Special Tax Benefits Still Available in 40 Designated Empowerment Zones

Eligible businesses can still claim Empowerment Zone tax benefits through the end of this year. Empowerment Zones are certain urban and rural areas where employers and other taxpayers qualify for special tax benefits.

The Department of Housing and Urban Development and the Department of Agriculture designated 40 economically distressed locations as empowerment zones. Find a list of them in the instructions to IRS Form 8844. Partnerships and S corporations must file this form to claim the credit. All others are generally not required to complete or file this form if their only source for this credit is a partnership, S corporation, estate, trust, or cooperative. Instead, they can report this credit directly on Form 3800, General Business Credit. The following exceptions apply. You are an estate or trust and the source credit can be allocated to beneficiaries. For more details, see the instructions for Form 1041, Schedule K-1, box 13, code K. You are a cooperative and the source credit can or must be allocated to patrons. For more details, see the instructions for Form 1120-C, Schedule J, line 5c.

 

Empowerment Zones Urban areas

Parts of the following urban areas were empowerment zones. You can find out if your business or an employee’s residence is located within an urban empowerment zone by using the EZ/RC Address Locator at www.hud.gov/crlocator.

  • Pulaski County, AR
  • Tucson, AZ
  • Fresno, CA
  • Los Angeles, CA (city and county)
  • Santa Ana, CA
  • New Haven, CT
  • Jacksonville, FL
  • Miami/Dade County, FL
  • Chicago, IL
  • Gary/Hammond/East Chicago, IN
  • Boston, MA
  • Baltimore, MD
  • Detroit, MI
  • Minneapolis, MN
  • St. Louis, MO/East St. Louis, IL
  • Cumberland County, NJ
  • New York, NY Syracuse, NY
  • Yonkers, NY
  • Cincinnati, OH
  • Cleveland, OH
  • Columbus, OH
  • Oklahoma City, OK
  • Philadelphia, PA/Camden, NJ
  • Columbia/Sumter, SC
  • Knoxville, TN
  • El Paso, TX
  • San Antonio, TX
  • Norfolk/Portsmouth, VA
  • Huntington, WV/Ironton, OH

 

Key Empowerment Zone tax benefits include:

  • Empowerment Zone Employment Credit. Eligible employers can claim this credit on Form 8844. It is worth up to $3,000 and is available to businesses based on wages paid to each qualified employee who both lives and works in an empowerment zone,
  • Increased expensing for qualifying depreciable property,
  • Tax-exempt bond financing,
  • Deferral of capital gains tax on the sale of qualified assets sold and replaced, and
  • Partial exclusion of capital gains tax on certain sales of qualified small business stock.

 

Filing a Business Tax Return

Information about Filing a Business Tax Return

Filing a tax return and reporting taxable income is more than just checking a few boxes and signing your name to a form. This may seem obvious, but you must report all taxable income on your tax return. Do you know what types of income are considered taxable to avoid tax trouble? All income is taxable, unless the law specifically excludes it. Income from your business can include many forms, such as cash, checks, or credit card payments, or the exchange of property or services, called bartering.

 

Business Tax Return and Batering

Bartering is the exchange of one product or service for another, including through the Internet. Both parties must include the fair market value of goods or services received as income on their tax return. With bartering, you must include the value of the non-cash income from the exchange as income.

 

Supporting Business Income and Expenses to IRS

To support your expenses associated with your purchases, such as the cost of all raw materials or parts purchased for manufacture into finished products, you need to keep a record that shows the amount you paid for these purchases. Proper documentation includes: canceled checks, cash register tape receipts, credit card sales slips, invoices. You also need to verify expenses — the costs you incur, other than purchases, to carry on your business. Your supporting documents should show the amount paid and business purpose, such as, canceled checks, cash register tapes, account statements, credit card sales slips, invoices, petty cash slips for small cash payments. The area of claiming expenses is a potential pitfall for tax trouble; specifically, claiming personal expenses as business expenses.

 

Keeping Business and Personal Expenses Separate

If you keep your business and personal records separate, you will go a long way to avoid this common mistake. While there are many examples we could go over, let’s look at three top expenses that are looked at very carefully by the IRS. First, home office deduction – many taxpayers work at home these days. If you have a home office, personal expenses are never allowed as a business expense. Business expenses must be kept separate, and good recordkeeping is a must when you have a home office. Next is frequent business vehicle use. Just as it’s easy to mix personal with business use in a home office, business vehicles are also rife for unqualified deductions.

