BHB Advisors LLC, CPAs and Consultants

 

Based in Minnesota, BHB Advisors, LLC is a full service tax and accounting practice, offering the following services:

  1. Tax – planning and compliance work for individuals, corporations and partnerships
  2. Accounting Services and Financial Statements
  3. Consulting and Management Advisory Services

Our mission is to communicate, collaborate and cooperate with our clients to help get them where they want to be financially.

Our specialty is working with individuals and small to midsize companies in the Minneapolis and St. Paul area.

We hope that our website will offer you a glimpse of our expertise and help answer tax and accounting questions you may have.

IRS Penalties

Paying taxes and filing the annual tax return is not most people's favorite activity.  Sometimes life gets a little crazy and taxpayers forget their obligation to file or pay the tax due on their return.  However understandable this situation may be, it is not without consequences. There are two penalties that apply to a late or unpaid return.

Late Filing Penalty

April 15th is normally the deadline to file a personal tax return, however taxpayers can file for a 6-month extension if necessary.  Should a taxpayer fail to file by April 15th without filing an extension, or exceed the extension by filing after October 15th, they will be subject to a late filing penalty.  The penalty for failing to file your tax return is normally 5% of your unpaid tax for each month or part of a month that the return is late.  There is a limit to the penalty and it will not exceed 25% of the unpaid tax.  However, if the return is more than 60 days late the minimum penalty is the lesser of $135 or 100% of the unpaid tax.

For example, Carlton did not file for an extension and did not file his tax return until April 30th.  The total unpaid tax was $500.  His failure to file penalty would be $25 ($500 x 5% x 1 Month). If Carlton had not file his return until June 30th his failure to file penalty would be $135.  Because he filed the return more than 60 days after the due date, penalty minimum rules apply. If there was not a minimum rule his penalty would have been $75 ($500 x 5% x 3 Months).

If a taxpayer does not have a balance due, then even if the return is late, there is no late filing penalty.

Late Payment Penalty

Even if a taxpayer files an extension, if they owe tax on their return they may be subject to a late payment penalty on any unpaid tax after April 15th.  An extension gives a taxpayer more time to file NOT more time to pay the tax.  The late payment penalty is .5% per month or part of a month that the tax is unpaid.  It is limited to 25% of the unpaid taxes. If a taxpayer requests an extension and has paid 90% of the total taxes owed, they may not be subject to the penalty.

Let's assume in our above scenario that Carlton did file an extension and then filed his return with a payment for the unpaid tax on April 30th.  The late payment penalty would be $3 ($500 x .5% x 1 Month rounded up). IF his unpaid tax was $3,000 and he paid on June 30th his penalty would be $45 ($3,000 x .5% x 3 Months).

Our example, only includes the penalty for a late payment. Be aware that late payments will also be subject to interest.

If a taxpayer owes both the failure to file and the failure to pay penalty, the maximum amount charged in those months is 5%.

It is recommended that taxpayers make sure to file on time even if they cannot pay the tax.  The failure to file penalty is 10 times more than the failure to pay penalty.  If a taxpayer cannot pay the whole amount of tax due they should pay as much as they can to reduce penalties.  After their initial payment, taxpayers may use IRS online resources to apply for a short extension to pay, set up an installment agreement, or suggest an offer in compromise.  If you can show reasonable cause for late filing and payment the IRS may waive your penalties.

No one likes to pay penalties, so it is a good idea to stay organized and plan ahead.  If you think you may owe tax and want to avoid surprises or start planning for any additional tax due, consider contacting your tax preparer for a tax plan.  A little time and money now could save you a lot latter.

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What to do if you receive an IRS letter

First of all don't panic, the IRS sends millions of notices and letters to taxpayers every year.  An IRS notice will typically be about your federal tax return or tax account.   Most of the letters will ask you to address a specific issue, however they may also send a letter requesting additional information.

If an IRS letter informs you that they have made a change or correction on your tax return, it is important to review the change carefully and it may even be necessary to discuss the matter with your tax advisor.  Typically, if you agree with the change, then you should follow the instructions in the letter if they guide you to take action.  If you do not agree with the change, then you or your tax advisor should write a letter to explain why you disagree.  You should also include any documents that support your conclusion.  There should be an address on a tear off portion of the IRS letter that will help you to send your response to the right location.

Most notices will not require a trip to the IRS or even a phone call.  If you have a question and wish to call them there should be a phone number in the upper right hand corner of the notice with the phone number of the correct department.

Please note that it is unlikely that the IRS will call you without sending a letter first. They will not contact you by email or social media to ask for personal or financial information.  If you are contacted and you are unsure if the request is legitimate you should contact your tax advisor before giving out any personal or financial information.  If you and your advisor deem that the contact is suspicious you should report the suspicious activity based on the IRS guidance here.

