Small Business

6 Reasons the IRS Might Zoom in on Your Business’s Finances

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Did you know that something as simple as a math error or an unsigned form could invite unwanted attention from the IRS? Even if you have no intention to evade taxes or find loopholes, if there’s something on your return that makes the IRS take a second look, an audit of your business may be inevitable.

When it comes to dealing with the IRS, honesty is always the best policy. Learn some of the top audit triggers for businesses — and tips on keeping Uncle Sam at bay.

Excessive deductions. As a business owner, you’re entitled to deduct certain expenses to lower your taxable income. But don’t overdo it. If your deductions appear disproportionately high compared to your income, the IRS might suspect you’re padding your expenses. So what constitutes a legitimate business expense? The cost of goods sold, rent, salaries and business-related travel are generally deductible. The key is to keep accurate records of all your business expenses, making sure every deduction is backed by appropriate documentation like receipts, invoices or mileage logs.

Consistent business losses. It’s normal for businesses to experience losses, but reporting losses year after year can catch the IRS’s attention. They might suspect that your business is more of a hobby — and hobbies don’t qualify for business tax deductions. To avoid this trigger, you must be able to demonstrate what’s called a profit motive. For example, this could be a business plan indicating how and when you expect to become profitable, or records showing that you’re treating your business seriously by maintaining regular hours, keeping accurate financial records or investing in professional development.

Sizeable charitable donations. If you’re not generating a significant amount of income, any large charitable donations can raise eyebrows. Be sure to document every generous gift with related receipts and any supporting materials to help prove you have the best intentions. And remember, contributions must be made to qualified organizations that meet IRS guidelines for your business to claim a deduction.

Home office deductions. In the post-pandemic world of work, more people than ever are clocking in from home. But the IRS knows that even if you’re running your business from home a few days a week, that doesn’t mean you’ll necessarily qualify for the home office deduction. Do your due diligence and ensure your home office fits the bill as your principal place of business, meeting these IRS guidelines.

Large cash transactions. Dealing with wads of cash? The IRS is watching. The agency requires businesses to report cash transactions exceeding $10,000, and all businesses must comply with reporting requirements. It’s not just cash transactions that need to be reported. The rule applies to cash equivalents like cashier’s checks, money orders and bank drafts, too.

Personal use of a work vehicle. If you think you can pick up the kids at school or run errands in your business vehicle, the IRS may be on to you. You may derive tax benefits for your vehicle’s business use, but if you’re also using it for personal business, you’ll need to account for it on your taxes. Keep a detailed record of your mileage and gas costs pertaining to your vehicle’s usage. Keep a calendar to record the purpose and the mileage of each trip, every time you get behind the wheel.

As a business owner, your focus should be on growing your business — not worrying about an audit. 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.

New BOI Reporting Requirements — Is Your Business Compliant?

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Beginning this year, your small business may be one of millions dealing with additional reporting requirements. Yes, you heard that right.

Many LLCs, S-corps and C-corps will have new reporting requirements under the Corporate Transparency Act (CTA). In a nutshell, this mandate is intended to help mitigate money laundering by requiring certain businesses’ “beneficial owners” to report their Beneficial Ownership Information (BOI). The goal? To help the Financial Crimes Enforcement Network (FinCEN) establish a national database that can be utilized by national security and law enforcement agencies to combat criminal activities.

So what might this mean for you?

Determining beneficial ownership

Are you a beneficial owner? The beneficial owners of a reporting company can be categorized into two groups:

  • Individuals who exercise substantial control over a reporting company
  • Individuals who own or control 25% or more of a reporting company’s ownership interests

Keep in mind, actual ownership in the company is not a requirement. If you’re a CEO, COO, CFO or president, you may qualify as a beneficial owner.

 Providing BOI to FinCEN

All beneficial owners must submit the following:

  • Full legal name
  • Date of birth
  • Street address
  • Unique ID number which can be obtained from a non-expired US passport, state driver’s license or other government-issued ID

Filing on time

Your reporting due date depends on when your company was created or registered:

  • Before 2024: January 1, 2025
  • In 2024: Within 90 days of its creation or registration
  • After 2024: 30 days to file the initial report

If there are any changes made to your company’s beneficial owners, an updated report must be filed within 30 days. Failure to file both initial and updated reports can result in costly penalties, fines and even possible jail time.

All BOI reports must be filed electronically through FinCEN’s e-filing portal. You may choose to complete or a web-based version of the form or upload a completed PDF version. It’s generally an easy, straightforward process with no associated fees.

Ensuring compliance with BOI reporting requirements

By taking the necessary steps to meet these obligations, you can keep your business in good standing, while contributing to the prevention of money laundering.

For more details on these reporting requirements, check out the Small Entity Compliance Guide or consult your legal counsel for guidance.