 

Claiming Business Expense Deductions

This doesn’t mean you can’t claim a business vehicle, but make sure you have a detailed log with the date, destination, and mileage for each trip. And then you don’t include stop offs for coffee or dry cleaning. And finally, travel and entertainment expenses – if you’re self-employed, it’s tempting to claim lots of meals and travel on the Schedule C you file with your tax return. But you can avoid tax trouble by claiming only the proper expenses allowed by the law. Let’s look at the last business expense a bit closer. If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove certain elements of expenses. If you’re claiming business-related trips and entertainment, it’s crucial to keep detailed records and receipts of who was there and event specifics.

 

Deducting Business Cost of Using a Vehicle

You will be able to deduct the cost of the vehicle you use for business purposes using either a standard per-mileage rate or the actual expense you incur. For additional information on how to prove certain business expenses, refer to Publication 463. In addition to allowing deductions which reduce the amount of taxable income, the Internal Revenue Code provides for business tax credits which can reduce the amount of tax on a dollar-for-dollar basis. You can search www.IRS.gov and enter “business tax credits” in the Search box to find out more information.

Choosing a Business Tax Return Preparer

When it comes to preparing the tax return for your business, you may want to choose a professional to help you. Here are some tips. Go to the Directory of Federal Tax Return Preparers on www.IRS.gov to start your search on the preparer’s qualifications. Avoid businesses which delegate the work to someone with less experience or knowledge. Also ask questions and get references from clients, friends, or coworkers who have used the tax professional before. Find out if they were satisfied with the services received.

 

Choosing a Small Business Tax Return Preparer

Select a preparer who will be available to assist you in the future, in case you receive a correspondence from the IRS or your return is selected for audit. Check if your preparer is affiliated with a professional organization and if that organization provides or requires their members to acquire continuing education and adhere to a code of ethics. Keep in mind that an unenrolled preparer may be affiliated with a professional organization. Check if the preparer has a mandatory IRS issued identification number, called a PTIN. Find out your preparer’s history with the Better Business Bureau and State Agency for Certified Public Accountants and the state’s Attorney General’s Office.

 

Other Choosing a Business Tax Preparer Tips

Other tips are to avoid preparers who guarantee they can obtain a larger refund than other preparers. Beware of a preparer who guarantees results or who bases his fees on a percentage of the amount of the refund. And remember, a practitioner may not charge a contingent fee – percentage of your refund – for preparing an original tax return. The law requires a paid preparer to sign the return and complete the information in the space provided for paid preparers. In addition, the preparer is required to give you a copy of the return and keep a copy of the return or list with your name and SSN for three years. It does not matter who prepares the return. The taxpayer is ultimately responsible for the information reported on the return and, if not accurate, would pay any additional taxes and interest and may be subject to penalties. So double-check every single line before submitting your return, especially if you’re a do-it-yourselfer. Be sure all your income is reported, including income for which you did not receive any statements, such as interest income and cash payments.

 

Signing a Tax Return Prepared by a CPA

Also, never sign a blank return or sign it in pencil. Watch for common mistakes, such as incorrect or missing Social Security numbers, incorrect tax entered based on taxable income and filing status. Computation errors in figuring the taxable income, withholding and estimated tax payment and credits you claim, withholding and estimated tax payments are entered on the wrong line and math errors. Most electronic software programs will help you avoid this. It is important that you review your entire return because any errors may delay the processing of your return. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it. Speaking of that, don’t forget to sign the return. Believe it or not, that’s another very common mistake.

 

Using IRS eFile to Submit Business Tax Return

When you are ready to file your return, consider IRS eFile, which will help you cut back on math errors that may cause you trouble. Best of all, you’ll get your refund faster with direct deposit. If you owe tax, you can file early and delay paying with several ePay options, including credit cards. If you are paying someone to prepare to file your return, make sure they offer IRS eFile. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically unless the client opts to file a paper return. IRS has safely and securely processed more than one billion individual tax returns since the debut of electronic filing in 1990.

