Sometimes dealing with the Internal Revenue Service goes smoothly. Yet
there are times within this agency when it seems one hand doesn’t know
what the other hand is doing. And this year, when budget cuts have
resulted in poor customer service, resolving the issue can be stressful
and take much longer than anticipated.

We received a phone call earlier from a taxpayer suffering at the hands
of the IRS. It’s a nightmare! Those were the first words I heard when I
answered the phone. This gentleman, let’s call him Stanley, is in poor
health. Stanley’s only source of current income is Social Security
Disability Income (SSI). He owes the IRS a substantial amount in back
taxes having failed to file returns believing his retirement income was
tax free. Cashing out his retirement fund to pay for medical expenses
landed him in tax trouble because the withholding from the distribution
did not cover the tax liabilities.

So we’re talking about a bona-fide hardship case. Normally in this
situation, the taxpayer would qualify to be deemed currently not
collectible, which would relieve him from any collection efforts at all.
The IRS would abandon collections then check back with him in a year to
see if his financial situation had improved. If it had, the service
would set up a payment plan and if not the currently not collectible
status would resume for another year.

Stanley called the IRS and offered to pay a small pittance each month.
This sum is not enough to cover even the interest on the liability much
less put a dent into the penalties and principal. He’ll likely be paying
off the debt for the rest of his life. But the IRS set up the payment
plan under those terms. A couple of weeks later before even the first
payment was due, he was notified that the IRS began garnishment of $200
per month from his SSI check, which increases his hardship circumstances
substantially. He called the IRS again and they promised to stop the
levy but they refused to return the amount taken. Another month went by
and again they yanked $200 from his check. Another phone call; another
promise to stop the levy. We’ll have to see if next month’s check is
intact or not. Then we received an email from another taxpayer with
exactly the same problem. A payment arrangement had been agreed upon
then two weeks later the IRS garnished the taxpayers wages.

If this happens to you or if you are having other tax problems, be sure
to call the number on the last notice you received from the IRS. If you
call the IRS main number you are sure to be transferred from one
department to another. Document who you spoke with, including the
employee ID number, the date called and the content of the conversation.
If you are at wit’s end and are more concerned with your mental health
than with the IRS problem, consult a tax professional to speak on your
behalf. You simply sign an IRS Form 2848 Power of Attorney. This allows
the tax professional to engage with the IRS regarding your confidential
tax file. Often times a tax professional can cut through the red tape
and achieve results quicker. If all else fails, call the Taxpayer
Advocate at 1-877-777-4778. The Taxpayer Advocate is an independent
agency within the IRS that goes to bat for taxpayers who have exhausted
all other means of resolving a tax problem.

Are you Self-Employed? If so, the IRS has you in their cross-hairs. Your
chances of being audited are THREE TIMES HIGHER than the average worker
bee. You see, if you work for an employer and receive a Form W2 at the
end of the year, the IRS gets a copy of this document. If what the
employer says you made and what you say you made matches and you have no
other sources of income, you get as close as possible to being audit
proof, although everyone is subject to being audited. However, if you
are self employed, the IRS believes that you are most likely cheating
the system, either intentionally or because you don’t fully understand
the tax codes. The IRS believes you may not be declaring all your income
(think about cash receipts) or over inflating your business deductions
with personal expenses. So the IRS audits you and your business. Fun right?

Here is what the IRS does when it examines the tax return of a
self-employed person:

