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Tax Controversy and Litigation Attorney, Jason Carr Law Firm, PLLC.
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As tax season approaches, business leaders may feel anxious. Especially this year. With the IRS adding more resources to conducting audits and he plans to double the number of audits, you might think your business will face more scrutiny than before. not. You may also wonder if the use of legal business tax credits increases audit risk. As April 18 approaches, how do you prepare your tax returns and your entire business to stand up to the IRS? How do I file my tax return?
The answer is deceptively simple. Stay calm and organized.
Importance of organization
As with many things, the sooner the better. If you’re a business owner, you should start reconciling all your bank accounts as soon as possible. You should also work with your accounting team or CPA to make sure you have everything you need. There are no special hoops to jump through. Rather, you should take steps (not particularly exciting, but absolutely necessary) to make sure all your financial documents and bookkeeping are in order. If you have invoices (paid and unpaid) or receipts, please put them all together and sort them properly before submitting your return. If you have employees or contractors, also collect 1099s and W-2s and give accountants access to them. The more and more organized your financial documents are at hand, the easier the process will be for the accountant and, by extension, you.
Ideally, you’re doing this all year round instead of rushing to get everything sorted out in January and February. But if you’re just starting out, now is the perfect time to get everything sorted out and make sure your balance sheet is in place.
The double-edged sword of tax credits
Many corporate executives wonder whether they are eligible for various business tax credits, such as ERC and research and development (R&D), and whether claiming these puts them at increased risk of being audited. There may be
At a high level, ERCs (employee retention credits) are for businesses that have kept their employees on staff during the pandemic despite obstacles such as stay-at-home orders and orders. One method of qualifying for ERC credit is called the “gross revenue test” and applies to businesses whose revenue has decreased by approximately 20% in 2020 and 50% or more in 2021. Most companies will not qualify this way. Another certification test, called the “Full or Partial Shutdown of Operations” Test (FPSO), considers state or government orders that have been implemented and their impact on operations. For example, if you run a restaurant and there is a government mandate for indoor dining that accounts for 10% or more of your revenue, your restaurant may be subject to his ERC.
The R&D tax credit has been around for decades and is more established. These are dollar-for-dollar tax credits to improve processes and encourage innovation in areas such as technology. The scope of these tax credits is more limited. For example, companies in industries such as marketing are less likely to have them available. Unfortunately, many companies are misadvised about their eligibility for these kinds of credits, so it’s important to make sure your company’s work actually fits this definition.
There are other types of credits in exchange for things like providing childcare to an employee, implementing an employee health plan, or starting an employee retirement plan. These credits are designed to help business owners and spur the economy. In my opinion, if you and your accountant believe you are qualified, then whatever is qualified should be taken advantage of. audit. However, it is important to have proper guidance and bookkeeping in place on the front end so that eligibility can be properly demonstrated during an audit.
Correct definition of receipt
A word about receipts: Unfortunately, many business owners don’t seem to understand the definition of a receipt, at least in the eyes of the IRS. Many people think that a credit card statement or bank statement will suffice. However, this is not the case when showing expenses up front, especially if he is trying to prove eligibility for certain credits such as R&D. A physical, printed, “old-fashioned” purchase receipt is required, including date of purchase, location, and item description. In other words, you cannot charge random Amazon fees as “business related”. The IRS has no way of knowing which items these credit claims are for without a receipt attached. Many people misunderstand this, and many are at a disadvantage.
final thoughts
Let’s face it: Most business owners are neither accountants nor CPA. That’s why it’s important to surround yourself with the best advisors you can: people you can trust, who know very well what they’re doing, and who are very experienced. If your bookkeeping is done in-house, make sure you hire the best people.
After all, you are the business owner and responsible for filing your tax returns. You could argue that you got bad advice, but ultimately, it won’t come into effect during the audit.
The good news is that it always comes down to organization. As long as you’re focused on sorting everything out so you can prove your claims and deductions, that is Prepare for an audit. Yes, sure, dealing with audits is a pain, but ultimately a painless process when all the ducks are in a row.
The information provided here is not investment, tax, or financial advice. Please consult a qualified professional for advice regarding your specific situation.
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