 

Using the Electronic Federal Tax Payment System (EFTPS)

For making your tax payments, use the Electronic Federal Tax Payment System. EFTPS is the secure, accurate, easy-to-use way to make Federal tax payments of any kind and provides an immediate confirmation for each transaction. The service is offered free of charge and enables employers to make and verify Federal tax payments 24 hours a day, 7 days a week, through the Internet or by phone. For more information, employers can individually enroll online at www.EFTPS.gov; or call EFTPS Customer Service at 800-555-4477 for an enrollment form. Staying knowledgeable about taxes is a vital part of your business and one way to avoid tax trouble. IRS has many ways to help you. Check out our website at www.IRS.gov. It has a comprehensive list of helpful publications and other small business tools on the Small Business and Self-Employed Center webpage. Or, if you are just starting a business, a good place to begin is the Starting a Business page on www.IRS.gov.

 

Other IRS Tools and Resources for Small Business Owners

Some of the tools and resources available to you are listed here. They are designed to help you learn more about business taxes on your own time and at your own pace. We’ll go over some of the more popular ones now. First, the Tax Calendar allows you to view tax payment and other due dates and actions for each month. You can see all events or filter them by monthly depositor, semiweekly depositor, excise, or general event types. You can even have these calendar reminders sent directly to your e-mail box or automatically update to your computer desktop. In addition, the Small Business Self-Employed Tax Center on www.IRS.gov is a one-stop taxpayer resource.

There you will find information on taxes, recordkeeping, accounting practices, completing Federal business and employment tax returns, and meeting other Federal obligations. IRS also offers 30 electronic new subscriptions, delivering Federal tax news and information directly to your e-mail box. eNews for small businesses provides important incoming tax dates for SBSE customers; what’s new for small businesses on the IRS website; reminders and tips to assist Small Business Self-Employed with tax compliance; IRS news releases and special IRS announcements that pertain to SBSE customers; and tax-related information from other Federal agencies.

Is it a business or a hobby for IRS Purposes?

What is a business for tax purposes? Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. In order to make this determination, taxpayers should consider the following factors: Does the time and effort put into the activity indicate an intention to make a profit?

Does the taxpayer depend on income from the activity? If there are losses, are they due to circumstances beyond the taxpayer’s control; or do they occur in the startup days of the business? Has the taxpayer changed methods of operation to improve profitability? Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business? Has the taxpayer made a profit in similar activities in the past?

Does the activity make a profit in some years? Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity? The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current tax year.

 

Structures for Businesses

It is important that you choose the right kind of business structure for your venture. The most common ones are first, sole proprietorship. A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company, that’s LLC, you are not a sole proprietor if you elect to treat the LLC as a corporation. Next is partnership. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, et cetera, from its operations; but it does not pay income tax. Instead, it passes through any profits or losses to its partners. Each partner includes his or her share of the partnership income or loss on his or her tax return. Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1, Form 1065, to the partners by the date Form 1065 is required to be filed, including extensions. Your business can also be a C Corporation. The profit of a corporation is taxed to the corporation when earned and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation. Generally, businesses need an Employer Identification Number, also known as a Federal Tax Identification Number. It is used to identify a business entity. You may apply for an EIN in various ways, including online at www.IRS.gov. The qualifying criteria for whether you need an EIN are listed on the website. The IRS.gov page is providing information on business structure, and also gives information on the Federal taxes that must be paid and the forms which must be filed with the IRS.

 

Do businesses owe tax?

The taxes your business may be subject to are: income tax, all businesses except partnership must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized, as we discussed in the Business Structure section earlier. Estimated tax – generally, you must pay taxes on income, including self-employment tax, by making regular payments of estimated tax during the year. Self-employment tax — self-employment tax, or SE tax, is a Social Security and Medicare tax, primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the Social Security system. Social Security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance, Medicare benefits. Employment taxes – when you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following: Social Security, Medicare taxes, Federal income tax withholding, and Federal unemployment or FUTA tax, excise tax. This section describes the excise taxes you have to pay and the forms you have to file if you do any of the following: manufacture or sell certain products; operate certain kinds of businesses; use various kinds of equipment, facilities or products; receive payment for certain services

 

Business Employment Taxes

Two of the major pitfalls for small business are poor recordkeeping and a failure to recognize all items that constitute gross receipts, otherwise known as taxable business income. We will also show several best practices that small businesses should use to avoid tax problems. They are: good recordkeeping, reporting all taxable income, separating business and personal expenses, making sure your returns are accurate, using eFile to increase filing accuracy and speed, choosing your preparer carefully, and finding out where you can go for IRS help. That’s a lot to cover, so let’s begin. The information being presented today can be found on the Starting a Business page on www.IRS.gov. We will go over some of the important issues that new business owners need to know. These issues include: is it a business or a hobby; selecting a business structure; employer identification number; understanding business taxes and recordkeeping requirements. All new businesses need to consider this threshold issue.

