Nick Magone, CPA, CGMA, CFP®

Four Secrets of a Tax Preparer: What You Don’t Know Can Cost You

by

Tax time will be here before you know it. If your return is a simple one, you may be up to preparing and filing yourself. But if your situation is somewhat complicated, seeking the help of a qualified professional may be a smart move.

When you look to hire a professional, keep in mind that training, certifications and expertise can greatly vary from one tax preparer to another. And what you don’t know about them can leave you on the hook for a hefty tax bill.

#1. Many tax preparers lack tax-specific training or expertise. Just because an employee of a large tax preparation company is allowed to complete tax returns doesn’t make them an expert. In fact, the only pre-requisite for obtaining the required preparer tax identification number (PTIN) to file taxes on your behalf is the completion of a simple form — one that takes about 15 minutes to fill out.

Before you engage any tax professional, ask questions about their specific training, qualifications and expertise. Find out how long they’ve been preparing returns, ask about audits they’ve been involved in, and share your personal tax situation. Above all, ensure that you’re confident with their ability to handle your tax return properly.

#2. They very likely won’t be preparing your return. It’s an open secret in the world of tax preparers that returns are prepared in stages. That means the owner of the firm or the most experienced professional will probably not be the one who initiates your return. Instead, a junior associate will likely enter your income information and other relevant data, identify potential deductions and tax credits and give your return a quick review. Once that’s done, a senior advisor or tax preparer verifies the return and signs off on it.

The sheer number of tax returns that experienced firms handle during a busy season makes this multi-step process necessary, but it’s important to know how things work. At Magone & Company, we’ve honed a rigorous quality assurance process to ensure your return gets the right level of attention. Read what our tax clients have to say.

#3. They may not research unusual deductions and tax breaks. Your tax preparer will typically apply the most common deductions and tax credits to your return — things like deductions for educational expenses and health care costs, as well as earned income or retirement tax credits, etc. But what they may not do is research more unusual tax credits and deductions, even if they could potentially save you money.

Keep in mind your accountant is not a mind reader. Without documentation and/or mention of situations such as property held in trust or part ownership of a business, it’s difficult to identify the best way to proceed to minimize your tax burden.

Discuss situations like these with your tax preparer. You may need to pay an extra research fee or renegotiate the cost of preparing and filing your return, but the tax savings could be well worth the extra cost.

#4. CPA doesn’t mean tax relief pro. When clients get into tax trouble or get behind on paying their tax debt, they often turn to the very same tax pro that prepared the return. Unfortunately, most CPAs and tax preparers are not skilled in tax relief.

Tax relief means they know all the available IRS programs to settle your tax debt or give you favorable payment terms that don’t drown you in penalties and interest. Even if they think they know, they may not be experienced in negotiating with the IRS on your behalf.

Get tax season off to a solid start
Tax season may look a little different this year, but you can count on the tax professionals at Magone & Company to provide you with straightforward, socially distanced tax preparation. To learn more about our virtual services, call our office at (973) 301-2300.

Failure to Plan for Business Succession Equals Failure to Succeed

by

You’ve spent most of your career building your business to be your legacy. You’ve reached a pinnacle, feeling secure in the knowledge that you’ve laid the cornerstone for future success.

So how can you ensure that legacy stays intact? Succession planning.

For many business owners, succession planning can be an uncomfortable topic to engage in, because it’s often associated with mortality or worse, loss of control.

Our advice? Put aside the discomfort and make a plan. That way, you have time to consider possible successors and invest in either training or hiring to fill critical skill or knowledge gaps.

Think of succession planning as a business will
Preparing for your departure — whatever the reason — can save your loved ones (either involved family heirs or your employees) from having to make up their own roadmap as they learn to drive.

Continuity is not accidental. It also signals to any investors or shareholders what the intention is for the direction of the company.

Without a well-structured, formal succession plan in place, you’re risking:

  • Unprepared or unsuitable leadership
  • Disputes for control/direction of the company
  • Unnecessary legal fees and protracted proceedings
  • A reshaped or ignored company vision
  • Financial instability
  • Inability to retain/recruit top talent

A pre-emptive consultation with a qualified CPA can help to alleviate most corporate headaches and reorganizing pains that can arise during a leadership change. Otherwise, it can be a protracted, contested tangled mess of lawyers and more CPAs, costing your company far more than if you planned a smooth exit.

