November 28, 2017 From time to time taxpayers, both individuals and businesses, may find themselves in a position where they are unable to pay the amount owed on a particular tax return. While its always best to pay the full amount due, there are alternative payment options available to taxpayers if they meet certain criteria. This post will discuss a few of the options taxpayers have when they are unable to pay the full amount owed with their federal returns. While penalties and interest will continue to accrue on any unpaid balance, reaching an alternative payment agreement can prevent the IRS from enforcing collection actions such as wage garnishments and levying bank accounts. Provided certain criteria is met, options available to taxpayers include: Extension of time tofull pay- many times the IRS will grant a taxpayer additional time, usually 60 days - 18 months to pay in full on an agreed upon date.  Installment agreements- allows the taxpayer to pay a liability over time by making monthly payments.  Currently not collectible status- used when taxpayers are not currently able to pay the liability, but are expecting to be able to pay at a later date. Offer in Compromise- in some situations taxpayers may be able to settle their tax liability for less than the total amount owed to the IRS.  By far the most common options are requesting the extension of time to pay in full and requesting an installment agreement. Unless the unpaid balance is the result of fraud, negligence or includes trust fund taxes, the IRS will grant an extension of time to pay in full, usually 60 days - 18 months depending on the situation. For extensions less than 120 days the IRS typically does not require additional information regarding the taxpayer's financial situation. For longer extensions, taxpayers will need to prove financial hardship by providing additional information and documentation to the IRS. There are three different installment agreements available to individual taxpayers: guaranteed, streamlined, and non-streamlined. Businesses do not have the option of the guaranteed installment agreement. While other conditions must be met, the guaranteed installment agreement is available for liabilities less than $10,000 and the streamlined in available for liabilities less than $50,000 ($25,000 or less for business). The IRS typically does not require any detailed financial information for the guaranteed or streamlined installment agreements, however non-streamlined installment agreements require additional information and documentation to determine the taxpayer's ability to pay the tax liability owed. Tax liabilities that include payroll and other trust fund taxes are pursued more aggressively by the IRS. Trust fund liabilities in excess of $25,000 or that cannot be paid within 24 months require the taxpayer to provide additional information and documentation to determine the taxpayer's ability to pay. No installment agreement is available for a payroll tax liability if the taxpayer is no longer in business. While not as common as the extension or installment agreement options, an offer in compromise allows a taxpayer and the IRS to settle a tax liability in certain situations. With an offer in compromise the taxpayer must submit detailed financial information to the IRS to prove the taxpayer does not have the ability to pay the entire balance owed. In calculating a taxpayer's ability to pay, the IRS uses predetermined amounts based on the taxpayer's geographic location and family size instead of using some actual expenses. Before agreeing to a settlement though, the IRS will generally require a taxpayer to sell assets if there is enough equity, or borrow enough against the equity to pay off the tax liability owed. Hopefully you never find yourself unable to pay a tax liability. If you do however, just remember there are some alternative solutions available. Which solution is right for you will depend on your particular circumstance. Regardless of your circumstance though, it is always better to deal with an unpaid tax liability head on than simply ignoring the problem and hoping it goes away. While this post deals with alternative payment options for unpaid federal tax liabilities, North Carolina has similar programs in place to provide alternatives for taxpayers facing unpaid tax liabilities. If you have any questions regarding this post, or need help with your unpaid taxes please feel free to give me a call at (919) 779-0506.   ...read more

Posted on November 6th, 2017As a follow up to last week’s post where we discussed some year end tax planning ideas for individuals, this week’s post is aimed at providing the same kind of information for the small business owner. In a perfect world your business would show a profit every year. In reality though, that doesn’t always happen, especially if your business is fairly new. For small business owners whose income or loss flows through and is reported on the owners individual return, it is important to make sure you have enough basis (equity) in the business in order to deduct those losses on your individual return. Otherwise, with no basis the losses are carried forward and used to offset future taxable income. With ten months of the year already complete you should have a fairly good idea whether this will be a profitable year or not. The basis rules for LLCs and S Corporations are different, so be sure you have enough basis if you are counting on deducting those loses on your 2017 tax return. Hopefully you find yourself and your business on the other end of the spectrum this year and are expecting to show income on your tax return. If that’s the case, this might be a good time to consider buying equipment and other capital assets your business needs. Section 179 generally allows for an immediate expense on items that might otherwise need to be depreciated over several years. In general Section 179 is only available for tangible