‘Tis The Season To Be Taxing

This time of year brings with it some of the busiest months of our lives, and it can be easy to get caught up in it all. However, as you’re getting the turkey ready and shopping for presents, it is important to remember to finish the year well in your own business. 

Part of finishing strong is preparing and reviewing your financial statements to reflect on what has happened, prepare for the next year, and possibly take advantage of some tax breaks that you need to implement before December 31st. Of course, we would love for you to come and see us before the year ends to identify the areas unique to your business and/or personal situation, but whether you come see us or not, here are a few items that we see year after year that may affect you:

One area of opportunity that requires more precise implementation is how health insurance premiums are handled and reported for shareholders who own more than 2% of the company. In order to receive the full tax benefit of these premium payments, they must be reported correctly not only on the financial statements, but also on the W2’s for the tax year. If we handle your payroll tax reporting, it is imperative that we know how much you/your company paid for health insurance for these owners specifically, as well as any other employees. If someone else handles your payroll tax reporting, you must let them know how much you/your company paid for health insurance for those who own more than 2% of the company and all other employees.

Another area to be aware of is how distributions are handled when the company has more than one owner. If the company has two owners, one owning 80% of the shares (owner A) and the other owning 20% (owner B), then every dollar distributed needs to be split along the same proportions. This means that for every $100 taken out as a distribution, $80 goes to A and $20 goes to B. Also, if A wants to withdraw $40, then B also needs to withdraw $10. Accordingly, if the company has two owners at 50% each, distributions must be split equally. If you let us take a look at you financials now, we can help you determine if you are in compliance regarding distributions.

We have noticed that the IRS is increasingly performing audits as Correspondence Audits. This means that they will send a letter requesting documentation or substantiation of certain deductions or expenses. If you cannot produce sufficient evidence, they may take further action to deny those deductions and incur tax, penalty and interest to you and your business. There are couple of areas that can end up becoming those traps for businesses.

One business expense the IRS has been putting under increased scrutiny is automobile expenses. If you are using a vehicle for business purposes, but it is in your personal name, there are some minimal records you need to keep. First, if you are taking mileage for your expenses, the IRS requires you to keep a log of business miles driven and personal miles driven. If you have not kept a mileage record for the current year, let us help you in creating a log so you can take the expense properly without risk of audit.

Also under increasing levels of scrutiny is the expense of meals and entertainment. This area (especially meals) is one that is not only misunderstood, but often misused (not by any of you, of course!). For a meal or entertainment event to be treated as a business expense (even if the business pays for it), it must be primarily for a business purpose. For instance, the majority of discussion during a meal could be about ways to increase sales over the next month. A round of golf with a client could be spent discussing the differences in the latest iteration of a product. Even if a meal or entertainment event is spent with clients or coworkers, if it is not for a business purpose, it will be disallowed under IRS scrutiny. There are a few best practices you can implement in order to ensure your meals and entertainment expenses will stand up under audit. Document what you did, who you met with, what you discussed and the total spent. This does not have to be an extensive breakdown of each minute, but it needs to be enough to substantiate the expense for a legitimate business purpose.

Another item to be aware of is a new law coming into effect in January of 2017. All businesses are required to have all of their W2’s and 1099’s filed by January 31, 2017. This means that you must be prepared as soon as the year ends to send all the necessary information to us or your payroll tax preparer for processing. The necessary information includes (at minimum) names, addresses, social security numbers, total wages and/or other payments for each person who will receive a W2 or 1099 from you for 2016.

If you have any questions about any of these items, please call us and we will be happy to discuss them with you.

Even if you have no questions about the above items, or they do not apply to you, come meet with us before the end of the year to determine any potential areas of opportunity or concern that may be unique to your business.

Happy Thanksgiving and Merry Christmas from all of us here at Heritage!

-Heritage Accounting and Tax Services

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