And nobody wants that for a legacy.

President Signs COVID-19 Relief Act

by

The President signed the COVID-19 Relief Act Sunday night. Echoing a previous post, a lot of uncertainty has been resolved. However, all may not be good in Mudville.

The deductibility of Paycheck Protection Program (PPP) loan expenses is generally seen as a positive result.  However, there is one catch.

If you are a shareholder in an S-Corporation or a member or partner in an LLC or partnership and you do not have basis (i.e., amounts at risk), the loss may not be deductible. Why? Because your PPP loan has not been forgiven in 2020, but will most likely be forgiven in 2021, which creates a mismatch of positive and negative basis adjustments.

The end result will be non-deductibility of your loss, which will be carried forward to 2021 when your loan is actually forgiven.  If you have enough basis, this will not be an issue for you and you can rest easy.

C-Corporations have no issue as it will create a Net Operating Loss (NOL) for future or carryback use.

Magone & Company clients who are concerned about deductibility should call us at (973) 301-2300 to discuss.

PPP News: Stimulus Package Approved by Congress

by

On December 20, 2020, Congress agreed on a $900 billion stimulus package. The President is expected to sign this legislation into law before Christmas.

What does this mean for you?
The uncertainty has finally been resolved! Businesses that received a Paycheck Protection Program (PPP) loan and had it forgiven would now be entitled to a tax deduction for costs covered by the loan. The COVID-19 relief bill clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act (which has been redesignated as Section 7A of the Small Business Act). This provision applies to loans under both the original PPP and subsequent PPP loans.

The COVID-19 relief bill creates a simplified forgiveness application process for loans of $150,000 or less.  Specifically, borrowers who received less than $150K would now be eligible to submit a simplified, one-page forgiveness application.

There will also be a new round of PPP loans available to businesses that are determined to be “eligible entities.” Businesses would need to demonstrate that the loan would be “necessary to support the on-going operations of the business.”

It appears that an “eligible entity” would be one with fewer than 300 employees that experienced at least a 25% reduction in revenue compared with the prior year or compared with the first quarter of 2020 for new businesses.

Stay tuned…

 

Avoid These 5 Common Tax Filing Mistakes That Can Get You In Tax Trouble

by

Whether you file the simple 1040EZ or a complex 1040 with multiple schedules, making a mistake on your tax returns could lead to big tax trouble. Something as simple as a math error or unsigned form could invite extra attention from the IRS.

The tax agency sees those mistakes every year, and IRS representatives warn taxpayers to be careful when filling out their forms. Even if you think you have everything filled out perfectly, it never hurts to double-check and look for these common errors.

#1 — Assuming your tax pro prepared your taxes properly
Blindly trusting your accountant or tax preparer to file your taxes correctly can be costly. Most tax professionals do a thorough job, but letting them file without your careful review is a mistake.

We resolve back tax problems for people, and often what gets people in trouble is a simple mistake, like forgetting to report income, missing deductions or taking too many deductions. These are sometimes honest mistakes that if not caught early can trigger red flags and have the IRS sending you balance due notices.

No one knows your financial situation better than you, do so it’s important you double-check your return so you’re not blindsided with an unwanted surprise.

#2 — Waiting until the last minute
Filing taxes is stressful enough. Don’t make things worse by waiting until midnight on deadline day to get your return in the mail. Give yourself plenty of time to gather all the necessary documents and complete your return.

Keep in mind that unexpected problems could interfere with your last-minute tax filing plans. Getting your taxes completed early is the only way to protect yourself from unforeseen circumstances that can delay your tax filing.

#3 — Failing to file on time
If you cannot file your return on time, you can ask for an extension by filling out a single form. Even if your documents are in disarray, there is no excuse for not filing on time. An extension gives you six more months to get everything in order and complete your return.

Keep in mind that even when filing an extension, you will still need to estimate the tax you owe and make your payment. Filing an extension extends the amount of time you have to get your return to the IRS, but it does not provide a reprieve from your tax debt. If you wait to make your tax payment, you will get hit with penalties and interest.

#4 — Not making a backup or keeping good records
Making backup copies of your tax returns, income documents and schedules is an essential part of tax planning and preparation. Set up a folder or file box and use it to store your tax documents as they come in, and then scan each one before you put it away.

