Author: Traci Fitting

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To Extend or Not to Extend? (Part 2)

This is the second installment of my two-part blog series discussion on tax return extensions. You can read my first article here To Extend or Not to Extend? (Part 1) in which I discuss some of the benefits of extensions. In this blog, I will focus on business tax return extensions and highlight potential benefits of filing an extension.

Important Dates

The due date for calendar year partnership (Form 1065) and S-corporation (Form 1120-S) returns is March 15th. The due date for C-corporation (Form 1120) returns is April 15th.

Extending Business Returns

As with personal returns, the IRS allows a six-month extension for business returns. An extension for a business return is requested with Form 7004, which is filed with the IRS, either electronically through e-filing, at the IRS website, or on paper through the mail. The extension must be filed on or before the original due date of the return. The extended due date for partnerships and S-corporations is September 15th and October 15th for C-corporations.

Please note that the extension is only for the tax return, not for any taxes due.

Partnerships and S-corporations are flow-through entities and do not pay tax at the entity level. C-corporations, on the other hand, do pay tax at the entity level. Any tax due is still due to the IRS by the original due date of the return and can be paid with the extension form. When filing an extension on paper through the mail, we highly recommend that you mail it certified so you have proof that you mailed it on time.

Benefit of Extension

Extensions for business returns also share the benefits of an extension for personal 1040 tax returns mentioned in part one of this blog series. An additional benefit is the time frame of the due date being extended. January 1st through April 15th is a very busy time for tax professionals.

1099 filings are due by January 31st, certain farm returns are due March 1st, non-extended 1065 and 1120-S tax returns are due March 15th, and non-extended 1120 tax returns and personal 1040 returns are due April 15th. In addition, personal 1st quarter estimated payments are also due April 15th.

This puts a heavy strain on tax professionals to be sure deadlines are met. By extending the due date of the business tax returns, this allows tax professionals to have more time to analyze tax situations and make the best decisions on items within the tax return.

As always, we recommend you consult with your tax professional at Ketel Thorstenson, LLP on the right course of action for your business.

November 26, 2024
| Traci Fitting
KT Insights
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To Extend or Not to Extend? (Part 1)

When it comes to tax deadlines, filing tax returns in a timely manner is very important. Some of the more common deadlines that people are familiar with are:

  • March 15 Deadline – Partnership Form 1065 & S Corporation Form 1120-S business returns
  • April 15 Deadline – Personal Form1040 & Corporate Form 1120 returns.

Missing these deadlines can lead to very expensive penalties. But meeting these original deadlines can also be difficult for many reasons, such as the bookkeeping for a business not being completed or not receiving necessary forms and schedules needed to file an accurate tax return.

If you are facing a similar delay, your tax professional at KT may recommend filing an extension for your tax return(s).

What is an Extension?

An extension is a form that is filed to do just what the name implies: extend the original due date for the filing of your tax return(s). If proper paperwork is filed with the IRS by March 15 (Form 1065 and Form 1120-S) or by April 15 (Form 1040 and Form 1120), the IRS will allow the extended filing deadline to be September 15 and October 15, respectively.

Note – There is no extension of time to pay taxes, only to file taxes.

Some people get nervous when they hear the word “extension.” They think it will put them front and center on the IRS’ radar (i.e., raise a red flag), or it will mean much more work for both the preparer of the tax return and the taxpayer than not filing the extension. On the contrary, there are several reasons for filing for an extension of time to file a tax return.

Benefits of Extension

One benefit of an extension is cash flow. For example, let’s say you file a Form 1120S tax return, and you choose to make a $10,000 simplified employee pension (SEP) retirement plan contribution on behalf of yourself the owner and/or the employees. Without an extension, the contribution is due no later than the original due date of the tax return, March 15.

Let’s also assume you have property taxes due April 30, sales taxes due on April 20, and your personal tax return payment due by April 15. The SEP contribution could hamper cash flow, so by filing an extension, the due date of the tax return and the SEP contribution are moved to September 15. This gives you extra time to put money in the retirement plan while still enjoying the benefit of the income tax deduction for the prior tax year.

Another benefit is that an extension allows for additional time for tax planning to see if the SEP contribution noted earlier is wanted or needed or if prior year expenses should be accelerated or delayed. Tax laws affecting your current tax return can also change during the extension period, especially in the 2026 tax year when it’s possible there will be several tax law changes occurring.

From a client service standpoint, the January 1 – April 15 time period is very busy for us tax professionals. An extension gives us the time to provide the tax advisory services that go above and beyond the process of preparing your tax return(s).