Remember that receiving an IRS letter does not automatically mean you did something wrong.  Take the time to carefully read the notice and most importantly follow up, as requested, in a timely matter.  Don't be afraid to utilize your tax advisor and make sure to send them a copy of any letters when you receive them.

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S-corporations and the Home Office Deduction

When you are a shareholder of an S-corp but also work for the company you are considered an employee.  Having employee status means that any home office deductions must be reported on Schedule A which requires that the deduction be greater than 2% of your adjusted gross income in order to have any tax benefit. This is generally not the case.  However there is another way to get a business deduction for the cost of your home office.   If you are not aware if you are eligible for the home office deduction please see our article “Work from Home? A Possible Deduction…

For S-Corp owners that are eligible for the home office deduction, the IRS allows the S-Corp to reimburse the owner and employees for ordinary and necessary business expenses including expenses directly related to keeping an office in their home as a "working condition fringe benefit."

The following steps must be followed to take advantage of this reimbursement plan and business deduction:

  1. The employer must adopt an accountable plan for business expense reimbursements and follow the substantiation rules.  Example
  2. The employee must provide an accounting (expense report with supporting documents) of the following expenses and apply a business use percentage based on the square footage of the area used exclusively for business to the entire home.

The following expenses are allowed (subject to the business use "square footage" percentage):

  1. Utilities
  2. Insurance
  3. Repairs and maintenance

The following "direct" expenses are allowed 100%:

  1. Office supplies
  2. Computer equipment
  3. Cell phone charges

The following expenses are NOT allowed for reimbursement:

  1. Depreciation of home
  2. Mortgage interest
  3. Property taxes

Mortgage interest and property taxes may be deductible elsewhere on your personal tax return so they do not qualify for reimbursement by the employer.  If you rent your home, you may also be able to deduct the business percentage of the rent paid as well.  Please contact your tax advisor if you have any questions and to discuss your specific situation.

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Work from Home? Possible Tax Deduction:

If you work from home you may be entitled to a tax deduction.  This deduction ordinarily benefits self-employed persons, but is available to employees as well.  Though it is available to employees, most will not see a tax benefit as the deduction is subject to a 2% of adjusted gross income reduction.  A future article will explain a way for certain employees (S-corp shareholders) to take advantage of the home office deduction.

In order to qualify for the home office deduction you must meet certain criteria.  The office space must be used exclusively and regularly as a principal place of business.  Let's break down these components separately.  Exclusive use means that the home office is not used for personal matters.  So an office that doubles as a spare bedroom does not qualify.  The regular use condition is satisfied if you use the space continually and in the normal course of business.  Occasionally meeting clients at home does not qualify.  Meeting the principal place of business requirement is more ambiguous but there are two main factors used to determine eligibility.  First, the importance of activities performed must be essential to the business.  The second factor, used if the first one is not clear, is the time spent in/at each place.

If you are an employee there is an additional requirement that the home office must be for the convenience of the employer.  This is a difficult test to meet, and lots of employees will not qualify.  Each situation should be evaluated specifically as there are exceptions but here is a quick reference that answers the basic question.  If you have space to conduct your business (i.e. office space) provided by your employer, you do not qualify.  The opposite is also true, if your employer does not provide office space; the home office is for the convenience of the employer.

If you meet the criteria and are eligible for a home office deduction how much is it worth?  As with most situations with the IRS there isn't just one solution.  There are two possible ways to calculate what your deduction may be.

  • Simplified Method – You receive a $5 deduction per square foot of office space; with a maximum of 300 square feet. With this method the record keeping requirements and allocations discussed below are eliminated.
  • Standard Home Office Deduction – There are three main components to the home office deduction
    1. Indirect expenses – these are taken based on the business use square footage percentage; the percentage of your home that the office occupies. These expenses impact the entire home.
      1. Utilities
      2. Insurance
      3. Repairs & maintenance
      4. Property taxes
      5. Landscaping & snow removal
    2. Direct expenses – related to the home office only.
      1. Repairs & maintenance for the office only
    3. Depreciation –this is a deduction for the decrease in value of your home over time. This deduction is allowed on the same percentage basis as indirect expenses.

As you can see, the amount of work to calculate and maintain the records for the standard home office deduction are quite substantial.  Also keep in mind that when you eventually sell the home any depreciation allowed for the period used for business must be taken into account for the purpose of determining taxable gain on the sale.  You can determine each year whether to take the simplified or the standard home office deduction.

We recommend taking advantage of every tax deduction available to you.  Not everyone qualifies for the home office deduction but if you do, it can be very advantageous.  With a little planning it is much easier to track and record everything needed.  If you have questions related to your specific situation, please contact your tax advisor.House2

2015 Tax Season Resources

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

Individual Engagement Letter

Fiduciary Engagement Letter

Individual Questionnaire – This is a “fill in” PDF form, but will need to be either printed to .pdf or paper to record your answers.

Fiduciary Questionnaire  – Print and record your answers on paper.