Once you have completed your return, be sure to make copies of every document, including your W-2 form and tax schedules, before sending the return to the IRS. If you file electronically, save a PDF copy of your return before completing the final step. Save all of those electronic tax documents on your computer or cloud storage device. Ordering a lost copy of a past year’s return from the IRS is time-consuming and expensive; you can save time and money by making your own backup copies. If the IRS audits you or requests more information, having your own records organized will be extremely helpful in the process.

#5 — Ignoring letters from the IRS after you file your taxes.
Sometimes the IRS will send follow-up correspondence, especially if you owe them money. It can be easy to ignore the first few letters. Even if you have the intention of paying your taxes soon, you should still take action and either get on an installment agreement or reach out to a reputable tax relief firm if your financial situation requires it.

That’s not all. Here are some suggestions to keep in mind if you’re preparing your own return.

Owe back taxes?
Our firm specializes in tax problem resolution. And you certainly don’t want to talk to them yourself. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to schedule a virtual or in-person no-obligation confidential consultation to explain your options to permanently resolve your tax problem. Need immediate assistance? Call 973-846-8265 today.

Paycheck Protection Program Forgiveness: Is it Taxable Even if Not Forgiven? An Analysis of Current Guidance

by

The only certainty in 2020 seems to be whatever you think you know about the Paycheck Protection Program (PPP) changes like the wind.

Established by the CARES Act (signed into law in March 2020), the PPP provided loans to eligible small businesses. If the borrower used the loan proceeds to pay certain eligible expenses, an amount of the loan up to such eligible expenses would be forgiven under the law, and such forgiveness would not be treated as taxable income to the borrower.

In April 2020, the IRS issued Notice 2020-32 explaining a deduction is not allowed for expenses where proceeds are effectively tax exempt, as is the case with the loan forgiveness. This would mean the loan proceeds received by businesses will be taxable since the expenses paid with those proceeds would be disallowed in determining taxable income.

This is a consistent position of the IRS, as expenses associated with tax-exempt investment income are not deductible.

Alternatively, the other argument in Notice 2020-32 is that the expenses are not tax deductible, because prior case law and published rulings essentially deny deductions for otherwise deductible expenses for which “the taxpayer receives a reimbursement.”

A second issue relates to economic performance. Economic performance states that a taxpayer is able to deduct expenses associated with a liability such as a loan, whereby the amount of the liability is unconditionally fixed. Upon review of the PPP loan document language, one finds the note to include language such as “The Note is subject to partial or full forgiveness, the terms of which are dictated by the SBA, Interim Final Rule RIN 3245-AH34, subsequent SBA guidance, the Code of Federal Regulations, the PPP, and all related rules, laws, regulations, and guidance, as may be amended from time to time (the “Forgiveness”).”

The fact the loan is subject to partial or full forgiveness is enough to question whether or not it is unconditionally fixed. It is our belief it is not unconditionally fixed and therefore, the expenses will be disallowed based on Notice 2020-32.

Finally, there is possible reliance on the Bliss Dairy case, which for the sake of brevity draws the following conclusion, “until a taxpayer obtains forgiveness there is no tax exempt income” and IRS Notice 2020-32 does not apply until there is tax-exempt income. The problem with this court case is the American Institute of Certified Public Accountants (AICPA) made an inquiry in regard to forgiveness occurring after year-end and the impact on the expenses paid with PPP monies. According to Mr. Edward S. Karl of the AICPA, “Treasury officials generally stated that if a borrower has a reasonable expectation of loan forgiveness, the expenses can’t be deducted to the extent paid by the loan. That’s true regardless of when the loan is forgiven.”

So what’s a business to do? Here are the options:

  1. Pay the tax on the disallowed expense (not optimal).
  2. Defer the tax on the basis of the Bliss Dairy case (not certain it will withstand an audit challenge).
  3. Place your business tax return on extension and await more guidance.

Congress may act on this issue with the relief being granted retroactively, as bills have been proposed by chairs of both tax committees and have bipartisan support. If this occurs, the entire discussion above for most businesses is moot.

Given the environment in Washington, we are not hopeful there will be a bill in time for the filing of most business tax returns. If Congress does not act, many businesses may find the relief of the PPP funding will be met by the possible nightmare of having to find the funds to pay the taxes.

Need help navigating Paycheck Protection Program loan forgiveness? Call us at (973) 301-2300 or reach out — we’re here to help.