And for businesses, with 1099 filing deadlines right after the first of the year, filing an extension for a business helps ease the stress of tax filing deadlines during tax season.

As you can see, filing an extension has many benefits and very little, if any, negative consequences. However, we recommend consulting with a tax professional at KT to discuss if filing an extension is the right course of action for you.

October 1, 2024
| Traci Fitting
KT Insights
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How Much is that Business Meal Worth?

Restaurant meal expenses incurred by a business in connection with clients and employees are 100% tax deductible for 2022.  Enacted in December 2020 as part of the Consolidated Appropriations Act, this 100% deduction applies to years 2021 and 2022 only.  The purpose of this law was to help the restaurant industry that was badly damaged by the pandemic.

However, all good things must come to an end.  On January 1, 2023, the deduction (for most meals) reverted to only being 50% deductible, as defined in the Tax Cuts and Jobs Act of 2017. Entertainment expenses are still nondeductible.

To qualify as a tax-deductible expense, business meals must meet certain requirements.

  • The expense must be ordinary, necessary, and paid or incurred during the tax year.  The IRS defines this as expenses that are helpful and appropriate to your business, but not necessarily indispensable.
    • Example: Taking a client out for dinner to discuss business matters. The business purpose must be documented for every business meal, but you do not need to keep the actual receipt if the meal is under $75.
  • The taxpayer, or an employee of the taxpayer, must be present at the meal.
    • Example: An employer supplying breakfast to hard-working tax staff on Saturdays during tax season.
  • The expense must not be lavish or extravagant under the circumstances. The IRS does not define what constitutes lavish or extravagant, but some common sense does come into play. In the case of an audit, the IRS will consider the facts and circumstances to determine if you spent too much on a meal. 

Be sure to keep receipts and document on the receipt who was present at the meal and what was discussed.  These will be your proof of expenditure in the case of an audit.  And be aware that different types of meal expenditures will be subject to varying rates of deductibility.

Entertainment expenses, such as concert tickets, golf games, hockey games, etc., are not deductible even if you are taking a client. However, if food is involved and detailed separately on the receipt, that part of the expense might be deductible. Business meals with clients, and office snacks and meals are 50% deductible.

Meals that are still 100% deductible in 2023 and beyond:

  • Food served at company-wide parties.
  • Food and beverages offered on the business premises primarily for the benefit of employees.
  • Food and beverages given to the public—such as free snacks at a car dealership.
  • Expenses directly related to business meetings of employees, stockholders, agents, or directors.

Meals that are 80% deductible in 2023 and beyond:

  • Meals for employees subject to the U.S. Department of Transportation hours of service limitation.

Please be sure to consult your tax advisor at Ketel Thorstenson, LLP regarding this complex issue.

February 14, 2023
| Traci Fitting
KT Insights
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The Changing Rules of Charitable Giving

Donating to qualified charities such as churches and other 501(c)(3) non-profit organizations is a great way to support your community and organizations that help others.  The added benefit of charitable giving is when it leads to a tax deduction, too!

For 2022 and future years, the 60% of adjusted gross income (AGI) limit is back in effect.  This means that if you itemize and claim qualified cash charitable contributions, the current year deduction is limited to 60% of your AGI.  In other words, if your AGI is $100,000, then the most you can claim as a current year deduction is $60,000.  Any amount over that is carried forward for five years.

For tax years 2020 and 2021, under the CARES Act, qualified cash charitable contributions were allowed up to 100% of AGI.  In addition, a deduction was allowed for certain contributions up to $300 or $600, depending on your filing status.  This deduction was taken in addition to the standard deduction and you did not have to itemize your deductions to claim this amount.  Both provisions expired after 2021.

Since you must now be able to itemize deductions to see a tax break from your charitable giving, here are couple tips to help you get the most bang for your charitable buck:

  • Consider bunching – Combine donations you would normally make over multiple years into one year, itemize that year and take the standard deduction the next year.
  • Consider making a Qualified Charitable Distribution (QCD) – If you are age 70 ½ or older, you can transfer up to $100K from your IRA directly to a qualified charity. The distribution essentially equates to a 100% above-the-line tax deduction as it is not included in taxable income.

Since every tax situation is different, be sure to ask your tax expert at Ketel Thorstenson about how you can maximize the tax benefits from your charitable giving.

February 7, 2023
| Traci Fitting
KT Insights
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Tax Tips: Taxability of Unemployment Compensation

Tax law is constantly changing.  Whether it is changing amounts of deductions to index those items for inflation (i.e. – the standard deduction) or sweeping tax law changes that radically affect numerous items, your tax return may vary from year to year.  Some changes are permanent, and some are temporary.

