Individual Tax

Once you’ve filed your income tax return, you may be ready to put some distance between you and the IRS and turn your attention to other things. If you’re employed, you probably can take a breather, since your employer will handle ongoing income tax payments for you through the wage withholding process. But it’s a different story if you receive other forms of taxable income — from self-employment, rental property, or investments, for example. When that’s the case, you’ll typically be required to make estimated tax payments during the year.

Generally, you must pay estimated tax for 2021 if you expect to owe at least $1,000 in tax for 2021, after subtracting withholding and refundable tax credits.

When Are Estimated Taxes Due?

Estimated taxes generally should be paid in four equal quarterly installments. The due dates for the four 2021 estimated tax payments are April 15, June 15, September 15, and January 15, 2021. If you receive income unevenly during the year, your required estimated tax payments may not be the same for each period under the IRS’s “annualized income installment method.”

How Much Is Enough?

The IRS can charge an underpayment penalty if you don’t pay enough estimated tax for the year or if you don’t make your payments on time or in the required amount. The IRS generally requires payments of 2021 estimated tax to total at least (1) 90% of your 2021 tax liability or (2) 100% of your 2020 tax liability, whichever amount is smaller. However, if your 2020 adjusted gross income was more than $150,000 ($75,000 if your filing status was married filing separately), your 2021 payments should be at least (1) 90% of your 2021 tax liability or (2) 110% of your 2020 tax liability, whichever amount is smaller.

If you or your spouse is employed, it may be possible to avoid the need to make estimated tax payments by having more tax withheld from your wages. To adjust your withholding, file a new Form W-4 with your employer. Taxpayers who had no tax liability for the 2020 tax year (the full 12-month period) and were U.S. citizens or residents for the whole year don’t have to make 2021 estimated payments.

If you’re self-employed, understanding what’s deductible and recording all of your business expenses should be priorities.

When you work for yourself, accurate accounting is critical. The IRS pays special attention to tax returns prepared by sole proprietors. Not only does the agency try to determine whether all taxable income has been recorded, but they also scrutinize business expenses that are claimed, since some taxpayers blur the lines between personal and business purchases.

We’re not suggesting you hold anything back when you’re tracking your tax-deductible business expenses. We want you to claim every penny that the IRS says is permissible. This is especially important if your company makes a lot of money. You’ll need to document everything you can to offset your income and minimize your tax obligation.

How do you ensure that all of the money you’re spending to make money ends up somewhere on your IRS Schedule C? Let’s look at steps you can take.

Review the Schedule C

The actual IRS Schedule C form contains broad expense categories. You may need to dig into deeper explanations of them.

If you’ve never completed a Schedule C before, it’s especially important that you familiarize yourself with it. You can view a copy of the 2020 version here. Pay special attention to Part II Expenses. The form breaks down business expenses into specific categories. But what’s the difference between Office expenses and Supplies? What does Other business property mean? Not only do you have to know which expenses are deductible, but you must be sure to include them in the right category.

The IRS has a special publication devoted to discussion of deductible business expenses. You’ll find links to it here. It’s a lengthy document, but there’s an interactive table of contents that lets you jump right to the section you want. You don’t have to read the whole thing, but you might bookmark it so you can consult it when you have a question. There are many questions on the Schedule C that may require additional explanation.

You might want to visit the IRS instructions online. This page displays a detailed outline of the form, section by section and line by line, so you can find what you’re looking for easily and click a link to get there.

Keep Detailed Records

This will be challenging if you’re doing your bookkeeping manually. You’ll need to set up a system of folders or envelopes or whatever works for you and separate receipts by either month or Schedule C category. If you know your way around Excel, you could set up a spreadsheet divided by category and enter receipt information as it comes in. This will make calculations easier, too.

Do make notes on your receipts so you’ll know why you thought the purchases would be deductible. You might also indicate whether the receipt was already entered in your master list, so you don’t have duplicate entries. Don’t forget about credit card charges and checks you’ve written for tax-deductible purchases that didn’t generate a receipt. Enter them in your master list as you go. If you’re ever audited, you’ll need copies of them for documentation. If you get electronic receipts in email, save them in a folder on your computer and record them.

You can categorize your tax-related business expenses using personal finance or accounting applications.

There are numerous personal finance and small business accounting applications that allow you to import your online banking transactions and categorize them. These include QuickBooks (online and desktop), Mint, Quicken, and Simplifi by Quicken. Their category lists can often be modified, so you can make sure your tax-related expenses are organized accurately.

Don’t Dismiss the Unusual

There are some legitimate tax deductions that the IRS doesn’t necessarily include in the Schedule C instructions, but which it will accept. For example, H&R Block reported on a case where the cost of cat food was considered a business deduction (a scrapyard was trying to attract wild cats to keep snakes away). A professional bodybuilder was able to claim his purchase of ProTan Muscle Juice Professional Posing Oil as an acceptable business expense.

We’re not recommending that you spend a great deal of time looking for obscure tax deductions. But think about your purchases as you make them to see if they’re tax-worthy.

All of these suggestions may sound time-consuming. They can be, until you get into the habit of tracking all of your tax-related business expenses, but it does require constant diligence. We can help ensure that you’re only claiming legitimate deductions and advise you on those you might question. We can also prepare and file your return for you and/or help with year-round tax planning. Contact us for a consultation.

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If 2021 is your first year as a sole proprietor, you’re likely to find income tax preparation challenging. Contact us for help with this.

Filing an IRS Schedule C requires careful, year-round bookkeeping. We can help you set up a system for tracking business expenses.

Before you can file an IRS Schedule C, you need to understand this complex form. Let us help you learn what’s needed.

There are numerous financial applications that let you import bank transactions and categorize them for tax purposes. Ask us.

Are you an individual or business owner who’s interested in lowering your tax burden? Call us at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

Are you an individual or business owner who’s interested in lowering your tax burden? Call us at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Note, however, that qualifying for such deductions became harder under the Tax Cuts and Jobs Act of 2017 (TCJA). If you previously claimed a home office as a miscellaneous deduction on your individual income tax return, the TCJA eliminated that deduction for tax years 2018-2025. You must now file a Schedule C on Form 1040 to be eligible for the home office deduction.

What Space Can Qualify?

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.