Blog

Why a Large Tax Refund Might Not be Best

Posted by Abacus on April 3, 2017

Every year millions of Americans rush to file their income taxes as quickly as possible.  For most of them, their excitement isn’t centered on their desire to expedite their civic duty, but to collect their annual income tax refund from the IRS and state taxing authority.  So what’s the harm?  Here are a few reasons why it might not be the best to count on that huge refund at the end of the year.

Interest Free Loan to the government:  The most obvious reason it is best to limit an end of the year refund, is you are essentially giving an interest free loan to the government.  Think of it this way, you are paying the government through withholdings all year long just to get them back many months later through a refund.  Wouldn’t it be best for you to keep your money all year long?

At the mercy of the government for your refund:  Government agencies do not guarantee a quick turnaround of your refund request.  A perfect example is what happened in Missouri for the 2013 tax year.  As of mid-June 2014, there were over a quarter of a million income tax refunds pending for the 2013 tax year.  Why the delay?  The state did not have the cash to pay the refunds. 

Tax Fraud:  Tax return fraud is a problem that is only getting bigger every year.  Fraudsters obtain the Social Security Number of taxpayers and use it to file fraudulent income tax returns on their behalf.  The income tax return(s) always show a large refund, which is direct deposited into the fraudsters account.  While this normally doesn’t financially impact the taxpayer, it will slow down their legitimate tax refund by months.

For most people, the solution to ending the quest for the annual refund is adjusting their W-4 with their employer.  If you are married with two children, it is not likely that you need the same withholding as a single person with no dependents.  The IRS has created a tool to help you fill out your W-4, the free calculator can be located at:  https://apps.irs.gov/app/withholdingcalculator/.

If you would like to learn more about your tax refund, contact us at 417-823-7171 or at www.abacuscpas.com.

- John Helms, CPA, CFE


It’s the time of year to BE CAUTIOUS!

Posted by Abacus on March 22, 2017

One of an identity thief’s favorite times of year is tax season! This is the time of year we all need to be cautious with phone calls, emails, and mail that we receive. During this time everyone is filing tax returns and waiting on the IRS to be in contact with them about what we owe or what refund we may get. Most of us are afraid of the IRS, so we will do whatever they ask of us to avoid getting in trouble with them. So if they ask, we tend to give them whatever they ask for.  This includes giving bank account numbers, social security numbers, credit card numbers, etc. Criminals know this, so this is the time of year they use to act as the IRS agents and try to get us to give up our information. This doesn’t just extend to individuals, they target businesses as well. Many businesses and accounting firms have received emails that include attachments from a hacker trying to get ahold of information or emails asking payroll employees to give employee names and other information.

Here are a few tips to help avoid the scandals:

  1. Do not open any attachments on an email that you are uneasy about.

    • If you receive and email from a sender that you have never had contact with and there is an attachment…DO NOT OPEN IT! This does not only extend to people that you are not in contact with though. If you receive an email from a coworker or friend but it’s unlike anything that they have ever sent you, be aware also. This is a time to use your instincts and be very cautious. Contact your IT department or contact the sender if you can to find out if the email is real or a scam.

  2. If the IRS emails or calls you it is a scam.

    • The IRS does not email or call. All of their information is through mail. Never give information over the phone or by email. If you do you are giving it to an identity thief. However, this does not mean that if you receive a piece of mail from the IRS you automatically respond without caution. If you receive a piece of mail from the IRS asking for information, make sure you call the IRS about the piece of mail that you have received to make sure they are needing this information. They are happy to let you know if what you have received in the mail is from them or a scam.

  3. If you are a business owner, have an IT department ready to handle scam emails.  

    • If you own a business then the best protection to have is an IT department that will help you shut down hackers if email attachments are accidently opened. This can save you time and money if a hacker is successful, your information can be compromised and then a recovery process will have to begin. This results in losing hours or days of work.

If you follow these tips and your instincts, they can help prevent you from being a victim of the identity theft scandals that are going around our country during this time. If you have any questions or concerns about identity theft during tax season, contact us at 417-823-7171 or at www.abacuscpas.com.

-Bailey Cannon


What is a Like Kind Exchange

Posted by Abacus on February 20, 2017

What is a Like Kind Exchange?