One such temporary change to an item that you may have noticed is the taxability of unemployment compensation.  Due to The American Rescue Plan Act of 2021, taxpayers that received unemployment compensation in 2020 enjoyed the benefit of the first $10,200 of unemployment compensation per person being excluded from income.   To qualify for the exclusion, your 2020 adjusted gross income (AGI) needed to be less than $150,000.  This threshold amount was the same for all returns, regardless of filing status.  The Act was signed into law on March 11, 2021, midway through the tax season, and was made retroactive back to January 1 of 2020.  Taxpayers that had already claimed their unemployment compensation as fully taxable were instructed by the IRS to do nothing as they would implement the change and refund any money due.

This was a one-year exclusion only.  So, for 2021, we are back to unemployment compensation being fully taxable, as it had been in years prior to 2020.  To offset the tax on unemployment compensation, you may elect to have federal withholding taken out of your unemployment checks and sent to the IRS as a prepayment of your taxes.  You then get credit for that withholding on your tax return when you file.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

March 29, 2022
| Traci Fitting
KT Insights
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Tax Tips: Stimulus Payment and Your Tax Return

As we prepare to file our 2021 income tax returns, one question that may come up from your tax professional that you will need to be prepared for is:  How much stimulus payment did you receive in the spring of 2021?  The stimulus payments are part of the Recovery Rebate Credit that is authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

 Unlike the stimulus payments for 2020 that went out two times, Spring of 2020 (EIP I) and January of 2021 (EIP II), most individuals or families received just one payment that was distributed in March 2021.  The maximum amount a person or family could receive for 2021 was $1,400 per qualifying individual.  Another difference between the 2021 and the 2020 payments was the 2021 payments could include qualifying dependents over age 17.  Payments were issued by direct deposit, physical check, or by EIP Card (similar to a prepaid debit card).

The payment will need to be reconciled on your 2021 personal income tax return.  It was a prepayment of a credit that you can claim for 2021.   For some people, the payment was based on 2019 tax filings and for some, it was based on 2020 tax filings, depending on which was available to the IRS at the time the payments were being issued.

For your 2021 tax return, the credit will be calculated, in a nutshell, as follows:  Determine what credit you qualify for based on your actual 2021 information, such as income and number of dependents claimed, then subtract what you actually received for your payment (spouses may have to add their totals together).  If the credit is more than what you received, you will claim the balance of the credit on your 2021 tax return.  If you received more than you were entitled to, it is a gift from the government at that point.  If you received exactly what you were supposed to, no further action is necessary.

For example, if you received $1,400 in March of 2021 and after calculating the credit, you were supposed to receive (based on actual 2021 information) $2,800, maybe because of claiming a dependent every other year, you will claim a $1,400 tax credit on your 2021 Form 1040.

Please note that if part of your stimulus was taken to pay a debt that was past due federal income tax, you are still considered to have received the money, even though it went to pay a debt on your behalf.  If you claim the wrong amount of stimulus payments the IRS will adjust your tax return for you. 

Per the IRS website, you should have received IRS Notice 1444-C in the Spring when the first payment went out and Letter 6475 in January 2022, letting you know the amount of the EIP III received.  Also, per the IRS website, if you have an account on IRS.gov (or set one up), you should be able to visit IRS.gov/account to view the amounts of the payments you received.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

February 8, 2022
| Traci Fitting
KT Insights
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Stimulus Payment and Your 2020 Tax Return

As we prepare to file our 2020 income tax returns, one question that may come up from your tax professional that you will need to be prepared for is:  How much stimulus payment did you receive in the spring of 2020 and in January of 2021?  The stimulus payments are part of the Recovery Rebate Credit that is authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  

Both of these payments will need to be reflected on your 2020 personal income tax return.  They were a prepayment of a credit that you can claim for 2020.   For some people, the payment was based on 2018 tax filings and for some, it was based on 2019 tax filings, depending on which was available to the IRS at the time the payments were being issued.

For your 2020 tax return, the credit will be calculated, in a nutshell, as follows:  Determine what credit you actually qualify for based on your actual 2020 information, such as income and number of dependents claimed, then subtract what you actually received for both payments.  If the credit is more than what you received, you will claim the balance of the credit on your 2020 tax return.  If you received more than you were entitled to, it is a gift from the government at that point.  If you received exactly what you were supposed to, no further action is necessary.

As an example, if you received $1,200 in May of 2020 and $400 in January 2021 and after calculating the credit, you were supposed to receive (based on actual 2020 information) $3,000, you will claim a $1,800 tax credit on your 2020 Form 1040.