 

More on employment taxes

If you have employees working for you, you will be responsible to withhold and deposit Federal income taxes, Social Security taxes, and Medicare taxes. The funds that you withhold from your employees’ wages are referred to as trust funds since you are holding these monies in trust until you, the employer, deposit these monies into the Federal Deposit system. As an employer, you will also be responsible to report and deposit Federal unemployment tax, known as FUTA. As a business owner, it is important that you understand an employer’s responsibility of withholding, reporting timely, and adequately depositing all employment taxes. One of the employment taxes to withhold from your employees’ wages is income taxes. To figure how much to withhold from each wage payment, use the Employees Form W-4, Employees Withholding Allowance Certificate; and methods described in Publication 15, Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide.

Other employment taxes to withhold are the Social Security and Medicare taxes that pay for benefits that workers and families receive under the Federal Insurance Contributions Act, known as FICA. The total Social Security is 12.4% of wages, with the employer paying 6.2%, and the other 6.2% being withheld from the employee’s wages up to the Social Security wage base. The total Medicare tax is 2.9% of the wages, with the employer paying 1.45% and the remaining 1.45% withheld from the employee’s wages. There is no wage base limit for Medicare tax, so all covered wages are subject to Medicare tax. Small business employers often outsource some of their payroll and related tax duties to third-party payroll service providers. These services effectively streamline business operations; however, an employer’s use of a PSP does not relieve the employer from his responsibility of ensuring that all its Federal employment tax duties are met. A PSP assumes no liability for their employer/client’s employment tax withholding, reporting, payment, and/or filing duties. A payroll service provider typically prepares employment tax returns for signature by its employer/clients and processes the withholding, deposit, and payment of the associated employment taxes for its common law employer/clients.

Small Business Tax Reccordkeeping

Now let’s turn to one of the most important factors in your small business success, keeping and maintaining good records. Recordkeeping can help you in several ways. First, you need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. You also need good records to prepare accurate financial statements. These include any income statements which show the income and expenses of the business for a given period of time; and a balance sheet, which shows the assets, liabilities, and your equity in the business on a given date. These statements can help you in your dealings with your bank or your creditors and in managing your business. You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business and non-business receipts and taxable from non-taxable income. Recordkeeping will also help you keep track of deductible expenses. You may forget expenses when you prepare your tax returns unless you record them when they occur. Of course you need good records to prepare your tax returns. Generally, these are the same records you use to monitor your business and prepare your financial statements. Finally, you must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to support the items reported. A complete set of records will help you explain the items you claim and speed up the examination

 

Keeping Track of Business Income and Expenses

Whether you use a system like this or an alternative system, you need to be aware of burden of proof. Burden of proof is the responsibility to prove entries, deductions and statements made on your tax returns. You must be able to prove certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts or sufficient evidence for the expenses. This substantiation includes receipts, canceled checks and bills. Additional evidence is required for travel, entertainment, gifts and auto expenses. The system you use to record business transactions will be more effective if you follow good recordkeeping practices. For example, record expenses when they occur and identify the source of recorded receipts. Generally, it is best to record transactions on a daily basis. For more information on recordkeeping and other small business topics, go to www.IRS.gov and enter “operating a business” in the Search box. As you can see, several major topics of interest are listed there. Clicking on these will link to further information, including forms, FAQs, and other resources to help you. One way to keep good records is to open a dedicated business bank account. You should keep your business account separate from your personal bank account.

 

Using a Business Checkbook

The business checkbook is your basic source of information for recording your business expenses. You should deposit all daily receipts in your business checking account. Consider using a checkbook that allows enough space to identify the source of the deposit as business income, personal funds, or loans. You should also note on the deposit slip the source of the deposit and keep copies of all slips. You should make all payments by check to document business expenses. Write checks payable to yourself only when making withdrawals from your business for personal use. Avoid writing checks payable to cash. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Use the business account for business purposes only. Indicate the source of deposits and the type of expense in the checkbook. Gross receipts are the income you receive from your business. Good recordkeeping also depends on you keeping supporting documents that show the amounts and sources of your receipts, such as cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips, and Forms 1099 Miscellaneous. Once your records are in place, make sure you report all of your taxable income to avoid tax trouble.

