Businesses aren’t immune to tax identity theft

Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.

How it works

In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.

For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds.

The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Red flags

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:

• Your business doesn’t receive expected or routine mailings from the IRS,
• You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,
• The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,
• You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or
• You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.

Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.

Prevention tips

Businesses should take steps such as the following to protect their own information as well as that of their employees:

• Provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.
• Use secure methods to send W-2 forms to employees.
• Implement risk management strategies designed to flag suspicious communications.

Of course identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.

© 2018

by Dukhon Tax

Be sure your employee travel expense reimbursements will pass muster with the IRS

Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees. If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS.

The TCJA’s impact

Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.

For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.

The potential tax benefits

Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible.

To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.

Reimbursing actual expenses

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

• Payments must be for “ordinary and necessary” business expenses.
• Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
• Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Keeping it simple

With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.

What’s right for your business?

To learn more about business travel expense deductions and reimbursements post-TCJA, contact us. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.

© 2018

by Dukhon Tax

Are you ready to expand to a second location?

Most business owners want to grow their companies. And one surefire sign of growth is when ownership believes the company can expand its operations to a second location.

If your business has reached this point, or is nearing it, both congratulations and caution are in order. You’ve clearly done a great job with growth, but that doesn’t necessarily mean you’re ready to expand. Here are a few points to keep in mind.

Potential conflicts

Among the most fundamental questions to ask is: Can we duplicate the success of our current location? If your first location is doing well, it’s likely because you’ve put in place the people and processes that keep the business running smoothly. It’s also because you’ve developed a culture that resonates with your customers. You need to feel confident you can do the same at subsequent locations.

Another important question is: How might expansion affect business at both locations? Opening a second location prompts a consideration that didn’t exist with your first: how the two locations will interact. Placing the two operations near each other can make it easier to manage both, but it also can lead to one operation cannibalizing the other. Ideally, the two locations will have strong, independent markets.

Finances and taxes

Of course, you’ll also need to consider the financial aspects. Look at how you’re going to fund the expansion. Ideally, the first location will generate enough revenue so that it can both sustain itself and help fund the second. But it’s not uncommon for construction costs and timelines to exceed initial projections. You’ll want to include some extra dollars in your budget for delays or surprises. If you have to starve your first location of capital to fund the second, you’ll risk the success of both.

It’s important to account for the tax ramifications as well. Property taxes on two locations will affect your cash flow and bottom line. You may be able to cut your tax bill with various tax breaks or by locating the second location in an Enterprise Zone. But, naturally, the location will need to make sense from a business perspective. There may be other tax issues as well — particularly if you’re crossing state lines.

A significant step

Opening another location is a significant step, to say the least. We can help you address all the pertinent issues involved to minimize risk and boost the likelihood of success.

© 2018

by Dukhon Tax

2018 Q4 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
October 15
• If a calendar-year C corporation that filed an automatic six-month extension:
o File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due.
o Make contributions for 2017 to certain employer-sponsored retirement plans.
October 31
• Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)
November 13
• Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.
December 17
• If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.
© 2018

by Dukhon Tax

HSA + HDHP can be a winning health benefits formula

If you’ve done any research into employee benefits for your business recently, you may have come across a bit of alphabet soup in the form of “HSA + HDHP.” Although perhaps initially confusing, this formula represents an increasingly popular model for health care benefits — that is, offering a Health Savings Account (HSA) coupled with, as required by law, a high-deductible health plan (HDHP).

Requirements

An HSA operates somewhat like a Flexible Spending Account (FSA), which employers can also offer to eligible employees. An FSA permits eligible employees to defer a pretax portion of their pay to later use to reimburse out-of-pocket medical expenses. But, unlike an FSA, an HSA is permitted to carry over unused account balances to the next year and beyond.

The most significant requirement for offering your employees an HSA is that, as mentioned, you must also cover them under an HDHP. For 2019, this means that each participant’s health insurance coverage must come with at least a $1,350 deductible for single coverage or $2,700 for family coverage. It’s okay if the HDHP doesn’t impose any deductible for preventive care (such as annual checkups), but participants can’t be eligible for Medicare benefits or claimed as a dependent on another person’s tax return.

The benefit of the high deductible requirement is that premiums for HDHPs are typically less expensive than for health plans with lower deductibles. You and your employees can use some or all of the money saved on premiums to fund their HSAs.

Pretax contributions

You and the employee combined can make pretax HSA contributions in 2019 of up to $3,500 for single coverage or $7,000 for family coverage. An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may contribute an additional $1,000.

The good news for you, the business owner: First, employer contributions are optional. Second, pretax contributions to an employee’s HSA, whether by you or the employee, are exempt from Social Security, Medicare and unemployment taxes.

Growing popularity

Just how popular is the HSA + HDHP model? A 2018 report by the trade association America’s Health Insurance Plans found that enrollment in these plans increased by nearly 400% over the last 10 years — from about 4.5 million in 2007 to about 21.8 million in 2017. Of course, this doesn’t mean your business should blindly jump on the bandwagon. Contact us to discuss the concept further or for other ideas regarding affordable employee benefits.

© 2018

by Dukhon Tax

Choosing the right accounting method for tax purposes

The Tax Cuts and Jobs Act (TCJA) liberalized the eligibility rules for using the cash method of accounting, making this method — which is simpler than the accrual method — available to more businesses. Now the IRS has provided procedures a small business taxpayer can use to obtain automatic consent to change its method of accounting under the TCJA. If you have the option to use either accounting method, it pays to consider whether switching methods would be beneficial.

Cash vs. accrual

Generally, cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid. Accrual-basis businesses, on the other hand, recognize income when it’s earned and deduct expenses when they’re incurred, without regard to the timing of cash receipts or payments.

In most cases, a business is permitted to use the cash method of accounting for tax purposes unless it’s:

1. Expressly prohibited from using the cash method, or
2. Expressly required to use the accrual method.

Cash method advantages

The cash method offers several advantages, including:

Simplicity. It’s easier and cheaper to implement and maintain.

Tax-planning flexibility. It offers greater flexibility to control the timing of income and deductible expenses. For example, it allows you to defer income to next year by delaying invoices or to shift deductions into this year by accelerating the payment of expenses. An accrual-basis business doesn’t enjoy this flexibility. For example, to defer income, delaying invoices wouldn’t be enough; the business would have to put off shipping products or performing services.

Cash flow benefits. Because income is taxed in the year it’s received, the cash method does a better job of ensuring that a business has the funds it needs to pay its tax bill.

Accrual method advantages

In some cases, the accrual method may offer tax advantages. For example, accrual-basis businesses may be able to use certain tax-planning strategies that aren’t available to cash-basis businesses, such as deducting year-end bonuses that are paid within the first 2½ months of the following year and deferring income on certain advance payments.

The accrual method also does a better job of matching income and expenses, so it provides a more accurate picture of a business’s financial performance. That’s why it’s required under Generally Accepted Accounting Principles (GAAP).

If your business prepares GAAP-compliant financial statements, you can still use the cash method for tax purposes. But weigh the cost of maintaining two sets of books against the potential tax benefits.

Making a change

Keep in mind that cash and accrual are the two primary tax accounting methods, but they’re not the only ones. Some businesses may qualify for a different method, such as a hybrid of the cash and accrual methods.

If your business is eligible for more than one method, we can help you determine whether switching methods would make sense and can execute the change for you if appropriate.

© 2018

by Dukhon Tax