Please note that if part of your stimulus was taken to pay a debt, such as delinquent child support, you are still considered to have received the money, even though it went to pay a debt on your behalf.  If you claim the wrong amount of stimulus payments received, the IRS will be adjusting your tax return for you.

Per the IRS website, you should have received IRS Notice 1444 for the first payment and Notice 1444-B for the second one.  Also per the IRS website, if  you have an account on IRS.gov (or set one up), you should be able to visit IRS.gov/account to view the amounts of the payments you received.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

February 9, 2021
| Traci Fitting
KT Insights
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The Ever Changing Mileage Rate

If you have used or plan to use your vehicle for business, charitable, medical, or moving (BCMM) purposes, you may qualify to claim expenses for your vehicle.  Taxpayers have two available options:  1) Actual Method– track all of your vehicle expenses, such as fuel, insurance, repairs, etc. and keep all receipts related to these expenses .  You are allowed to deduct actual expense based on the ratio of BCMM miles to total miles or 2) Mileage Method– track your BCMM mileage and multiply that by the appropriate IRS approved mileage rate.  If you choose to use the mileage method, the rates change every year and typically are announced in late December for the upcoming year.  The IRS also requires written records of the mileage in order for you to claim a deduction using either method.

If you are using your vehicle for business purposes, you may deduct 53.5 cents per qualified, unreimbursed business mile for 2017.  This will be for mileage incurred for business purposes, such as errands to pick up business supplies, mileage for going from one job or job location to another in the same day, or visiting customers.  The mileage must have a business purpose.  However, commuting from your tax home to your work location is not deductible mileage.

If you are a business owner reimbursing employees for mileage you can reimburse them at the current rate (or less, if you choose).  If you choose to reimburse at a rate higher than the standard rate, then the excess mileage amount should be included in your employees’ W-2 as a taxable fringe benefit.

If you are using your vehicle for charitable purposes, you may deduct 14 cents per mile for 2017 for each qualifying, unreimbursed mile incurred on behalf of the qualified charitable organization.  To qualify, there cannot be a significant element of personal pleasure, recreation, or vacation in the travel.  The mileage must be directly connected with the volunteer service(s) you performed if you are reimbursed for your mileage at a rate greater than 14 cents per mile, the difference should be reported as income on your personal income tax return.  As an example, if the charity were to reimburse you at the rate of 20 cents per mile, then 6 cents per mile would be added as income on your personal income tax return.  On the other hand, if you were reimbursed 10 cents per mile, then your deduction would be 4 cents per mile.

If you are a representative of a qualified charity that chooses to reimburse its volunteers, you should do so at the standard rate.  You are not responsible for issuing any 1099 to report reimbursed expenses. We do highly recommend that you have the volunteer submit written records for reimbursement.

If you use your vehicle in connection with medical or moving miles, then you may deduct 17 cents per mile for each qualifying, unreimbursed mile incurred for 2017.  To qualify, medical mileage must be incurred primarily for, and essential to, medical care for you and your spouse, as well as those you claim as qualifying children or qualifying relatives.  Moving expense mileage is allowed for each car driven from your former home to your new home (1 one-way trip each), provided you meet all the tests for claiming moving expenses.

The above summary is a brief overview of the different mileage rates available.  The rules governing the ability to claim deductions for mileage can be quite complex, depending on your tax situation.  For further, in-depth discussions regarding this information, please contact one of our qualified professionals at Ketel Thorstenson, LLP.

September 19, 2017
| Traci Fitting
KT Insights
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Roth IRA – The Right Choice For You?

As I talk to people Traci Fittingabout retirement planning and their income taxes, one option that comes up frequently is Roth IRAs.  The Roth IRA was established by the Taxpayer Relief Act of 1997.  Annually, Congress evaluates the amount a taxpayer can contribute, but the underlying rules governing contributions (monies put in) and distributions (monies pulled out) have remained unchanged.

The maximum Roth contribution that can be made for 2017 is $5,500 for those under age 50.  For those 50 and older, the maximum amount is $6,500, due to a special catch-up provision.  These amounts are subject to limitations based on income levels.  For example, a single individual under 50 years of age can contribute up to $5,500 if her Modified Adjusted Gross Income (MAGI) is under $118,000.  If her MAGI falls between $118,001 and $133,000, she can only contribute a percentage of that amount.  And once her MAGI reaches $133,000, she is ineligible to contribute at all.

Contributions to a Roth IRA must be made by the due date of the tax return, without regard to any extensions-meaning April 15 Contributions to a Roth IRA are nondeductible.  This means they cannot be used to reduce taxable income on your current tax return.