What is a Tip for IRS Purposes?

Tips are optional or extra payments that employees receive from customers. Tips include cash tips received directly from customers, tips employees receive directly from customers through an electronic settlement or payment, including credit cards, debit cards, gift cards, or any other electronic payment method, and the value of any non-cash tips such as tickets or other items of value employees may get from customers.

And tip amounts received from other employees paid out through tip pools, tip outs, or tip splitting, or any other formal or informal tip sharing arrangement. Employees who receive tips must do three things: keep a daily record or tip diary, report tips to the employer, unless their tips are less than $20.00 in any given month, report all tips on their individual income tax return.

 

Tipped Employees and Form 4070A

Tipped employees may use Form 4070A, Employees Daily Record of Tips. That’s available in Publication 1244, the Employees Daily Record of Tips and Report to Employer. Note that many employers provide other means for their employees to report tips. For example, a system for electronic tip reporting by employees. In addition to the information on Form 4070A or other tip diary, employees need to keep a record of the date and value of any non-cash tips they get, such as tickets, passes, or other items of value. Although non-cash tips don’t need to be reported to their employer, employees must report the value of these items on their income tax return. The second requirement is for employees to report to their employer in a written statement all tips received. Tips include tips received from customers, charge tips, for example credit and debit card charges, and tips received from other employees under any tip sharing arrangement.

Form 4070, Employees Record of Tips to Employer

Form 4070, Employees Record of Tips to Employer, which is also available in Pub. 1244, is convenient and includes all the necessary information. There is no particular form that must be used. Any tip report submitted to the employer must be signed by the employee and must include the employee’s name, address, Social Security number, the employer’s name, address, and business name if different. The month or shorter period the report covers. And the total amount of tips received during the month or period. Employees must report tips to the employer by the tenth of the month after the month the tips are received. An employer may require employees to submit a statement reporting tips more than once a month. However, the statement can’t cover a period of more than one calendar month. The third obligation is to report their tips as income on their income tax returns. The tips should be entered as income on the same line as other wages. Even if at year end an employee has not reported all of their tips to the employer, they must still include these tips as income on their Form 1040.

 

Social Security Taxes and Tips

The employee must also calculate and report their employee share of Social Security and Medicare taxes owed on those tips on a Form 4137, Social Security and Medicare Tax On Unreported Tip Income. That form can be attached to the Form 1040. Both directly and indirectly tipped employees must report tips to the employer. A directly-tipped employee is a tipped employee who receives tips directly from customers, including an employee who, after receiving tips directly from customers, turns all the tips over to a tip pool. Examples of directly-tipped employees are waiters and waitresses, bartenders, and hairstylists. An indirectly-tipped employee is a tipped employee who does not normally receive tips directly from customers. Examples of indirectly-tipped employees are bus boys, service bartenders, cooks, and salon shampooers. Indirectly-tipped employees usually receive their tips from a directly-tipped employee. Both directly and indirectly-tipped employees must report tips to their employer. For example, a food server may tip out to bussers and bartenders. The busser or bartender must report these tips received from the food server to the employer.

Employers Submitting W-2 in 2017

A new federal law, aimed at making it easier for the IRS to detect and prevent refund fraud, will accelerate the W-2 filing deadline for employers to Jan. 31. For similar reasons, the new law also requires the IRS to hold refunds involving two key refundable tax credits until at least Feb. 15. Here are details on each of these key dates.

 

When Must Employers Send W2s to Employees?

The Protecting Americans from Tax Hikes (PATH) Act, enacted last December, includes a new requirement for employers. They are now required to file their copies of Form W-2, submitted to the Social Security Administration, by Jan. 31. The new Jan. 31 filing deadline also applies to certain Forms 1099-MISC reporting non-employee compensation such as payments to independent contractors.

In the past, employers typically had until the end of February, if filing on paper, or the end of March, if filing electronically, to submit their copies of these forms. In addition, there are changes in requesting an extension to file the Form W-2. Only one 30-day extension to file Form W-2 is available and this extension is not automatic. If an extension is necessary, a Form 8809 Application for Extension of Time to File Information Returns must be completed as soon as you know an extension is necessary, but by January 31. Please carefully review the instructions for Form 8809, for more information.