At Abacus CPAs, we often are asked by our clients if there is a way to reduce the tax gains that occur when an asset is sold. They often ask about a like kind exchange. But everyone has a little bit of a different idea as to what that is. Through our team of tax professionals, Abacus CPAs is able to advise our clients on the steps needed to ensure that a like kind exchange is handled properly so that our clients are able to reinvest more of their money back into their company.

What is a like kind exchange? What does a like kind exchange do?

When someone mentions a like kind exchange, they are generally referring to exchanging old business property for new assets of similar use as allowed by the IRS Code, Section 1031. A § 1031 like kind exchange defers the taxable gains that an owner would receive if they sold the property by reducing the basis of the new property by the amount of the taxable gain.  The old property is not sold tax free; rather, the taxable gains are deferred until the new asset is sold.

What property qualifies? What are asset classes? What does like kind mean?

To be eligible for a § 1031 like kind exchange, the old and new property must both be tangible property held for use in a trade or business or for investment.  This applies to both real and personal property.  Items that are inventory or held for resale are not eligible for a like kind exchange.   Once the old property is sold, there is a 45 day window to identify the replacement property of like kind, and then a total of 180 days from the day of the sale to acquire the replacement property.

The relinquished and replacement property must be of the same kind of property.  Like kind property is defined as being either of the same Asset Class or Product Class.[1]  An asset class is best defined by the IRS through Revenue Procedure 87-56 as having the same depreciable life, depreciation method, and depreciation convention.  Revenue Procedure 87-56 has detailed lists of asset classes that help categorize just about any property that a regular business would come across.  However, there are times when a particular piece of property does not fit into any of the asset classes mentioned; that is when the North American Industry Classification System (NAICS) is used to determine the Product Class for the piece of property.  If the two pieces of property can be shown to both fit in the same four digit business activity, then the properties are generally considered to be of like kind.  To qualify for a like kind exchange, the assets only have to be of the same asset class or the same property class, not both.

Why would I want to do a like kind exchange?

A § 1031 exchange would allow you to use the pre-tax proceeds from selling a business asset to purchase another business asset, allowing you to immediately reinvest more money back into your trade or business. 

For example, what if Company A sold a fully depreciated machine for $100,000 and wanted to use the proceeds to help purchase a new like-kind machine that cost $200,000? Without a § 1031 like kind exchange, Company A would have to pay income tax on the gain of $100,000.  At a maximum corporate income tax rate of 35%, Company A would have to pay tax of $35,000 on the gain as part of the current year income taxes.  That new machine now cost Company A $235,000, of which they could only depreciate $200,000.  Consider this instead: Company A sold the fully depreciated machine for $100,000 to help purchase a $200,000 new machine through a § 1031 like kind exchange.  The gain, instead of being recognized in the current year, would be used to reduce the basis of the new machine and not trigger a taxable event in the current year.  This gain is not erased, simply deferred to when this new machine is sold in the future.  Now cost of the machine to Company A is $200,000, with a depreciable tax basis of $100,000.

Why would I not want to do a like kind exchange?

Not all property is sold for a gain. If the property is sold for a loss, then it would benefit the company to have the loss recognized in the current year to reduce taxable income.  Also, the cost of ensuring that a § 1031 like kind exchange is done properly might outweigh the benefit of deferring the gain and paying the tax. 

What would disqualify a like kind exchange?

There are several rules and guidelines that must be followed when you are conducting a like kind exchange and if they are not followed precisely, could disqualify the entire § 1031 like kind exchange.  

The most common mistakes are:

  • Not using a Qualified Intermediary to hold the proceeds from the sale of the relinquished property and purchase the replacement property,

  • The entity selling the old property and purchasing the new property not being the same entity.

  • The two pieces of property not being of the same general asset class or NAICS property class.

  • Not identifying the replacement property in 45 days or the exchange taking longer than 180 days.

  • The seller taking possession of the proceeds from the sale before the new property is acquired.

  • Selling the replacement property too soon after the exchange, creating doubt as to the property being used in a trade of business or being held for investment.

