Just a reminder that the “floor tax return” for the Chicago Bag Tax is due this Friday. Don’t risk a $100 fine — take a look at my comprehensive guide to the bag tax and get this off your “to-do” list asap. Please share far and wide with other small business retailers in Chicago; I’ve found very few how-to resources, and none that break it down step-by-step, and I’d love for my research for my own clients to be of use to other small business owners.
I had a tough time getting 1095-B & 1095-C forms from clients last year in time for filing, as many of their health insurance providers were delayed in sending them out. Unfortunately, late last year, the IRS decided to allow providers to file extensions again, and I was dreading the same experience.
So you can imagine that I was pretty pleased to read, in today’s National Association of Tax Professionals e-newsletter:
|According to Question 14 on the IRS Health Care Information Forms FAQ, you do not have to wait for either Form 1095-B or 1095-C from your client’s coverage provider or employer to file the individual income tax return. You can use other forms of documentation in lieu of the Form 1095 information returns to prepare the tax return. Other forms of documentation that would provide proof of a taxpayer’s insurance coverage include:
Of course, many of these documents will not confirm that insurance was for the entire year, or all members of the family, so it is still best practice to get the 1095-B or 1095-C. But when it’s unobtainable, it shouldn’t delay your client’s filing — just make sure they provide it to you once they are able.
I’m seeing a lot of questions on my tax professional newsgroups and discussion boards about the so-called “silent return” provision that has made so much news lately, and I want to set the record straight here.
For this filing season, the IRS had put system changes in place “that would reject tax returns during processing in instances where the taxpayer didn’t provide information related to health coverage.” (I.e., they were “silent” on the topic.) However, due to an executive order, they have removed this barrier to filing.
“Consistent with that, the IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status.”
However — and herein lies the confusion — this does not mean the ACA laws have changed (yet).
“Legislative provisions of the ACA law are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe.”
What it does mean is (as with any other area in a return where a taxpayer or preparer enters information that is incorrect, or does not answer a required question), the IRS has every right to come back and inquire, request further information, or even audit. If the taxpayer is found to be out of compliance with the law, then corrections, penalties and interest would be due.
“Processing silent returns means that taxpayer returns are not systemically rejected by the IRS at the time of filing, allowing the returns to be processed and minimizing burden on taxpayers, including those expecting a refund. When the IRS has questions about a tax return, taxpayers may receive follow-up questions and correspondence at a future date, after the filing process is completed.”
This is no different than how the same issue was handled last filing season: the requirement was there, but ignoring it did not prevent your return from being e-filed or processed.
“This is similar to how we handled this in previous years, and this reflects the normal IRS post-filing compliance procedures that we follow.”
In other words — if your client refused to answer whether they were required to file 1099s or not, you wouldn’t just leave the answer blank on the tax return; you’d make it clear to the client that this is required information. It’s the same thing here. Just because refusing to answer the question about health insurance coverage will no longer prohibit the return from being processed does not mean you do not have to answer the question. You are simply inviting your client to be audited, which is doing them a disservice.
More here, from Accounting Today: IRS puts new regulations and ACA coverage requirement on hold
I just got word that my accountant-referral pricing on QuickBooks Online is changing soon. It’s currently a “35%-off for the life of the account” discount. Due to cost increases from Intuit, they have to switch to “50%-off for 12 months and then full-price afterwards”. So, if you are thinking of moving to QBO from QB Desktop or spreadsheets, now is the time to do it.
(Yes, of course they’d do this during tax season. Sigh.)
To be fair, the 50%-off for 12-months is still better pricing than Intuit’s 50%-off for 6-months, but it’s not as good as perpetual 35%-off. Please get in touch with me immediately if you’re interested in trying to get under the wire for the old deal; they haven’t given me an actual date for the change yet, and I’m not sure if I’ll get advance-warning beyond what they’ve just sent.
(In case you know what you came here for, and don’t want to read my long-winded intro, here’s a link to the article you really want to read: Credit Card Processing Guide for Small Businesses – The Simple Dollar.)
I get contacted pretty often by companies asking if they can submit to my blog, or if I’d be willing to tout their product, website, app, etc. Generally, the answer is “no” — I started this blog as a sort of collection of searchable bookmarks for myself, to save the research and resources that I’ve found helpful in my own practice and for clients; not as a marketing tool, and certainly not as a platform for folks to sell their solutions.