“As tax season approaches, the IRS wants to be sure employers, especially smaller businesses, are aware of these new deadlines,” said IRS Commissioner John Koskinen. “We are working with the payroll community and other partners to share this information widely.”

The new accelerated deadline will help the IRS improve its efforts to spot errors on returns filed by taxpayers. Having these W-2s and 1099s earlier will make it easier for the IRS to verify the legitimacy of tax returns and properly issue refunds to taxpayers eligible to receive them. In many instances, this will enable the IRS to release tax refunds more quickly than in the past.

The Jan. 31 deadline has long applied to employers furnishing copies of these forms to their employees and that date remains unchanged.

 

2017 Tax Refund Delays

In addition, to the W2 Rule Change. Taxpayers may face slower refunds in 2017 when they file their 2016 taxes.

Due to the PATH Act change, some people will get their refunds a little later. The new law requires the IRS to hold the refund for any tax return claiming either the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) until Feb. 15. By law, the IRS must hold the entire refund, not just the portion related to the EITC or ACTC.

Even with this change, taxpayers should file their returns as they normally do. Whether or not claiming the EITC or ACTC, the IRS cautions taxpayers not to count on getting a refund by a certain date, especially when making major purchases or paying other financial obligations. Though the IRS issues more than nine out 10 refunds in less than 21 days, some returns are held for further review.

IRS Fast Track Settlement

The joint Large Business and International (LB&I) Division/Appeals Fast Track Settlement program (FTS) offers a customer-driven approach to resolving tax disputes at the earliest possible stage in the examination process. This program is designed to:

  • Provide an independent Appeals review of the dispute in an environment where all parties to the dispute have a “voice” in the dispute resolution process,
  • Utilize the mediation skills and delegated settlement authority of Appeals, and
  • Reduce the length of a taxpayer’s overall IRS experience.

 

Applying for IRS Fast Track Settlement

Applying for Fast Track Settlement is quick and easy – simply complete a one-page application. A formal written protest is not required. Once the case is accepted into the FTS program, an Appeals official will serve as a facilitator to arrive at and execute a resolution or settlement that is mutually agreeable to all parties.

 

What is IRS Fast Track Settlement?

Fast Track Settlement is designed to help other IRS Operating Division taxpayers expeditiously resolve disputes during an examination while their case is still in Examination or Collection. Fast Track Settlement brings Appeals resources to a mutually agreed upon location to resolve the dispute before the 30-day letter is issued. A specially trained Appeals employee facilitates the discussion between you and the revenue agent and their team or group manager to reach and execute a settlement with which you both agree.

Requesting IRS Fast Track Settlement

You may request Fast Track Settlement after Form 5701, Summary of Issues, Examination Re-Engineering Lead Sheets or other similar document has been issued and you have provided a written response. FTS may be available for factual and legal issues, including listed transactions, Compliance and Appeals Coordinated Issues, and issues that require consideration of the hazards of litigation.

 

IRS Fast Track Settlement Benefits

Your benefits with Fast Track Settlement include: • A one-page application, Form 14017 ; • Consideration of the hazards of litigation; • An answer within 120 days for Large Business and International (LB&I) cases and within 60 days for Small Business Self Employed (SB/SE) and Tax Exempt Government Entities (TE/GE) cases; • No ‘hot’ interest under IRC 6621; • An option to withdraw from the process at any time; • Retention of all traditional appeal rights; • Significantly shorter IRS experience; • Only one tax computation; • Your case closes agreed in the other Operation Division; and • Immediate use of Delegation Order 236

Business Filing and Paying Taxes Late with IRS

Now, let’s talk about when businesses file and pay late. Not only does the failure to-pay and failure-to-file penalty up to 47.5 percent apply, but there’s also the failure to make Federal Tax Deposit Penalty.

 

Filing Form 941 and Form 940 with IRS

Employers who file the Form 941 owing over $2,500 for the quarter currently or the previous quarter, as well as people who file the Form 940 owing over $500 for the year, must make federal tax deposits using the Electronic Federal Tax Payment System. Failure to use the Electronic Federal Tax Payment System or to make the federal tax deposits will result in a penalty. This penalty can be abated if reasonable cause applies.

 

Business Receiving Notice of Federal Tax Lien

Just like individuals, businesses can have the Notice of Federal Tax Lien filed if a taxpayer neglects or refuses to pay overdue taxes. It attaches to business property and rights to property including accounts receivable. Businesses should also be aware that the Trust Fund Recovery Penalty can be assessed against individuals. These are usually people responsible for collecting the trust fund tax and who knowingly fail to do so.

