Business Taxes

Why Your Business Should Prep for an Employment Tax Audit — Now

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In August 2022, the Inflation Reduction Act was signed into law with a provision earmarking nearly $80 billion in funding to support the IRS enforcement of federal tax laws, notably, employment tax.

The IRS typically performs employment tax audits to ensure that a business is compliant with tax filing requirements and to verify the reported amounts.  With more IRS “boots on the ground,” you may want to prepare for a potential employment tax audit sooner rather than later.

Zeroing in on employer liability

Employers are generally required to withhold federal income, Social Security and Medicare taxes (collectively known as employment taxes) from employees’ earnings and forward these funds to the U.S. Treasury on employees’ behalf.

You’re also liable for taxes imposed by the Federal Unemployment Tax Act (FUTA). The IRS examines some employment tax returns to determine if wages, tips, compensation, credits and taxes are reported accurately.

Companies are obligated to remit payroll taxes on a timely basis. These taxes are called trust fund taxes because employee money is held in a trust until the employer makes a federal tax deposit in that amount. Any unpaid trust fund taxes must be immediately available for collection from the business.

In addition, it’s critical to correctly determine whether workers are employees or independent contractors, as it impacts employment taxes. Employee misclassifications can be an expensive mistake. If an independent contractor is misclassified by a company and pays his/her own self-employment taxes, but offsets it with expenses, the government never receives the entire amount owed.

If you’re concerned you may be falling short on your obligations, now’s your chance to make sure you’re in good standing — and fix what’s broken before an employment tax audit is conducted.

Calling for audit improvements

On February 13, 2023, the Treasury Inspector General for Tax Administration (TIGTA) released a report on the need for improvements to the employment tax examination process to increase taxpayer compliance and collection potential.

Employment tax workstreams are set up to focus on probable areas of non-compliance to show cases with a high potential for audit adjustments. But with increased funding, the employment tax audit process is likely to fine-tune its processes and may involve using more technology in selecting who will be subject to an examination.

Here’s an unexpected way that artificial intelligence (AI) could impact your business. An AI algorithm, for example, could examine thousands of tax returns and isolate certain areas where there are anomalies in a matter of milliseconds.

Getting a step ahead

Businesses may use internal or external resources to prepare for an IRS employment tax audit. Internal audits may be better suited for larger employers with an in-house tax department responsible for filing tax returns and other levels of compliance.

For smaller employers, seeking the help of an independent auditor can provide deeper knowledge into the issues being probed.

Staying ahead of an employment tax audit can be a challenging task. Reach out to the CPAs at Magone & Company to ensure you’re on track for IRS compliance.

This information is provided for educational purposes and should not be construed as financial or legal advice. Please consult your accountant or attorney for advice specific to your situation.

6 Ways Small Businesses Can Reduce Their Taxable Income

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If you’re a small business owner stressing about taxes, you’re not alone. Seventy-seven percent of small business owners feel the burden of business taxes.

But you can possibly reduce your tax obligations — and potential headaches — with these money-saving opportunities.

Keep it in the family. If your small business is looking for an extra set of hands, have you considered hiring your spouse? If certain requirements are met, you can deduct contributions made to a qualified retirement plan on behalf of your employees, including your spouse. Plus, if you’re currently paying to cover your spouse under the company’s health insurance plan, you may be able deduct all the health insurance premiums the business pays on their behalf.

Save money on healthcare. Speaking of health insurance premiums, one of the easiest ways to reduce your business taxes is by using a Health Savings Account (HSA). An HSA is a tax-advantaged account that allows you to make tax-free contributions and withdrawals to put toward qualified medical expenses like copays, prescriptions and more.

Deduct marketing expenses. Are marketing expenses tax deductible? You bet — as long as they’re directly related to your business. Marketing expenses that are commonly deductible include:

  • Content development
  • Designing and maintaining a website
  • SEO services
  • Exhibiting at an industry trade show
  • Hiring a marketing consultant

 Make charitable contributions. By contributing to a cause that’s close to your heart, you may be able to deduct a percentage of taxable income. Keep in mind, contributions must be made to qualified organizations that meet IRS guidelines.

Revisit employee compensation. Offering your employees a competitive compensation plan can help you attract and retain the best. And it may also have an added perk of tax-saving benefits for your business. Employee salaries and bonuses are generally tax deductible and are exempt from Social Security and Medicare (FICA) taxes.