However, once-in-a-while, the information that I’m sent is so valuable and useful that… well, it fits all my criteria for bookmarking and sharing, and I feel lucky that the resource landed in my lap. This is one of those posts.
I have mixed feelings about personal finance site The Simple Dollar — though much of the content is excellent, some of it is oversimplified, and certain articles seem to encourage readers to believe they can handle challenging financial situations without the advice of a professional.
But this article is the best I’ve ever seen on the topic of credit card processing for small businesses. If you are starting a small business and haven’t yet made the decision about whether or not to accept credit cards; or if you’re at the point in your business’ development where it’s time to make the leap, but you’re not sure in which direction; or if you’re already accepting cards but are worried you’re paying too much: read it. It’s comprehensive, full of information and examples, and if you’re willing to take the time to study it and take notes, you will not regret the investment. In fact, it will likely save you time — and definitely money — in the long run.
“Due to the lack of transparency and hidden fees scattered throughout the credit card processing industry, there is a gross misconception of how debit and credit card processing work. This creates a challenge for many small business owners because making an uneducated decision could cost time and money. For this reason, The Simple Dollar has developed a guide that aims to help small businesses gain in-depth knowledge about credit card payment processing, along with practical strategies to manage their fees and get the most out of their services.”
They offer advice on how to find the lowest possible credit card processing cost:
- Isolate the markup
- Choose a pricing model (pass-through pricing is cheapest)
- Compare multiple processors with fees up-front and in writing
- Calculate the total cost
- Negotiate favorable terms (they even offer a list of terms they specifically recommend working on)
As well as suggestions on how to keep costs low, including tips for avoiding punitive interchange rates:
- Track the processor’s fees
- Interchange optimization
- Avoid — Processing expired credit cards, Duplicating transactions, Setting a minimum or maximum limit on your transactions, Charging a usage fee for credit card transactions, Displaying full account numbers on your receipts, Processing Internet transactions with your retail merchant account, Running your personal card through your merchant account, and Splitting one transaction into several smaller transactions
So, give it a read, and share it with others you think might find it useful. There simply aren’t many guides out there on this topic that are as worthwhile as this one: Credit Card Processing Guide for Small Businesses – The Simple Dollar.
I’ve been meaning to write a blog post on S-Corp “reasonable compensation” — a hot audit topic at the IRS these days — for quite some time… in fact, ever since discovering my favorite app of the year, RCReports, which has been a real game-changer for my practice and my S-Corp clients.
(Note: RCReports has its own series of webinars, which I can personally recommend.)
However, being in the bowels of tax season, for now I’m just going to encourage you to attend this CCH webinar on the topic, coming up on Feb 28, 2017 at noon Central-time:
Learn how the IRS determines “reasonable” compensation for S corp shareholder-employees: in this two-hour CPE webinar, business taxation expert Eric Wallace, CPA, will look at the latest developments in this hot area of dispute between taxpayers and the IRS.Mr. Wallace will review the latest legal and regulatory developments and provide practical guidance.
Spread the word to your S-Corp clients and colleagues who work with them.
Today, an important note from the IRS, with a page full of great links to help you obtain information and assistance specific to your needs. Don’t get caught on-hold forever… take a moment to see if your request can be answered more efficiently.
First, I recommend you save this 2-page pdf guide somewhere useful, or print it out and pin it to your bulletin board — the IRS Services Guide is a succinct reference for where to go to find what you need.
For further resources, all of the below comes straight from the IRS at Avoid the Rush: Online Options Help You Avoid Presidents Day Rush.
Avoid the Rush: Online Resources
Refund Delays – By law, the IRS must hold Earned Income Tax Credit or the Additional Child Tax Credit refunds until Feb. 15. Taxpayers will begin to see refunds claiming EITC/ACTC the week of Feb. 27. “Where’s My Refund?” will update for EITC/ACTC refunds on Feb. 18 for the vast majority of early filers who claimed the Earned Income Tax Credit or the Additional Child Tax Credit. Before Feb. 18, some taxpayers may see a projected deposit date or an intermittent message that the IRS is processing their return.
Where’s My Refund? – You just need a little info from your tax return to track your refund.
Finding your Adjusted Gross Income – If you changed tax preparation software products this year, you may be asked for your adjusted gross income to help verify your identity. You must use the procedures outlined on IRS.gov for getting your AGI. We cannot provide you with your AGI if you call.