Due to the complex nature of § 1031 like kind exchanges, professional legal services should be obtained to assist you during the process.  If not, you could inadvertently trigger a taxable event that adds a large tax liability to your current year taxes that you were not planning on. Contact our tax professionals at Abacus CPA’s to help you with any future § 1031 like kind exchanges you have!

- Sam Shafer 

 

 



[1]Reg § 1.1031(a)-2. Additional rules for exchanges of personal property


Home Away From Home

Posted by Abacus on January 31, 2017

Home is Not Always Where the Heart Is

For Federal Income Tax purposes, when you are traveling away from home, you are able to deduct travel expenses that are ordinary and necessary for your job or business.[i] There are several key words in that sentence that are potential pitfalls for the taxpayer. What is a “necessary” travel expense? What is considered “ordinary”? What is my “job or business”? What is considered “away” from home?  What is “home”? As we will see, “home” is actually defined as “tax home”, and has a different meaning than what you might think.

Internal Revenue Service Publication 463 has defined your tax home as the place where you conduct your principal business or employment activities.[ii]  Most work near where they live, so this does not create much of a problem.  However, some work a long distance away from their families for a prolonged amount of time. Their tax home could very well be in a different state.  If you have a job, business, or employment that makes up a majority of your income and you are required to be in that certain location to perform the work longer than a year, then that location is your tax home.  For example, if you lived in Kansas City, Missouri, but the job you worked at all year was in Olathe, Kansas, then for Federal Income Tax purposes, Olathe, Kansas, is your tax home, even though you identify yourself as a resident of Missouri on your state income tax return.

How much of a distance do you have to travel to be considered “away” from home? 

This measurement considers a combination of how long you are outside the general area of your tax home and if the work is demanding enough to require you to rest while you are away.   Traveling from St Louis, MO, to Memphis, TN in one day and back would not be considered away from home if you did not need any periods of rest to continue on with your work. However, while in Memphis, if your job requires you to rest and sleep before continuing on, then that would generally be considered as away from home.  In this instance, you would be able to deduct the cost of lodging, transportation, half the cost of meals, and any other necessary and ordinary expenses related to the business trip.[iii]

What if you do not have a principal place of business? 

If you do not have one place where a majority, or substantial amount, of your business or employment is conducted, then you may choose your residence as your tax home if you maintain that residence on a continuous basis while you are away.  You will need to prove support by providing receipts and documents that show you have made regular payments to someone for the use of the home (think mortgage payments, rent payments, or a written agreement between family/friends with check receipts). You will also have to be able to verify that you have ties to the community through social, family, or church connections in order to show that you consider that area as your true home while you are away.  Otherwise, you are considered as having no primary residence and your tax home is wherever you are at the time.  If your tax home is wherever you are, then you can never be away from home, and therefore cannot deduct any travel expenses or per diem while away from home.[iv]

If you ever have doubt as to what constitutes your tax home for Federal Income Tax purposes, consult Abacus CPAs to help you make the right decision based on the facts of your situation.  Without the proper documentation and support for your decision, the IRS could disallow your travel business deductions on your Federal Income Tax return.  This would result in a larger tax bill, with late payment penalties and interest added on.  Also, if the deduction was above a certain threshold, an additional accuracy-related penalty could be added as well. In order to prevent this, contact one of our tax professionals in Springfield, Branson, or Lee’s Summit, Missouri. Give us a call at 417-823-7171 or visit our website at www.AbacusCPAs.com.

 



[i] IRS publication 463

[ii] IRS publication 463

[iii] IRS publication 463

[iv] Howard v. Commissioner, 2015-38 T.C.M [2015 RIA TC Memo ¶2015,38]

 

- Sam Shafer


Audit FAQ's

Posted by Abacus on January 23, 2017

Audit FAQ's


Do I need an attorney or CPA to represent me or my business?

Legally speaking, no.  Individuals and Schedule C businesses are legally able to represent themselves.  However, an attorney would be necessary if a tax matter relating to a business entity is being litigated through a court or commission.   If your business is an LLC, Partnership, S-Corporation, or C-Corporation, these business structures are deemed to be separate legal entities from their owners, therefore, any litigation will have to be done by a member of the bar in the jurisdiction in which the litigation is occurring.  