They will first ensure that all income is declared. The first line on
the business tax return or Schedule C is Gross Receipts. If yours is a
service business like a graphic artist or web designer you will likely
receive Form 1099 at year end from your customers. The IRS receives
copies of these 1099s, totals them and compares the total to what is
declared on the Gross Receipts line. So you too should total all 1099s
you receive for the year and make the comparison yourself prior to
filing the tax return. If your 1099s total $200,000 and you declare only
$150,000 on your tax return, guess what? You will receive a visit from
an IRS agent! If in your calculation you find an error on a 1099, make
sure the originator files a correction with the IRS and provides you
with a corrected copy. The next step the IRS takes to ensure proper
reporting of income is a comparison of Gross Receipts from the tax
return with total bank deposits for the year. (This will include your
personal bank account). It’s important to define additional bank
deposits that do not relate to sales and keep a record of the details of
the transaction. For example if the IRS sees $200,000 in bank deposits
but you report Gross Receipts of $150,000 the IRS will want to know
where the other $50,000 came from. If you cannot prove a legitimate
source, it will likely assign the $50,000 difference to sales and charge
tax on it. You must prove the bank deposits were not taxable sources of
income. For example, the $50,000 difference may include capital
contributions on your part of $10,000 from savings to help cash flow,
and a credit line advance of $40,000. These two transactions are not
taxable events and if you have canceled checks for your contributions
and the credit line statement as proof, you’re home free.
Second they will ensure that no personal expenses are deducted. Your
taxable income is reduced by the total deduction of all ordinary and
necessary business expenses. Classification of these expenses is a
subjective task open to argument with the IRS. As long as the deduction
falls within those parameters and was also not for an illegal activity
(such as getting a parking ticket while attending a business meeting),
you are fine. Let’s say for example that entertaining customers is
common in your industry because you own a winery. These expenses will
fly with the IRS as ordinary and necessary. However, if you are a
carpenter, you will likely have a very small amount of expense in this
area. The IRS will not expect to see a large deduction for meals and
entertainment and will disallow anything excessive, feeling that you are
likely attempting to write off family meals, meals with friends and
other personal meals such as your lunch. If you have valid deductions
that may be questionable, such as meals, travel, entertainment and
vehicle expenses, you should keep all documentation that proves business
rather than personal intent. Remember, a DETAILED log is important as
well as an independent third party statement that will verify your log.
An example is your mileage log might be very detailed with date,
business purpose and odometer reading, however the IRS has won in court
when a tax payer was unable to produce third party maintenance records
that verified the vehicle odometer reading.
The IRS will look for personal use when touring your home office. The
auditor will measure the square footage to determine if it matches what
is declared on the tax return (yes they will use a tape measure). The
auditor will also check out the space itself to see if the room is used
for personal purposes, like a guest bedroom, and if so, may disallow
that portion of the room. Basically the same rule applies if, for
example, you have business inventory or assets in storage or the
basement. The auditor will tour the location to see if any personal
items are kept there. If so, the amount paid for storage expense may be
reduced and result in a higher tax liability.

No one can guarantee you will never be audited, but a good tax
professional will help you survive an audit.

Owning a small business is not easy! It is important that you keep a
good set of books. These books should be constantly and
contemporaneously updated to keep the IRS satisfied that you have not
just thrown together records at the end of the year.
Preparing taxes is a primary reason to keep a detailed set of books,
however this is not the ONLY reason. Every business owner wants to know
how profitable their business is and this means tracking income &
expenses. This also means a successful business owner will compare
current year to prior year results as well as compare how the business
is progressing to current industry standards. Reviewing this year’s
balance sheet accounts (cash, receivables, liabilities, etc.) to prior
years will help establish profit and sales goals.

There are more than 30 million small businesses in the US, 74 percent do
NOT employ full-time or part-time accounting help according to a June
2012 article published by AccountingToday.com. Consequently, many small
business owners are attempting to figure this out on their own without
the necessary background, taking away valuable time from running their
business.
Going at it alone might save money at first, but if you aren’t qualified
to do the work, you could end up landing in more trouble. Tasks such as
posting payroll properly, tracking credit card usage and reconciling
accounts can be tricky. Just knowing which account to post a particular
transaction isn’t always clear. A very clear comparison is just because
you own a hammer does not make you qualified to build a house.
Throwing data into QuickBooks or some other accounting software without
knowing the key elements of the bookkeeping process will create some
disastrous results. And those results will adversely affect your tax
return. This could result in additional tax liabilities as well as open
up other years for examination during an IRS audit.
Experts will tell you to seek out professional help in all areas of your
business in which you are not competent. In the past, small business
owners have had three options when it comes to business bookkeeping:
handle it themselves, utilize online bookkeeping programs or outsource
to a CPA. Small businesses embrace online tools for their lower dollar
cost, but without accounting expertise, spend valuable time trying to
figure out tasks in desperate need of a human being for guidance. CPAs,
on the other hand, are very expensive localized, and are not required to
keep up to date on tax issues, something that is all important to small
business owners.
So try going the cost effective route. Premiere Business Services knows
bookkeeping and most importantly studies tax law constantly! Our staff
works closely with small business owners to ensure they pay the least
amount of legal tax possible.