personal property however, some real property expenses also qualify for Section 179. Before making the purchase, double check that your are eligible to take the Section 179 deduction (Section 179 is not available if it creates or adds to a taxable loss) and that the property you wish to purchase is eligible. If you are a sole proprietor and report your income on Schedule C and also have a child under the age of 18, consider employing your child in the business. Any wages paid to the child will be considered income to the child, however those wages will not be subject to FICA or FUTA taxes and will provide the business owner with an additional deduction. The wages will most likely be offset, at least partially by the child’s standard deduction ($6,350 in 2017) with the majority of the wages escaping tax free. Consider the long term benefits of employing this strategy and contributing the child’s wages to a Roth IRA set up for the child. The wages effectively become tax free forever. Hopefully you will be able to use at least one of these ideas in your business before year end. At a minimum, schedule an appointment with your tax advisor to review your current year situation and see what else can be done to minimize your tax bite. If you have any questions about the items above or if I can help you with your year end planning, please do not hesitate to reach out at (919) 779-0506 or send me an email at brad@ddocpas.tax. ...read more

Posted on November 13th, 2017So you’ve finally decided to scratch that entrepreneurial itch? You’ve got a great idea for a new business, researched whether or not there is a demand for your new product or service, and you’re ready to give your two week notice and get started being your own boss. One of the more important decisions you will make before launching the business is how your new business will be setup and organized. Most business owners will have four different organizational structures to choose from. The following is a brief summary of the advantages and disadvantages of each. Sole Practitioner For most people, operating as a sole practitioner is probably the simplest way to do business. The income and expenses of the business are reported on Schedule C of the owner’s individual income tax return. This simplicity eliminates some of the cumbersome reporting requirements of doing business as a separate legal entity such as an S or C Corporation. The simplicity though comes at a cost. Sole practitioners pay self employment taxes on profits of the business (15.3% on income of up to $128,700 in 2018). Another downside is the potential unlimited liability exposure of the owner’s personal assets if the business is sued. Limited Liability Company Limited Liability Companies (LLCs) have become a popular way to do business in recent years in part because they can offer some of the same simplicity afforded to the sole practitioner. When an LLC has only one owner (or member) it is considered a disregarded entity for Federal income tax purposes and the business can still report it’s income and expenses on the owner’s individual tax return like the sole practitioner. One advantage of using an LLC is that the LLC is a separate entity for all practical purposes and can be used to limit the owner’s liability exposure if sued. If there is more than one owner a separate return will be required, in most cases a partnership return, and the income will flow through to the owner’s individual returns. Most of the time, owners of the LLC who are active in the business will still be subject to the self employment taxes on their business earnings, whether there is one owner or multiple owners. LLC members are not considered employees of the LLC. Because they report their share of the business income and expenses on their individual return in the year earned, in general LLC members can withdraw profits of the business without incurring any additional tax (assuming the LLC member has sufficient basis). S Corporations S Corporations are separate entities that have their own annual filing and reporting requirements which makes them a little more complicated. The income and expenses still flows through and is ultimately reported on the owner’s individual income tax return. S Corporations can also provide their owner’s with some liability protection much like LLCs do. One major benefit of using an S Corporation is that it can be used to reduce the self employment taxes that would be due on the same income from a sole practitioner or LLC member. S Corporation owner’s who participate in the business are considered employees and should receive a W2 for their wages. As with LLCs, because the owner reports all of the income and expenses on their individual return in the year earned, the profits of the business can generally be taken out without incurring any additional taxes (assuming the owner has sufficient basis). C Corporations C Corporations are separate legal entities that file and pay their taxes separate of their owners. The owners who work in the business are considered employees. Because the business reports and pays income tax itself, the profits of the business can generally only be taken out by the owners through dividends, which are generally taxed at 15% (and can be taxed as high as 23.8%) to the owners. This means the profits of the business are taxed twice, once when earned and once when taken out. The double taxation is the single biggest disadvantage to operating as a C Corporation. The way in which you organize your business is one of the most important decisions you will make when deciding to open your own business. This decision can sometimes have unintended consequences so it’s always best to seek out professional advise and make an informed decision. If you have any questions regarding this post or need help with your small business tax and accounting needs, please do not hesitate to give me a call at (919) 779-0506. ...read more