Letter 4883C – We take many steps to protect you from identity theft. If you receive Letter 4883C, it’s because we stopped a suspicious tax return. Before you call, be prepared to validate your identity. See Understanding Your 4883C Letter for details.
ITIN Renewal – If you have an expired Individual Tax Identification Number and need to file a tax return, there are new rules this year.
Get Transcript – You can view your tax transcript, a summary of your tax return, online or you can order it by mail. You may need this for non-tax reasons such as student or mortgage loan income verification. Or you may need it to find your adjusted gross income.
Appointment Service – We’re trying to eliminate the long lines at our office, especially at this time of year. You must make an appointment for most services at our Taxpayer Assistance Centers. Again, most questions can be answered at IRS.gov.
Free File – Do your taxes yourself, using free, brand-name software through the IRS Free File program. A dozen partners offer free federal tax prep, and in many cases free state as well, to anyone earning $64,000 or less. Taxpayers earning more can use Free File Fillable Forms.
VITA/TCE – Need help doing your taxes? Find volunteer help near you through our Volunteer Income Tax Assistance program or AARP’s Tax Counseling for the Elderly.
Avoid the Rush: Keyword Search
Still can’t find what you’re looking for?
Use our search tool to track down your topic and get the answer at your fingertips. Or, try our Interactive Tax Assistant. This is similar to the tool used by our customer service representatives to answer your tax questions. Our Help and Resources page also contains valuable information.
Avoid the Rush: News Releases
IR-2017-32, Feb. 14, 2017, Avoid the Rush: Be Prepared to Validate Identity if Calling the IRS
IR-2017-30, Feb. 13, 2017, Avoid the Rush; Use IRS.gov for Quick Answers to Questions
I recently had the pleasure of being asked by Hustle & Co to contribute to their blog post on common mistakes that freelancers and the self-employed tend to make regarding taxes. My quotes in their article came from a longer version intended for my blog — and lucky day: you can now read the full version here.
What are common mistakes that freelancers or self-employed people tend to make when preparing for or filing taxes, and how can these mistakes be avoided?
The biggest mistake that self-employed people tend to make when preparing for taxes is that they don’t seek professional help. (I’m not saying this just because I’m a CPA; I’m saying it because I see the results of this mistake regularly.) To clarify, by “professional help”, I’m not suggesting you go to a big tax prep chain and hand in your shoebox of receipts at tax-time; I’m saying that involving an accountant in your business should be one of the first steps a freelancer takes, well before taxes are due. This doesn’t mean you can’t file your own taxes… but if you take the time to consult with an expert first, you’ll make way fewer mistakes when you do. A qualified accountant who specializes in your industry can help you with so many of the key issues that otherwise might come back to haunt you at tax-time:
1) Selection of the right type of entity: sole proprietor, single-member LLC, partnership, multi-member LLC, S-Corp, C-Corp, cooperative, not-for-profit, etc.
2) How to fund your business without tapping into retirement funds and paying a major tax-time penalty.
3) Setting up accounting software and tracking income and expenses properly.
4) Deciding whether to file taxes on the cash basis or accrual basis.
5) Understanding the home office deduction rules.
6) Sorting through the complexities of health insurance: what’s deductible and where; do you qualify for exemptions; how to minimize any penalty for lack of coverage.
7) Explaining the rules for what is deductible, and helping to identify commonly missed deductions such as travel, equipment, cell phone, meals & entertainment, dues & subscriptions, and mileage.
8) Demystifying and debunking what your “uncle’s friend’s lawyer” said you should do to save on your tax bill.
In other words, find an accountant who you feel comfortable with, ask them a million questions, and develop a relationship with them, involving them on your team.
The second-biggest mistake that self-employed people tend to make when preparing for taxes? Looking for an accountant during tax season. By that time, we’re all knee-deep in our existing clients’ needs, and most of us don’t have time to help you convert to QuickBooks or organize your receipts. If you haven’t found someone by tax time, then it might make sense to approach potential accountants with the suggestion that you’d like them to help you file an extension and get organized after tax season is over; you’re more likely to have good luck getting them to work with you.
As for mistakes that I see on a lot of prior-year tax returns that new clients bring me, here are some of the most common:
1) All income is taxable — not just the income that is reported on your 1099-MISC forms.