 

What are Trust Fund taxes?

Trust fund taxes are those withheld for employee wages and excise taxes. Congress established the Trust Fund Recovery Penalty to encourage prompt payment of the trust fund taxes, and as an additional tool to collect. For employment taxes, the amount of the penalty equals the unpaid income tax plus the unpaid FICA. When trust funds taxes are unpaid, we conduct an investigation to determine if the penalties should be assessed and against whom. The first step is an interview on who can be assessed. The interview determines who had the responsibility to collect and pay the tax but willfully and knowingly failed to pay it over.

 

Late Payment of Trust Fund Taxes

The position of the IRS is that paying other creditors or net payroll, but not the associated tax, implies willfulness. Under consideration for the Trust Fund Recovery Penalty are those who: determine financial policies for the business; direct and authorize payments of bills to creditors; authorize and make federal tax deposits; and sign payroll tax returns. Assessment doesn’t mean that the trust fund gets paid twice by the individual as well as the business. It’s only paid once by either the business or the individual or a combination of the two.

 

Trust Fund Tax Penalty

The penalty is assessed against the individual though, so a Notice of Federal Tax Lien may be filed. And if arrangements aren’t made to pay it, collection actions may be taken against the individual’s assets. The trust fund can be appealed to the Office of Appeals. How to appeal is explained in the letter sent proposing the assessment.

 

Assessment of the Trust Fund Recovery Penalty

Even if a business is granted an installment agreement, IRS may still consider the assessment of the Trust Fund Recovery Penalty. It’s usually based on the facts and circumstances of the case, as well as the history of compliance. For example, if a taxpayer has a history of prior default in installment agreements, we may be more inclined to assess the Trust Fund Recovery Penalty in order to be assured that we can collect this tax. On the other side, it’s also possible to hold off on the assessment of the Trust Fund Recovery Penalty, and it again depends on the facts, circumstances, and the history of compliance.

 

Form 2750, the Waiver Extending the Statutory Period for Assessment of the Trust Fund Recovery Penalty

If there’s not enough time left on the assessment statute of limitations to allow full payment of an installment agreement, then the responsible person may be asked to sign the Form 2750, the Waiver Extending the Statutory Period for Assessment of the Trust Fund Recovery Penalty. This is usually extending it beyond the terms of an installment agreement. So, if the installment agreement terms are not met, the trust fund can still be collected.

 

Businesses that fail to meet the IRS payment requirements

Businesses that fail to meet the payment requirements are subject to the same penalties and interest as individuals. For employment tax deficiencies, businesses are subject to the Federal Tax Deposit Penalty. Some responsible individuals may be held liable for the Trust Fund Recovery Penalty personally, and businesses as well as individuals that don’t make arrangements to pay their delinquency are subject to the Notice of Federal Tax Lien, Levy, Seizure and Sale, and they have collection appeal rights.

How stock traders can prepare their tax returns

Although a trader’s security gains and losses are excluded from SE earnings, there is no guidance as to how the trading expenses reported on Schedule C impact SE earnings. Presumably, a trader who has SE earnings from other sources can reduce those earnings by the SE loss generated from the trading expenses.

 

Trader Tax Returns

Because of the unique tax rules that apply to securities traders, properly reporting trading information on Form 1040 can be a challenge. Practitioners should consider the following reporting issues and recommended solutions:

 

Stock Trader Schedule C Loss

Traders who do not make a Section 475 election report no income and only expenses on Schedule C, resulting in a loss on that form. This reporting may get the IRS’s attention since Schedule C losses sometimes stem from disallowable hobby losses. To help avoid IRS questions regarding this reporting, a footnote or statement explaining the taxpayer’s trader status and the filing implications should be attached to the return.

 

Stock Trader Reconciling to Forms 1099-B

Because traders report their security sales on Form 8949, the amounts reported to them on brokers’ Forms 1099-B will normally agree with the reported gross proceeds. However, traders who make the Section 475 election treat their trading gains and losses as ordinary income reported on Form 4797 (Part II). The Form 4797 instructions state that these traders should enter the total gross proceeds from Forms 1099-B on line 1 of Form 4797. To help avoid IRS matching notices for gross proceeds shown on Form 1099-B and ultimately reported on Form 4797, taxpayers should also report the gross proceeds for these transactions on Form 8949 and enter the appropriate code (see the Form 8949 instructions) in column (f) and the appropriate dollar amount in column (g) to reconcile any Forms 1099-B and 8949 differences.

