In the summer of 2015 the Congress passed legislation, subsequently signed by President Barak Obama, that modified tax return filing due dates, starting in tax year 2016 (2017 tax filing season).
WHY THE CHANGES ARE IMPORTANT:
Prior to the new legislation, partnership and LLC (Form 1065) tax returns were due by April 15th, at the same time as individual tax returns. This circumstance complicated tax return filing for individuals who are partners in a partnership or members in an LLC. Schedule K-1s (partner’s/shareholder’s share of income, deductions, credits, etc.) were not always available to individuals at the time needed to prepare their personal tax returns.
With the new legislation, partnership and LLC tax returns (Form 1065) will be due by March 15, along with S-corporation tax returns (Form 1120S).
The new due dates will allow for earlier access to the K-1s, which will encourage a more efficient processing of tax returns and ideally reduce the need for extensions.
Summary of business tax return deadline changes:
Partnerships (Form 1065) — The due date is moved from April 15 to March 15 or the 15th day of the third month after the year-end.
S Corporation (Form 1120S) — No change, due dates remain March 15, allowing for preparation of Schedule K-1s as they relate to individuals and organizations.
C Corporations (Form 1120) — Due date moved from March 15 to April 15; in most cases, returns will be due on the 15th of the fourth month after the year-end.
Both Partnership (1065) and S Corporation tax returns can be extended for six months, due by September 15. Calendar year C Corporation tax returns, however, can be extended only for five months, due by September 15 (until tax year 2026).
Individual tax return filing deadlines remain unchanged with the exception of Foreign Bank and Financial Accounts Report (FBAR), due by Aril 15 instead of June 30, with the new legislation.
While adjusting to these new deadlines may be overwhelming, they generally will benefit the taxpayers by making Schedule K-1s available earlier for individual tax return preparation. If you need help understanding how the new deadlines affect your business tax filing or have questions regarding any forms not mentioned in this article, please do not hesitate to contact us for a free consultation.
If your business does not have a properly kept set of books, an audit can be a nightmare. Tax deductions without proper records may be questioned and denied by the IRS. Use these tips to help you audit-proof your business records.
1. USE A GOOD SOFTWARE SYSTEM
It is highly recommended to use accounting software to keep track of your business income and expenses and reconcile your bank accounts. In addition, accounting software offers a suite of reports for business owners who want know how their business is doing at any time. Modern accounting software is fairly easy to use once it is properly set up for your specific business. Be sure to consult with a professional to help you select the right software solution for your business and have them set it up for your specific business needs.
2. DOCUMENT ALL OF YOUR INCOME
Make sure you maintain a separate bank account for your business and do not commingle personal and business income. All of your business income should be deposited to the designated bank account and only then used for expenses, to pay employees and yourself. An auditor will add up all of your deposits and compare the number with the total income declared on your tax return. Be sure to always report all of your income.
3. DEDUCT ONLY “ORDINARY AND NECESSARY” EXPENSES
The basic requirement for an expense to be deductible is that the expense is both ordinary and necessary to your business. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. It is important to separate business expenses from capital assets as the latter are depreciated over their life. In addition, you must separate business expenses from your personal expenses.
4. KEEP PROPER RECORDS
Even when you use accounting software, you must still maintain proper records of your income, expenses, asset purchases, cash and loan balances. Make sure to keep your bank and loan statements, copies of canceled checks, expense receipts, and a mileage log. You can maintain these records either on paper or electronically. There are multiple apps and add-on software solutions to help you automate record keeping. The IRS requires companies to keep copies of tax returns and supporting documents for a minimum of three years.
5. SELF-AUDIT YOUR BOOKS
Finally, self-audit your books. Generally, a tax professional will ask you reasonable questions and ask for any additional information when preparing your tax return. However, it’s a good idea to look at your Income Statement and Balance Sheet once in a while to make sure your reports make sense. Learn how to read these reports, so you can spot obvious mistakes or red flags. It’s also a good idea to sit down with your accountant after the return is prepared to make sure you understand what adjustments have been made and what the numbers on your return represent.
1. MISCLASSIFYING EMPLOYEES AS INDEPENDENT CONTRACTORS
It is critical that business owners properly determine whether individuals providing services to the business are employees or independent contractors. When you hire employees, you must withhold proper taxes and pay the company’s portion of Social Security and Medicare tax, plus federal and state unemployment taxes. This can be costly, so many business owners choose to work with independent contractors. Follow the IRS guidelines to properly determine the relationship with the individuals who provide services to your business in order to avoid penalties and back taxes.
2. FAILING TO TIMELY DEPOSIT WITHHELD TAXES
When you are late on your deposits to the IRS or the state, you are not only liable for being late on paying the company’s portion of payroll taxes, you are also liable for remitting the employees’ withholding late. When paying your staff, the difference between gross and net pay is the employees’ portion of taxes which you are holding in escrow and are supposed to remit to the government according to the schedule assigned to you. Failure to do so will definitely cost you, and it happens more often than one would think.
3. FAILING TO FILE TIMELY PAYROLL REPORTS
When you first hire employees, the state requires that you file a new hire report on every new or rehired employee. These reports often get overlooked. On a quarterly basis, the IRS and the state require that you file payroll forms to report wages paid, income taxes withheld, and Social Security and Medicare taxes for both the employer and employees. After the year-end, there are additional forms to be filed, such as the federal unemployment report, W-2s and 1099s. Keeping track of all these reports gets confusing, yet making a mistake may turn out very expensive. It is recommended to get an accounting professional to help you navigate through the reporting requirements.
4. NOT PAYING YOURSELF REASONABLE COMPENSATION
If you are self-employed (sole proprietor), it is very straight forward as to what your compensation is. You pay income taxes, as well as self-employment tax on your net income. However, if your business entity is a corporation or an S-corporation, generally you must receive reasonable compensation in the form of wages or salary and pay both income and payroll taxes, just like other employees. The general guideline to determine your reasonable compensation is what you would be paid for the same type of services if you were to work for another similar business. S-corporation owners have been under the increased scrutiny by the IRS in the recent years because they generally prefer to take distributions and thus avoid payroll taxes. Such mistakes can cost your business a lot of money in penalties, back taxes, and interest.
5. NOT KEEPING PROPER RECORDS
You are required to keep all records of employment taxes for at least four years. Such records include, but are not limited to amounts and dates of all wages, tips, and bonuses paid, employee and independent contractor information, such as names, addresses, and SSNs, dates of employment, copies of payroll reports filed, and dates and amounts of tax deposits you made. If you are paying yourself as an officer of a corporation or an S-corporation, keep the records of how you came up with the amount of your salary and why you consider it reasonable. Failure to keep proper records becomes a nightmare during an audit and can cost you a lot in your time and possible tax consequences.
To avoid making any of these mistakes, consult with an accounting professional when first setting up payroll for your company. The accounting technology today allows us to provide payroll services at more affordable rates, and many business owners prefer that we take this off their hands. If you have payroll questions, do not hesitate to schedule a free consultation and have your questions answered.