The beauty of the Roth IRA is the potential for nontaxable distributions.  If you are 59½ and have had the Roth IRA for at least 5 years, then there is never income tax or penalty on withdrawals.  If distributions occur prior to age 59 1/2, you may pay tax and get penalized if you withdraw more than what you originally put in.  The good news is that withdrawals from your Roth IRA are considered to be from your contributions first and from your earnings second.  As such, there is never income tax or penalty upon withdrawing your original contributions.

Also, you can convert regular IRAs to Roth IRAs at any time without any AGI limitations, but you may have to pay income tax on the conversion. This planning tool is particularly useful for years in which a taxpayer would otherwise have a net operating loss.

But perhaps the best feature of a Roth IRA is that there are no minimum distribution requirements at age 70.5.

Is the Roth IRA the right choice for you?  This overview provides the basics as a starting point, but the rules can be quite complex, depending on your tax situation.  Please consult one of our tax professionals at Ketel Thorstenson, LLP for further assistance.

 

May 25, 2017
| Traci Fitting
KT Insights
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The Dreaded IRS Letter – What To Do

Something all my clients have in common is absolute dread when a  letter from the Internal Revenue Service arrives.   For many, the letter causes, at a minimum, great concern, and on the other end of the spectrum, actual anxiety.  Unfortunately, the letters tend to arrive on a Friday and by the time the taxpayer contacts me on Monday, they have had a whole weekend to panic.  Fortunately, a lot of the letters are not difficult to clear up.  They definitely can, however, be very time consuming and can require persistence and patience. The professionals at Ketel Thorstenson, LLP have the persistence, patience, and knowledge necessary to take care of whatever issue needs to be resolved.

So, you may ask, “Why did I receive an IRS letter?” and “What should I do if I receive an IRS letter?” There are a lot of different reasons why someone might receive an IRS letter.

First and most common, the IRS thinks there has been a misreporting of an item of income.  The IRS receives copies of all tax forms that are filed on behalf of an individual, such as W-2 income reported by an employer or non-employee compensation reported on a 1099-MISC.  The IRS then performs computerized data matching, where they cross check the information they received with the tax return that is filed.  The IRS tends to look for these reported items in a certain place on the tax return, and if the item has been reported in a different place, the IRS computers will not catch it.  They simply assume the information was not reported at all and generate a CP2000 notice they send to the taxpayer.  There is probably a very good reason why the income was reported in a place other than where the IRS expected it to be and usually a well-written response to the notice will take care of the matter.

Another reason someone might receive an IRS notice is if a tax return was not filed.  As mentioned previously, the IRS receives copies of tax forms.  If a form that the IRS receives reports enough income and the IRS doesn’t receive a tax return reporting that income, they will calculate what they assume your tax should be and will simply send you a notice of tax due.  They will not take into account any deductions against the income that you may be entitled to and they will typically file the return using the worst filing status.  For example, if you are self-employed and receive a 1099-MISC showing income of $100,000 and you have deductions of $60,000 to subtract from the income, you need to file a tax return to report those deductions to the IRS.  If you do not file a tax return, the IRS will assume your net income is $100,000 rather than $40,000.  Another example would be if you qualify for a head of household filing status, they will probably file you as single with no dependents.  Each of these scenarios would not be accurate and would generate a much higher tax due to the IRS.

What should a person do if they receive an IRS notice?

  • Don’t panic! While the notices are not pleasant to receive, keep in mind there is a good chance the IRS is wrong.  I think of IRS notices simply as inquiries asking for clarification of what was claimed or not claimed on a tax return.
  • Don’t just assume the IRS is right and pay the tax they are requesting.
  • Let your tax professional look at the notice. This gives us a chance to determine what the notice is asking for and if the IRS is correct in their assumptions.  The wording on IRS notices can be very confusing and if you are not familiar with tax law and tax “jargon”, it can be difficult to determine what the IRS is saying or requesting .  Once we have reviewed the notice, we can then determine the best course of action for responding to the notice.  There are certain procedures that must be followed when responding to an IRS notice.  If these procedures are not followed correctly or the letter of response does not refer to a certain Internal Revenue tax code section, it can result in an automatic IRS ruling that is very unfavorable to you.
  • Don’t ignore the notice. There are situations where you have a certain window of opportunity to respond to the IRS.  If you don’t respond timely, then your options could be severely limited.  For example,  a taxpayer  may bring in a notice of IRS intent to levy property that tells us that they have received at least two previous notices.  It is much harder to respond to an intent to levy notice as opposed to the first or second notices received.

Our knowledgeable tax professionals would be happy to answer any questions you may have on this topic.  Please feel free to contact us.

 

January 27, 2017
| Traci Fitting