 

Stock Trader Detailing Trading Activity

In many cases, the taxpayer will have detailed records reporting each trade that can be attached to the return to support the amounts shown on Form 8949. The Form 8949 instructions indicate that, instead of reporting each stock transaction on a separate line, taxpayers can report them on an attached statement containing all the same information as Form 8949 and in a similar format. They can use as many attached statements as they need.

IRS Form 8949

The combined totals from all the attached statements are entered on a Form 8949 with the appropriate box checked. The Form 4797 instructions state that traders who make the Section 475 mark-to-market election should attach a statement to the return detailing each trading transaction and carry the totals to line 10 of Form 4797.

Taxation of traders and how do day traders pay tax

Unlike investors, securities traders are deemed to be conducting a trade or business, so their trading expenses are deductible as ordinary and necessary business expenses under IRC Sec.î 162. Thus, the difference brings along many differences of how a day trader will pay tax on their trading gains and be able to deduct trading losses.

 

What are a trader’s business expenses?

A trader’s business expenses include interest paid on margin accounts used in connection with the trading activity. This is much different than ordinary investors.  However, if the taxpayer does not materially participate in the trading activity (e.g., a limited partner in a trader partnership), interest incurred in the activity is subject to the investment interest expense limitation. In addition, a trader’s business status makes him or her eligible for claiming a home office deduction, provided that the other home office deduction criteria are met. Individuals report their trading expenses (including interest on margin accounts) on Schedule C of their annual tax returns.

 

Special Assets Held by Day Traders

Traders may acquire assets that qualify for Section 179 expensing. Traders will generally show a loss on their Schedule C (since the gains from trading are reported on either Form 8949 and Schedule D, or if a mark-to-market election is made, on Form 4797). Although the annual Section 179 deduction is limited to taxable income from a trade or business, practitioners should not confuse taxable income with income shown on Schedule C.

 

What are Day Trading Gains?

The authors believe that the trading gains and losses are included in taxable income for the Section 179 limitation. Reg.î1.179-2(c) defines taxable income as the aggregate net income (or loss) from all of the trades or businesses actively conducted by the individual. Furthermore, business income for this purpose includes Section 1231 gains (or losses) from the trade or business and interest from working capital of the trade or business. Thus, income clearly can include items other than those reported on Schedule C.

 

What happens when a trade disposes of stock?

When a trader disposes of a stock, the general rule is that the sale is treated as a short-term or long-term capital gain or loss, depending on how long the stock was held. This capital asset treatment occurs because traders do not have customers to whom they sell stock; therefore, their stock does not meet any of the exceptions to capital asset treatment under IRC Sec. 1221. Thus, traders generally report their stock gains and losses as capital gains and losses on Form 8949 and Schedule D and, accordingly, are subject to the $3,000 annual limitation that applies to net capital losses under IRC Sec. 1211(b) and the wash sale rules. The Section 1091 wash sale rules can be particularly detrimental to traders because they defer the recognition of a stock loss when the taxpayer acquires the same stock within a period beginning 30 days before and ending 30 days after the date of sale.

 

Benefits of Mark-to-market Election for Day Traders

As an alternative to capital asset treatment, IRC Sec. 475(f) allows traders to elect to mark their stock holdings to market at the end of the tax year. If the election is made, all security gains and losses are treated as ordinary income and all securities on hand at year-end are deemed to be sold at the year-end market value, thus recognizing unrealized gains and losses. For traders, the primary benefit of making the election is that the $3,000 limitation on net capital losses and the wash sale rules no longer apply. Conversely, the trader is no longer allowed to treat trading activity gains and losses as capital asset transactions, but this should have minimal negative impact since traders by definition should have few, if any, long-term capital gains.

 

Using Mark-to-market Election for Day Traders

Because capital gains and losses are specifically excluded from the definition of net earnings from self-employment (SE), earnings from a trading activity are not subject to the SE tax. A Sectionî 475 mark-to-market election converting the gains and losses to ordinary income does not change their status for SE tax purposes. However, since a trader’s net earnings are not SE income, he cannot contribute to a retirement plan (e.g., SEP or IRA) based on such income.