How Qualified Charitable Distributions can Fulfill RMD Obligations

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When saving for retirement, tax advantages play a significant role. Traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans such as 401(k)s offer tax-deferred growth, so you don’t pay taxes on the investment gains — as long as the money stays in your account.

However, the IRS doesn’t want you to avoid paying taxes on these funds indefinitely.

If you’re approaching age of 70½, required minimum distributions (RMDs) will help ensure that you start withdrawing money from your tax-deferred retirement accounts and pay the appropriate taxes on those distributions. But did you know that a qualified charitable distribution (QCD) can fulfill your RMD obligations while avoiding taxes on the distribution?

The ABCs of a QCD

A QCD refers to a taxable distribution that is paid directly from an IRA to a qualified charity. According to the IRS, this includes nonprofit groups that have a charitable, educational, religious, literary or scientific purpose, or that work to prevent child or animal cruelty.

When a QCD is directly paid from your retirement account to an eligible charity, it’s not included in your taxable income, meaning the distribution is tax-free. The giver must be at least 70½ at the time the QCD is made.

Because it’s tax-free, you cannot deduct the QCD on your Schedule A as an itemized deduction. In order to claim that charitable contribution deduction, your total itemized deductions must exceed the standard deduction. Keep in mind, the increased income resulting from the distribution could impact your eligibility for certain tax credits and push you into a higher tax bracket.

Questions regarding qualified charitable distributions? Let us help you with tax planning to minimize your tax burden and make the most of charitable giving. Reach out to the tax experts at Magone & Company or call us today at (973) 301-2300 for an evaluation of your tax situation.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

6 Financial Faux Pas for Small Business Owners

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Fifty percent of small businesses fail within five years. Now, that’s a troubling statistic. What goes wrong? Are you making missteps that could lead to financial failure?

Find out the top financial mistakes that are all too common for small businesses — so you can ensure that you’re not caught in the same painful cycle.

Mistake #1: Not sticking to a budget. When you’re caught up in your business, it’s easy to overlook the importance of budgeting, which can lead to disastrous and costly consequences.

A budget provides a roadmap for your business’s financial journey, allowing you to set realistic goals, allocate resources effectively and make informed financial decisions. It also can help you identify potential financial pitfalls before they become major issues.

Mistake #2: Failing to differentiate personal and business expenses. By keeping personal and business finances separate, you not only maintain accurate records, but also protect your personal assets.

In the unfortunate event that your business faces legal issues or bankruptcy, having separate accounts can shield your personal savings, home and other assets from being seized to cover business liabilities. In addition, keeping separate accounts helps simplify your tax reporting, ensuring that you stay compliant and avoid unnecessary penalties.

Mistake #3: Using credit cards to cover business costs. While a credit card can increase your company’s purchasing power, business credit issuers can lower your credit limit and raise your interest rates at any time.

By putting major expenses on a card, you may pay significantly more in the long-run. Instead, business loans may be a smarter option due to lower rates.

Mistake #4: Expanding your headcount too quickly. During an upswing, it may be tempting to quickly to add to your team. But hiring, training and maintaining new staff is a hefty expense that might not be sustainable. And if you have to let them go, creating severance packages and extending insurance benefits also carry a price tag. Unless absolutely necessary, hold off on hiring to see if the growth persists.

Mistake #5: Neglecting to build an emergency fund. Failing to plan for unforeseen circumstances can leave your business vulnerable to financial shocks. Building an emergency fund is essential, providing a safety net to help you weather unexpected expenses, such as equipment breakdowns, legal disputes or economic downturns. Without an emergency fund, you may be forced to rely on credit cards, which can cripple your business’s financial health in the long-run.

Mistake #6: Doing your own taxes. Did you know that 77% of percent of small business owners feel the burden of business taxes? Unless you’re a tax professional, tackling your own business tax return can lead to trouble.

For example, if you claim too many deductions, you may find yourself getting audited. If you don’t claim enough, you could end up owing the government money that you haven’t budgeted for.  There are many variables that can impact your company’s tax circumstances, so it’s your best bet to consult with a trusted business or tax advisor.

Take charge of your finances now — before it’s too late

The professionals at Magone & Company can help you navigate debt traps, business taxes and smarter financial management practices to help keep your business afloat. Call us today at (973) 301-2300 for a specific evaluation of your situation.