Money is the lifeline of any business, so whether you’re starting a
business or running an existing one, securing financing is a major
factor. Many budding entrepreneurs find the task daunting and don’t even
know where to begin.

We do not encourage unnecessary borrowing, however when you must borrow
here’s a simple and practical guide on how to go about preparing to
apply for a small business loan.

*What criteria do banks look for in making small business loans?*

Different banks or lending institutions may have different standards,
but in general, in order to consider your application for a small
business loan, banks will require:

*

The loan must be for a sound business purpose. The business must be
eligible based on size, use of loan proceeds and the nature of the
business.

*

You and your business partner(s) must be of good character, have
experience and good personal and/or business credit history .

*

The ability to pay back the loan and reasonable to strong collateral
is very important. And of course, owners must have personal equity
investment in the business, know as “skin in the game”.

*What information will you need?*

Different lenders may require more or fewer documents, but in general,
you will need:

*

Personal and business credit history

*

Personal and business financial statements for existing and start-up
businesses as well as projected financial statements

*

Strong, detailed business plan including personal information such
as bios, education, etc.

*

Cash flow projections for at least a year, and

*

Personal guaranties from all principal owners of the business

*How can you set yourself up from the beginning to make the process
easier? *

Be prepared; be thorough; be truthful.

*

Choose your lending institution carefully. Larger banks tend to shy
away from small loans as they are less profitable and take the same
amount of underwriting and servicing. That doesn’t mean large banks
do not make small loans; it is just more difficult.

*

Approach banks or lending institutions you have worked with or of
which you are a customer.

*

Explore community banks and Credit Unions.

*

Talk to a lending officer and find out exactly what documentation
they require.

*

Be thorough, bring everything they ask. Many loan applications are
denied or face unnecessary hurdles because of incomplete applications.

*What is the typical size of a small business loan?*

Small businesses come in many sizes, from a start-up of a one-person
company to hundreds of employees, and their financial needs vary
accordingly, so “typical” also varies. That said, in the banking
industry the median small business loan is about $130,000 – $140,000
with highest around $250,000.

*How can you get financing to start a business since many banks want to
fund growth?*

Start-ups are probably the most difficult ventures when it comes to
securing financing. Many start-up businesses seek financing from family,
friends and credit cards. Again, we do not encourage credit card
financing as this is the most expensive and the hardest to eventually
pay back.

If the credit is sound, the business plan strong and you have enough
personal resources to invest and collateral to guarantee, smaller,
community banks and other community financial institutions and Credit
Unions may consider lending you money.

*Where do you turn for help?*

*Premiere Business Services offers consulting for new and existing
businesses. You also will want to have conversation with your banks loan
officer and even your attorney.*

Do you work from home? If so, you may be familiar with the home office
deduction, available for taxpayers who use their home for business.
Beginning in 2013, there is a new, simpler option to figure the business
use of your home.
The new simplified option does not change the rules for who may claim a
home office deduction, it merely simplifies the calculation and record
keeping requirements.
Here are some facts you need to know about the new, simplified method to
claim the home office deduction.
1. If you use this method to claim the home office deduction, you will
not need to calculate your deduction based on actual expenses. You may
instead multiply the square footage of your home office by a prescribed
rate.
2. The rate for 2013 is $5 per square foot of the part of your home used
for business up to a maximum footage allowed of 300 square feet. This
means the most you can deduct using the new method is $1,500 in 2013.
3. You may choose either the simplified method or the actual expense
method for any tax year. Once you use a method for a specific tax year,
you can later change to the other method for future years, you just
cannot change for the same year.
4. If you use the simplified method and you own your home, you will not
be able to depreciate your home office. You can still deduct other
qualified home expenses, such as mortgage interest and real estate
taxes. You will claim these deductions on Schedule A, Itemized Deductions.
5. You can still fully deduct business expenses that are unrelated to
the home if you use the simplified method. These may include costs such
as advertising, supplies and wages paid to employees.
6. If you use more than one home with a qualified home office in the
same year, you can use the simplified method for only one in that year.
However, you may use the simplified method for one and actual expenses
for any others in that year.
Remember, you must still use the space regularly and exclusively.

Premiere Business Services provides tax preparation for individuals and
business. We also provide accounting and payroll services for small
business owners who want to keep as much of their business profits as
legally possible. Call us, (636)947-8885, to find out how we can help
you grow your business while saving you tax dollars.