That said, during the audit process, hiring a CPA or tax attorney is often the best course of action.  With the federal tax code rivaling the encyclopedia in content, audits can uncover technical issues.  Abacus CPAs, LLC recommends a CPA or tax attorney to help guide you through an audit.

What if I agree with the auditor’s findings & adjustments but cannot pay the new balance?

If you have an additional tax due pursuant to an IRS or State audit, you may enter into the same payment plan arrangements available to the public.   In the State of Missouri, the standard payment plan is an optional 10% down payment at initiation with the total balance due over 24 months.   The IRS will allow an additional 120 days to pay a balance due without a fee, although the balance would still be subject to interest and penalties.  If you believe it will take longer than 120 days to pay an IRS tax balance, you may qualify for an installment agreement.  Further information on the IRS’s installment agreement can be found at the IRS’s website under Topic 202 - Tax Payment Option. A CPA with Abacus CPAs can also help you with this process

Penalties and Interest

Interest is usually unavoidable, with interest rate changes occurring monthly, quarterly, or annually depending on the tax jurisdiction.

Failure-to-pay penalties are imposed when statutorily allowed.  Most tax authorities must show some level of negligence on the taxpayer’s part to impose penalties.  Most taxing authorities feel that unorganized records and lack of basic controls over your business is enough to impose these penalties.  The important thing to note here is that the burden of proof is on the auditor to show the penalty should be imposed.   

Failure-to-file penalties are the second most severe and the most easily avoidable – just file your returns on time.   A tax return filed but not paid is penalized significantly less than an unfiled return.  These penalties can be as much as 25% of the tax due.

Fraud Penalties are often the most severe and are applied on top of all other penalties and interest.   If a taxing authority is pursuing a fraud penalty, you should seek guidance at Abacus CPAs from a tax attorney.

What are these tax relief companies I keep seeing on TV or the Radio?

Companies advertising tax relief should be approached with extreme caution.   The FTC and the IRS have begun to crack down on fraudulent transactions.  A FTC press release cautions, “Tax relief companies use the radio, television and the internet to advertise help for taxpayers in distress. If you pay them an upfront fee, which can be thousands of dollars, these companies claim they can reduce or even eliminate your tax debts and stop back-tax collection by applying for legitimate IRS hardship programs. The truth is that most taxpayers don't qualify for the programs these fraudsters hawk, their companies don't settle the tax debt, and in many cases don't even send the necessary paperwork to the IRS requesting participation in the programs that were mentioned.”

A link to the full release is below and also contains information to report problems experienced with tax relief companies.

CPAs, EAs (enrolled agents) and Attorneys can assist with issues relating to delinquent tax matters and are almost always a better option than tax relief companies.

https://www.consumer.ftc.gov/articles/0137-tax-relief-companies

Common sense tips to avoid an audit

Many analytical procedures are applied to file tax returns to determine a probability of non-compliance, but one of the easiest way to avoid an audit is always to file your tax return on time and pay any balance due in full.   Most analytical models place a high weight on non-filers and accounts with balances due.

Auditor Budget and Findings per Hour Metrics

First off, auditor performance metrics are real.  While generally not directly related to auditors’ performance evaluation, metrics such as days an audit is “open”, hours spent per audit, and findings per hour are tracked.  This puts the IRS and State’s Departments of Revenue in a dichotomy.  Above all, regulatory authorities should be auditing for compliance with tax law, not for additional tax revenue, meaning they should be looking for refund opportunities in an equal vein as additional tax revenue, making findings per hour a particularly troubling aspect.  If you are under audit, it’s important to be mindful of these conflicts of interests and potential threats to a fair audit.

Abacus Experience in Tax Disputes

Abacus CPAs is a full service CPA firm able to provide guidance through every phase of IRS and State/Local audits.   Abacus CPAs will work with you and develop a plan to minimize the impact of an audit.   We can act as an advisor if you prefer to handle the bulk of the audit demands on your own or act as your representative so you rarely, if ever, see or speak to the auditor.   Abacus CPAs has both Federal and State tax experts available to answer any questions you might have. Contact us at 417-823-7171!

 

-Matt Clark, CPA

 

 


      © 2017 Abacus CPAs. All Rights Reserved. Login.