Tax Considerations for Small Business and Self-Employed Tax Payers
Episode 17: In today’s episode, host Jim Ray is joined by Alisha Harper, Professor of Accounting, and Timalyn Bowens of Bowens Tax Solutions (also a graduate of Bellarmine’s Rubel School of Business).
Today’s we’re focusing our discussion around disregarded entities (“flow entities”), such as LLCs, LLCs filing as S-corporations, Partnerships, etc.
The type of entity you form, how you conduct your tax planning and other key activities should be done with the guidance of a qualified tax professional. Your situation may be different, so the information you hear today should not be taken as tax advice. If you hear something interesting, consult with your tax professional to determine how it might impact you and your business.
Timalyn Bowens is an Enrolled Agent. She doesn’t work for the IRS, but she is licensed to do tax preparation and returns. Most importantly, unlike a CPA as an enrolled agent she is licensed to represent clients in front of the IRS, in all 50 states. Bowens Tax Solutions is located in Louisville, KY.
Advance Child Tax Credit (CTC)
This is an important topic for business owners and self-employed individuals. A tax credit is a dollar for dollar deduction to reduce your tax liability. During the pandemic, this credit was expanded from $2,000 per child. It’s currently $3,600 for children from 0-5 years of age. It is $3,000 for children from 6-17 years of age.
The government offered advance payments. The payments were given to qualifying individuals, even though this is actually a tax credit. The checks were issued from July to December of 2021. The total amounts were divided into monthly payments.
An opt-out provision was given, but it wasn’t as easy to enact. Timalyn describes some of the confusing ways this opt-out issue may lead to some tax surprises when people prepare their 2021 tax returns.
Alisha, who is a former IRS tax attorney, explains the phase-out structure of the CTC, based on a person’s adjusted gross income (AGI). The phase-out for a single individual starts at $75,000. Many small business owners can easily surpass that threshold. For couples who select married filing jointly, the amount is $150,000. If people received the CTC payments, but earned more than the threshold, they will be responsible for paying back the difference to the IRS. Timalyn reminds us that the estimates were initially based off of the 2020 AGI levels. It’s quite possible that business and individuals earned more in 2021.
If a couple divorced in 2021 and one spouse took the credit, if that spouse surpassed the 2021 threshold but elects not to claim the children for 2021, the other spouse would be entitled to claim the tax credit. This can cause an issue regarding which spouse is responsible for repaying the liability.
Overlooked Tax Deductions
Alisha begins this segment by discussing expenses related to automobiles. Individuals need to be able to prove they qualify to take the deduction. Without documentation, the IRS and disallow your deduction.
Mileage is a simple deduction to take for your business miles. But, you need to track the mileage and be able to differentiate between personal miles and business miles.
Timalyn discusses the business-use of home (“home office deduction”). There are advantages allowed, as long as you can document the incurred expenses. Consider the internet, utilities, cell phone and other related expenses. Alisha is careful to warn us that the area your claiming in the house, must be considered exclusive use. Your kitchen table or living room wouldn’t necessarily qualify.
Alisha reminds us to look for those smaller expenses such as business cards, thank you notes, website-related expenses can really add up at the end of the year. Approaching the year with a focus on tracking those expenses will help you to minimize your tax liability.
The qualified business income deduction enables businesses to deduct up to 20% of net income before calculating federal income tax liability. This is a significant advantage. However, you may still be exposed to the self-employment tax at the higher level.
Procedural Issues Related to Taxes
What should you do if you owe the IRS? Timalyn says the first thing to do is to breathe. The second action is to file the tax return(s). The IRS does not forget and you will be subject to interest and penalties. Don’t wait to take action. It compounds the problem.
Your tax professional will need to confirm the full total amount you owe. He/she will make sure the full picture is understood, so a plan can be put together on how to best deal with the situation. There are options, but you have to act.
Alisha warns that taking the ostrich approach is never a good idea. In fact, in some cases, the IRS is authorized to file a return on your behalf and usually doesn’t include the deductions for which you may have qualified.
Timalyn will engage with the IRS on the client’s behalf. She puts together the story of what happened and why. This timeline and the details can help in the negotiations with the IRS.
To contact Timalyn at Bowens Tax Solutions:
Website: www.BowensTaxSolutions.com (schedule your call)
Phone: (502) 632-3171
Alisha closes with while you want to comply with the law, there’s no harm in asking questions. You can ask your tax professional or even visit www.IRS.gov to find answers to your tax-related questions.
Timalyn closes with the fact that she doesn’t expect her clients to be tax experts. She wants them to feel comfortable asking questions, regardless of how simple or complex they may seem. That’s the advice for which you’re paying. You should expect that of your qualified, tax professional.
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