There are many variables that can impact your company’s tax circumstances, so be sure to consult with your trusted business or tax advisor before implementing any new tax-saving strategies.

The CPAs at Magone & Company can support you in making the most tax-efficient decisions for your business. Give us a call today at (973) 301-2300 to learn more.

A Chapter 11 Filing Doesn’t Always Mean the End

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In a roller-coaster economy, a struggling company might decide to seek a fresh start under Chapter 11 bankruptcy proceedings — especially if its leadership believes the business could eventually become profitable through debt relief.

Generally, filing Chapter 11 is done voluntarily by a company to protect itself from creditors. It differs from Chapter 7, which involves liquidating or selling off the assets of a business that’s closing its doors. Debts aren’t simply absolved by filing Chapter 11 — though they’re likely to be reduced or paid off over a period of years.

Instead, Chapter 11 allows the business to continue day-to-day operations, as it undergoes downsizing and liquidation. The goal of a Chapter 11 filing is to implement a more sustainable solution to pay off debts and reorganize the business so it may survive this process.

What to expect

There are five major steps involved in the Chapter 11 process:

Step 1. Once the appropriate forms are filed in court, the company is provided immediate relief — called an automatic stay — from creditors. A bankruptcy filing doesn’t always affect business operations, but it will likely influence the stock price of a public company and the borrowing costs for any business. The company continues to pay employees and provide benefits. It’s also able to keep dealing with suppliers and customers so that it may continue earning money.

Step 2. The bankruptcy court appoints a committee to ensure that creditors are dealt with fairly. Notice is provided to parties who believe they’re owed money by the company.

Step 3. The business proposes a reorganization or recapitalization plan. By law, the company has the exclusive right to propose a plan during the first 120 days of the Chapter 11 process. If the business proceeds in good faith, the period may be extended.

Step 4. Once the court collects all claims against a company, hearings are held to estimate the value of any disputed claims. And once the total value is determined, the business can establish whether its reorganization plan is viable. Sometimes, litigation over the priority or handling of creditors arises.

Step 5. A disclosure statement pertaining to all assets and liabilities is presented to the court. If the statement is approved by the court, creditors vote on a reorganization plan and the company distributes payments according to the plan.

Restoring your rep

Even though a business can overcome a Chapter 11 filing and thrive over time, its reputation with customers, suppliers and employees may take a hit. If your company is thinking about filing Chapter 11, be sure to clearly understand what’s involved and the potential impact on critical business relationships. Be sure to consult with your attorney and CPA to help ensure bankruptcy is the right move for a better future.

Don’t already have a trusted CPA working on behalf of your organization? Magone & Company has 30 years of experience assisting organizations during financial challenges. Let’s chat.

Financial Check-up: Is Your Organization Fiscally Fit?

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Comprehensive financial statements can help tell the story of your organization’s financial health. Together, a balance sheet, income statement and statement of cash flows can be powerful diagnostic tools to help evaluate its financial well-being. Moreover, by carefully analyzing them, you may be able to uncover potential money-management problems or even fraudulent activity.

Assets vs. liabilities — The balance sheet

A balance sheet provides a snapshot of a company’s financial health at a moment in time. One side shows the assets owned by a company, such as cash, accounts receivable and inventory. The other side contains liabilities or claims on the assets, including accrued expenses, accounts payable and equipment loans.

Current assets (such as receivables) mature within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as payables) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which assets exceed liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your company’s liabilities exceeds the value of its assets, net worth will be negative.

A focus on profits — The income statement

The income statement reports revenue, expenses and profits earned (or losses incurred) over a given period. A commonly used term when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Another important term — “net income” — describes income remaining after all expenses (including taxes) have been paid.

Sales, general and administrative expenses (SG&A) are also indicated on income statements, reflecting business functions, such as marketing, that support a company’s production of products or services. The ratio of SG&A costs to revenue tends to be relatively fixed — no matter how well your business is doing. If these costs constitute a rising percentage of revenue, business may be slowing down.

The income statement can reveal other potential problems. It may show a decline in gross profits, as expenses rise quicker than revenue. Common causes include hiring more employees than needed or doing an excessive proportion of low- or no-margin business. In today’s business environment, many companies are reporting lower gross margins due to rising labor and materials costs — unless they’ve managed to pass along these cost increases to customers through higher prices.

Cash is king — The statement of cash flows

The statement of cash flows shows all the cash coming in and out of a company. Your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt. Ideally, a company will derive enough cash from operations to cover its expenses. If not, it may need to borrow money or sell stock to survive.