Individual Organizer (Not available for Fiduciary)

If we did your return in 2014, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

  • Basic – For taxpayers without Schedule C business income or rental property.
  • Business Income – For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Rental Income – For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Complete – This is the complete version for taxpayers with multiple activities such as business, rental, or farm income.

If you have Adobe Acrobat see our instructions for filling out your organizer in Adobe.

2015 Tax Planning

It is time to consider your end of year tax plans.  The laws for 2015 have not yet been finalized, however, most analysts expect the expiring provisions to be reinstated for 2015.  Some may be made permanent or extended for multiple years giving certainty to future years.  Following is a letter that we provide to clients detailing some of the opportunities for tax planning.  The letter specifies which provisions are up for extension and the rules in effect should they not be reinstated.

Consult your tax advisor for any tax planning considerations and check back here for any updates.

2015 Tax Planning Letter

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Repair Expense Safe Harbor Increased

Companies that do not submit financials to the SEC or have their financial statements audited each year could only deduct repair expenses up to $500 under the IRS's de minimis safe harbor.  This safe harbor applies to a large number of small businesses.  The IRS has increased the de minimis safe harbor amount to $2,500 for tax years beginning after 2015.  They also stated that they will not challenge this for earlier years if other conditions are met.  You must have a policy in place at the beginning of the year to take advantage of this safe harbor.  Consider adopting this policy soon to prepare for the 2016 tax year.  Do not hesitate to contact your tax advisor to ask about this new policy change.

Sample Capitalization Policy

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Understanding Taxable Fringe Benefits

Have you ever wondered if your company is handling fringe benefits correctly?  Click on the link below for an introduction on understanding taxable fringe benefits as published in the Minnesota Society of CPA's November issue of the Footnote.

Understanding Taxable Fringe Benefits

Common QuickBooks Mistakes

Throughout my years working with QuickBooks and doing bookkeeping I have observed that problems with year end and interim financial statements can be boiled down to simple input error. Many business owners do not have the ability to hire a bookkeeper with extensive knowledge of the software and find themselves (as usual…) doing everything.  So here are a few common mistakes to avoid while doing your books…

  1. Make end-of-the-year journal entries.  Most CPA's after reviewing the books for official consolidated financial statements and tax returns will come up with a few adjustments to the books and give the adjustments to the owner for entry. A common pitfall is to fail to make these adjustments.  Failure to make these adjustments will mean that your year end will not match what is filed for taxes and the next year your CPA will have to spend additional time to reconcile the balance sheet. This can get expensive.

 

  1. Do not change entries from a prior year.  Similarly to the first common mistake that owners will make is to change an entry in a prior year.  This will again throw off the balance sheet, which will need to be reconciled before new data can be interpreted.  If you feel a change from a prior year is necessary, talk to your accountant first! They will be able to tell you if the corresponding change will effect what was reported to the IRS or if you may do a simple journal entry as of January 1st of the current year.  It can be easy to make a mistake at the beginning of a new year when entering a date. Luckily, QuickBooks has user preferences that can be used to prevent these mistakes. First you can set a closing date that will prompt you to enter a password before you can make any changes to a prior year. Or you can set a range warning that will prompt you if the date you entered is a certain number of days in the past or future of the current date.  Both of these options can be found under the EDIT > PREFERENCES tab.

 

  1. Pay attention to dates. Do we see a theme starting? Timing is a very important aspect of accounting/bookkeeping. It is important to record transactions when they occur.  If you wait to enter data into QuickBooks at the end of every month or every other month, that is fine but make sure not to use the current date for every transaction.  Using the current date will make it very difficult to reconcile your bank account. For example, if you have two transactions with the same amount you may not actually know which has cleared. Using the current date for all transactions will also prevent you from having good data to analyze business performance.  For example you will not be able to tell which months perform well vs. poor, which expenses have risen, and the cause and effect of external factors on your financials.

 

  1. Be consistent. Bookkeeping is about processes. Therefore if you use the QuickBooks accounts payable function make sure you always enter the invoice before paying the bill.  Writing a check against the accounts payable account without entering a bill will give you negative accounts payable.  If you use the accounts receivable function, make sure to enter an invoice before receiving payment or you will throw off undeposited funds.  If you use the class function, make sure to always enter a class before saving a transaction or you may not have accurate reports by class.  QuickBooks has many defaults that create warnings when you start doing things out of order or forget something; don't turn these off, they will help you.

 

  1. Don't be afraid to ask for help. Your accountant/CPA is there for you, if you have a weird scenario or just a question, call them.  They see weird transactions everyday and a quick call could save you a lot of money in the long run.

Hopefully spelling out a few of the common mistakes will help you save time and money. For any general questions, questions about outsourcing your bookkeeping, or questions about getting some QuickBooks training give us a call. We have many years of experience with QuickBooks and would be happy to help.