses incurred when traveling. The allowance is in lieu of paying employees for actual travel expenses.

The amount of expenses considered substantiated for each calendar day equals the lesser of the per diem allowance for that day or the amount computed at the federal per diem rate for the relevant location set by the U.S. General Services Administration.

No receipts are required to substantiate the deduction as long the employee provides the time, place, and business purpose of the travel for that day.

If the per diem allowance is only for meals and incidental expenses (i.e., there are no lodging costs) the amount considered substantiated is the same as above using the per diem allowance for meals and incidental expenses (M&IE).

A per diem allowance is treated as paid for M&IE only if:

The business pays the employee for actual expenses for lodging based on receipts submitted to the payor,
The business provides the lodging,
The business pays the actual expenses for lodging directly to the lodging provider,
The business does not have a reasonable belief that the employee will or did incur lodging expenses,
The allowance is computed on a basis similar to that used to compute an employee’s compensation (such as the number of hours worked, or miles traveled).

Businesses that pay employees on a per diem basis should review their procedures for compliance with Rev. Proc. 2019-48 so they can deduct their per diem payments to employees without limitation including 100% for meal costs.

Understanding Estimated Taxes and Penalties

Annual Reviews of Federal Withholding for Employees

2022 Payment Due Dates for Estimated Taxes

2022 Payment Due Dates for Estimated Taxes

Deducting Business Expenses: Separating Fact from Myth

Insurers Must Now Cover COVID-19 Tests

Can I Deduct That Business Meal?

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