Year-end Tax Planning for Small Businesses

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The year-end is a busy time for small businesses — from finalizing your books to forecasting for the year ahead. But it’s also a key time to take action to help lower your taxes. Read on for tax-saving strategies that may help your business save this year and next:

  • Did you know that taxpayers (excluding corporations) may receive a deduction of up to 20% of their qualified business income? If your taxable income exceeds $340,100 for a married couple filing jointly, the deduction may be limited based on paid W-2 wages, the unadjusted basis of qualified property (e.g. machinery and equipment) and whether you’re engaged in a service-type business or trade (e.g. accounting, law, health or consulting). Note that the limitations are phased in for those with taxable income up to $50,000 above their threshold, as well as for joint filers with taxable income up to $100,000  above the threshold. You may be able to claim a portion or all of this deduction by accelerating deductions or deferring income. You may also boost your deduction by increasing W-2 wages before year-end.
  • Compared to earlier years, more small businesses can use the cash method of accounting, rather than the accrual method. Your business may prefer this method as it’s easier to shift income to other years. To qualify, you must satisfy a gross receipts test, ensuring that your average annual gross receipts don’t exceed $27 million.
  • Excluding large corporations, a corporation that expects a small net operating loss (NOL) for 2023, and substantial net income in 2024, may accelerate a portion of its 2024 income or defer a portion of its 2023 deductions to create a small amount of net income for 2023.
  • The liberalized business property expensing option may give you an opportunity to save if your business possesses property and off-the-shelf computer software that’s depreciated. It covers interior improvements to a building, such as elevators, HVAC, security systems and more. For tax years beginning in 2022, the expensing limit is $1,080,000, while the investment ceiling limit caps at $2,700,000.
  • Your business may also can claim a 100% bonus first-year depreciation deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service. It applies to machinery and equipment purchased used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described in the expensing deduction.
  • To expense the costs of certain lower-cost assets, materials and supplies, you may take advantage of the de minimis safe harbor election, also known as the book tax conformity election). To qualify, the cost of a unit of property can’t exceed $5,000 if you have an applicable financial statement (AFS). The cost of a unit must not exceed $2,500 if there’s no AFS.
  • For optimal tax affect, you may choose to strategically time employees’ year-end bonuses. Cash-basis employers may deduct bonuses in the year paid, while accrual-basis employers may deduct bonuses in the accrual year, as long as the bonus is paid within two months following the end of the employer’s tax year. If you’re an accrual employer looking to defer deductions to a higher-taxed year in the future, you may change your bonus plan before year-end to establish the payment date after the 2.5-month window.

At Magone & Company, our goal is to get you thinking about potential moves that can minimize your small business’s tax liability now and in the future. For tax planning guidance or assistance, give us a call today at (973) 301-2300.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation. 

Understanding Earnouts: The M&A Negotiating Tool with Tax Consequences

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After a lull in 2022, merger and acquisition (M&A) activity has picked up this year as expected. However, due to ongoing economic uncertainty, earnouts are likely to play a big role in many deals — which may carry significant tax consequences.

Also known as a contingent consideration, an earnout is a mechanism that promises future payments to the seller in addition to an upfront payment.

The ins and out of an earnout

Today, the gap between what sellers want and what buyers are willing to pay has widened due to several valuation variables — expected cash flows, pricing multiples and rates of return.

Earnouts can help bridge the valuation gap and facilitate deal making by offering a contingent payment that the seller only receives when specific performance targets are met by an agreed-upon date. For example, 10% of the purchase price might be contingent on whether an acquired company meets a specific revenue or earnings target over a two-year period.

Dueling tax treatments
Depending on how a deal is structured, earnout payments may be treated as either part of the purchase price or compensation to the seller for services rendered.

If an earnout is deemed part of the purchase price, it’s taxed at the capital gains rate, generally 15% or 20%. The 3.8% net investment income tax also may apply in this situation. However, if it’s considered compensation, it’s taxed at the applicable ordinary income rate, which can be as high as 37%. (Plus, it’s subject to payroll taxes.)

The characterization of an earnout affects the buyer, too. An earnout that’s treated as compensation is immediately deductible. On the other hand, the earnout must be capitalized and amortized over time if it’s considered a deferred payment on the purchase price.

Compensation vs. purchase price
Several factors can indicate whether an earnout is part of the purchase price or compensation for the seller’s services:

  • Is the seller required to perform services to receive the earnout payment?
  • Are they receiving separate reasonable compensation for those services?
  • Is the seller’s employment required for the entire earnout period?
  • Is the earnout paid even if the seller is terminated?
  • How does the earnout amount compare with reasonable compensation for the seller’s services?

Another important consideration is whether there’s any evidence of intent in documentation related to the transaction. For example, does correspondence show a difference of opinion on the target’s valuation and, in turn, the purchase price? Did the deal close after an earnout was added? Does the letter of intent connect the earnout to the seller’s continued employment?

Do your due diligence
When buying or selling a business, always consult with your tax advisor to ensure the transaction documents and structure reflect the intended tax results. The professionals at Magone & Company can help you navigate M&As to help achieve the most favorable tax position. Call us today at (973) 301-2300 for a specific evaluation of your situation.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.