Commonsense CPA: Tax Season Has Begun

I hope this New Year finds you working on your resolutions (if you have any), enjoying a cleansing Dry January (if you do that), or rooting for your favorite team in the NFL playoffs (if you’re not a Commanders fan). When the calendar turns to January, it means the same thing for me and your Harmony team – tax season has begun.

Tax season is our busiest time of the year. It can get complicated when we get emails wondering why the taxes for a client, their business or K-1s for their investors haven’t been issued. While we aren’t perfect, the vast majority of the time there is a delay in filing is because we haven’t received the information in a timely manner. So, we wanted to share some best practices to ensure that you have a stress free tax season.

First, when and where should you send your information to us so we can complete your taxes?

Everyone should have received engagement letters, or will shortly, and can start uploading information into your Client Portal. We aren’t too proud to beg and bribe everyone for early submissions, so we offer a $50 gift card to one of our great Harmony businesses – Preserve, Even Keel Spa, or the new beer & wine garden Garten – for everyone who gets all their information submitted by February 15th. The cut-off to file with no extension AND ask for an extension is March 31st. If you foresee any issues or challenges your Harmony advisor would be happy to get on the phone with you.

Secondly, since you’re working on last year’s taxes, the start of the New Year is a great time for a reminder about best ‘tax practices’ for some of the common expenses that business owners run into. We are going to tackle two of the most common questions and issues before running briefly through some questions that briefly touch on the other common deductions.

Vehicles/Mileage

Thinking of buying a new vehicle for you or your business this year?  

Consult with your Harmony CPA to determine where to title in the business name or claim mileage. Due to depreciation rules around different classes of vehicles – a 10 minute call could save you $1,000s. On the personal vehicle side, the Inflation Reduction Act introduced significant credits around the purchase of electronic vehicles that are being phased in over the coming years.

As for mileage rates, if you are driving for work you can be reimbursed for your miles driven, but not for commuting, and the reimbursement rate increased significantly to 62.5 cents per mile for 2022. W-2 workers can be compensated by their employer but cannot take this deduction directly. There is no federal requirement for reimbursement unless the lack of reimbursements would take the employee below the minimum wage. 

The key for business owners and independent contractors to take advantage of this deduction (or reimburse employees) is contemporaneous record keeping. A spreadsheet works well and there are many applications that can track mileage as you drive, and many integrate with your accounting software.

Record-Keeping

When you’re reviewing your files you might be tempted to earmark certain files for spring-cleaning. So the question of how long you need to retain records for the IRS is relevant for when you can start tossing old documents out. Our guidance is keeping records for five years is a safe harbor for keeping relevant records to substantiate your tax returns. For a business, certain permanent records need to be kept indefinitely (CAPEX, Assets, Organizing Documents). The IRS guidelines are more confusing and are based on your tax status and which deductions you claim, but 5 years is appropriate in almost every situation. Before throwing documents away – just confirm that creditors/lenders/state agencies might not require a copy. 

Expense Review Quick Hitters

Here are some quick notes about things to evaluate as you're preparing your taxes that could be valuable deductions. If one seems particularly relevant don’t hesitate to reach out to your Harmony CPA and it’s also useful to keep these deductions in mind as we go into the new tax year.

Have you maxed out your retirement or HSA accounts?

The deadlines for retirement plan contributions often stretch into the next year so if you are planning to max out tax advantaged contributions for a previous tax year it’s a good idea to do that before filing and tell your Harmony CPA. We covered HSA utilization in more depth in last month’s Commonsense CPA.

Do you have a good business credit card?

Good business credit cards have sizable benefits including frequent flier miles, points, cash rebates and other incentives that can be very beneficial and are not considered taxable income by the IRS in most instances.

Is your cell phone paid by the business? 

If you use your cell phone for business, that usage can be deducted from your income. If you are a business owner, you can provide cell phones to yourself and employees and pay those bills as a business expense.

Is your home your principal place of business?

If so, you may qualify for the home office deduction. You have to use your home office regularly and exclusively for conducting business (no deducting the kitchen because you answer emails there) and it has to be where you spend your most time working. If the above applies, you might be eligible for a deduction.

Do you pay for health insurance or have significant medical expenses?

If your medical expenses exceed 7.5% of your gross income you can choose to itemize your deduction. Health insurance costs not paid by an employer go towards meeting this 7.5% threshold.

Do you frequently have business meals? 

While the meal deduction is now dramatically less generous as the COVID deduction expired, you may be able to deduct 50% of business meals that aren’t extravagant. You can deduct 100% of the cost of working meals provided to employees.

Did you travel for business this year?

Travel expenses, which can include pretty much all costs incurred while traveling to another city or region for business purposes are generally deductible provided that the travel is necessary and truly for business purposes (the majority of the trip is spent on business).

Did you have business loans that you paid interest on?

Interest expenses are usually deductible to a business, and for homeowners/students so it is important to watch for any 1099-INTs and chase down any you believe are missing. You can also deduct credit card interest for business but not personal expenses.

Did you take educational courses related to maintaining or improving your skills?

We covered educational tax benefits extensively in a prior Commonsense CPA but if you took classes related to your job or business or improving your ability to perform that job, this cost may be deductible. 

This is just a partial list, and if this gives you anxiety don’t worry – your Harmony advisor is going through your records to assist you in getting the most beneficial tax treatment. 

Here’s to a successful tax season!

Journal Entries

SECURE Act (2.0) Passes

Within the 4,000 page omnibus budget that passed was Secure 2.0 – bringing sweeping changes to the nation’s regulations around retirement accounts, catch-up contributions, required minimum distributions, and lessening or eliminating penalties for certain withdrawals among other changes to the retirement system. With the help of Chris Oland of Harmony Wealth Advisors we’ve written a “brief summary” with what you need to know about the legislation and its impacts on individuals and businesses. Many provisions are phasing in over the next few years, so we will be in touch as they become effective. What you should think about today is: (1) small business owners should consider starting a retirement plan to  be grandfathered out of automatic enrollment if you are cost sensitive around your ability to pay the increased benefit cost arising from the forthcoming automatic enrollment and (2) consider opening a 529 college savings account because you will be able to roll that a retirement account as long as the 529 is at least 15 years old.  

Certainly, don’t hesitate to reach out to your financial professionals if you have specific questions around your retirement.

New Guidelines Go “Venmoose” on 1099-K Regulations… For Now

As we covered last month, Congress dropped the threshold after which payment processors and marketplaces such as Venmo, Paypal, eBay, Square are required to issue 1099-K to people on the platform to a limit of $600 regardless of the number of transactions – down astronomically for the former threshold of over 200 transactions worth over $20,000. Thankfully, the IRS has delayed implementation to FY 2023, giving taxpayers another year before 1099-ks will be issued. Going forward, it’s important to keep very good records of any business conducted on these networks (no matter the amount) because that information will likely be shared with the IRS.

The Mouse Says Get Back in the House

New CEO Bob Iger may have won fans among Hollywood and park users by easing some of Disney’s more avaricious practices instituted under his predecessor but his stance on work from home may rankle employees. Citing the increased need for collaboration, Iger is ordering Disney employees back  to the office four days a week. While our interest in Disney is more focused on Star Wars (Andor!), the continued push-pull between employees who desire work from home options and management who want employees to get back in the office seems to be shifting towards management. Layoffs in the tech sector, businesses that have been a trendsetter for office culture in many industries may further strengthen employer’s hands. DC seems tired of waiting around with downtown office occupancy staying below 50%. Mayor Bowser recently announced tax relief for office to housing conversions and told the Federal Government to either get back in their offices or let someone else use them.