The statement of cash flows shows changes in balance sheet items from one accounting period to the next. It’s organized into cash flows from three primary sources:

  1. Operations
  2. Investing activities
  3. Financing activities

To complicate matters, non-cash investing and financing transactions are reported at the bottom of the statement of cash flows. These transactions don’t involve direct cash exchanges. For example, a machine that’s purchased directly with loan proceeds would be reported here.

Although this report may seem similar to an income statement, its focus is solely on cash. A product sale might appear on the income statement, even though the customer won’t pay for it for another month. But the money from the sale won’t appear as a cash inflow until it’s collected.

To remain in business, your company must continually generate cash to pay creditors, vendors and employees, watching your statement of cash flows closely.

 Ensuring tip-top financial shape

Financial statements can be valuable for many purposes — whether you’re evaluating the financial results of your own business or one that you’re considering acquiring, lending to or investing in. An experienced professional can help you assess your company’s financial health, including potential risks and areas of improvement.

Surprise! Improperly Forgiven PPP Loans are Taxable Income

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A new IRS memorandum has confirmed that improperly forgiven Paycheck Protection Program (PPP) loans should be considered taxable income, and recommends affected taxpayers file original (or amended) returns that accurately reflect the status of their loan.

You may recall that PPP loans were established to help small U.S. businesses impacted by the pandemic cover certain critical expenses.

Under the program, loans were forgiven if the borrower met three conditions:

  1. The loan recipient was eligible to receive the PPP loan. An eligible loan recipient is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity; was in business on or before February 15, 2020; and had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
  2. The borrower used the loan proceeds to cover eligible expenses such as payroll costs, rent, interest on a business mortgage and utilities.
  3. The borrower applied for loan forgiveness and attested on the application that they were eligible for a PPP loan, they used the loan proceeds for eligible expenses, certain financial information was correct, and they met other legal qualifications.

When all three requirements were met, the loan (or a portion of it) was forgiven. But if they weren’t? The IRS memorandum confirms that any portion of the loan not meeting the requirements for forgiveness must be included in income and any additional income tax must be paid.

Consult with your accountant to determine if you need to file an amended return. Not working with a trusted advisor? Magone & Company can help — call us at (973) 301-2300.

The Verdict is In: NY Bank to Release Crypto Customer Records

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Under a federal judge’s recent ruling, a New York City banking institution must produce records on U.S. customers of a digital asset trading platform who may owe tax on unreported crypto transactions.

On September 21, the U.S. District Court for the Southern District of New York granted the IRS’s petition to summons M.Y. Safra Bank, following an investigation into crypto trading platform SFOX.

The Justice Department described SFOX as “a cryptocurrency prime dealer and trading platform that connects digital currency exchanges, over-the-counter virtual currency brokers and liquidity providers globally.” The platform boasts more than 175,000 users and has facilitated over $12 billion since 2014.

Making a case for reporting of income

In the petition, the IRS explained that taxpayers “must report income, gain or loss from all taxable transactions involving virtual currency on their federal income tax returns for the year of the transactions, regardless of the amount or whether they received a payee statement or information return.”

Judge Paul Gardephe agreed there was a “reasonable basis for believing” at least 10 individuals may have failed to disclose and pay tax on applicable gains from crypto transactions conducted by the taxpayers via SFOX, which uses M.Y. Safra’s banking services. The agency can make this determination by obtaining the bank records.

The IRS, and the federal government overall, have begun cracking down on tax evasion schemes that take advantage of Web 3.0 crypto technologies.

Reports IRS Commissioner Chuck Rettig, “The government’s ability to obtain third-party information on those failing to report their gains from digital assets remains a critical tool in catching tax cheats. The court’s granting of the John Doe summons reinforces our ongoing, significant efforts to ensure that everyone pays their fair share. Taxpayers earning income from digital asset transactions need to come into compliance with their filing and reporting responsibilities.”

For the record on tax liabilities

Although M.Y. Safra had been issued summonses, the Justice Department was clear that there was no allegation that the bank engaged in any unlawful activity. Rather, the summonses issued serve only to identify the unidentified individuals suspected of having tax liabilities.

In response, SFOX said it would review “internally and with external legal counsel around next steps,” and “always adheres to the law.”

Magone & Company specializes in complex tax cases. To sort out your situation, call our office at (973) 301-2300 today or reach out.