2) Speaking of 1099-MISC forms… double-check yours the moment they arrive and request corrections immediately. Don’t wait until April.
3) Keep a mileage log or recreate your mileage log from the last tax year based on calendar entries. The IRS does not allow vehicle mileage deductions without one.
4) Speaking of mileage — commuting is not deductible.
5) If you have inventory, count it at 12/31 or as close to it as you can. Even cash-basis taxpayers have to report inventory and cannot include it as a cost of sales.
6) Be careful deducting educational expenses. The IRS will not allow a deduction for education a) to meet minimum requirements of a job, nor b) that qualifies you for a new trade or business. They do, however, allow a deduction for education to “maintain or improve skills”.
7) Gifts to business clients, vendors and the like are only deductible up to $25 per person, per year. (Seriously — it was never indexed for inflation.)
8) Understand the rules of the entity type you chose. (For example, if you’re an S-Corp, pay yourself “reasonable compensation” via payroll; it’s the law.)
9) Depreciable basis on property does not include land. Ever. (If you own your own home and are claiming a home office deduction without using the safe harbor, this means you.)
10) Speaking of depreciation — it’s not optional. You can’t decide not to depreciate something just because you feel it’s too complicated. If the IRS audits you, they will reduce the basis of your property by the amount of the depreciation you should have taken, and you’ll pay gain on the disposal of your property without having had the benefit of the deduction. Sound complicated? (It is. Hire a professional.)
The IRS is warning taxpayers, business owners and tax preparers of a Dangerous W-2 Phishing Scam Evolving; Targeting Schools, Restaurants, Hospitals, Tribal Groups and Others. If you are a victim of or inadvertently assisted in W-2 information theft, please contact the IRS at once, so they can protect the affected taxpayers from tax-related identity theft.
Tax preparers have additional responsibilities and should read this IRS info on what to do if you suffer a data breach of client information.
Here’s how the scam works: Cybercriminals use various spoofing techniques to disguise an email to make it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2.
This phishing variation is known as a “spoofing” e-mail. It will contain, for example, the actual name of the company chief executive officer. The following are some of the details that may be contained in the emails:
- Kindly send me the individual 2016 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review.
- Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary).
- I want you to send me the list of W-2 copy of employees wage and tax statement for 2016, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.
In the latest twist, the cybercriminal follows up with an “executive” email to the payroll or comptroller and asks that a wire transfer also be made to a certain account. Although not tax-related, the wire transfer scam is being coupled with the W-2 scam email, and some companies have lost both employees’ W-2s and thousands of dollars due to wire transfers.
The IRS, states and tax industry urge all employers to share information with their payroll, finance and human resources employees about this W-2 and wire transfer scam. Employers should consider creating an internal policy, if one is lacking, on the distribution of employee W-2 information and conducting wire transfers.
Organizations receiving a W-2 scam email should forward it to firstname.lastname@example.org and place “W2 Scam” in the subject line. Organizations that receive the scams or fall victim to them should file a complaint with the Internet Crime Complaint Center (IC3,) operated by the Federal Bureau of Investigation.
Employees whose Forms W-2 have been stolen should review the recommended actions by the Federal Trade Commission at www.identitytheft.gov or the IRS at www.irs.gov/identitytheft.
Employees should file a Form 14039, Identity Theft Affidavit, if the employee’s own tax return rejects because of a duplicate Social Security number or if instructed to do so by the IRS.
The IRS also has a page offers all sorts of helpful security awareness tips for taxpayers as well as tax preparers.
UPDATE 2/17/17 — I spoke to Jennifer at the City of Chicago, and she was able to answer many of my outstanding questions. I’ve updated the original post with these edits.
UPDATE 2/12/17 — a retail client highly recommends buying bags wholesale from Howard Packaging in Skokie; her sales rep is Marc Moder. She says, “My vendor is charging the tax… I will happily refer anyone to them. The owner of the company apparently loves dealing with small businesses and undercutting Uline prices.”
I’m all for taxation as a way to effect public policy. But it has to be manageable. It’s amazing how challenging it can be to follow the rules for collecting and remitting a particular tax. Take the City of Chicago’s new “checkout bag tax”, for example. Great idea — encourage folks to bring their own bags by making it more expensive to use a bag given to them by the store.
This new tax replaces a ban on “flimsy” plastic bags which targeted chain stores, who quickly found a loophole in providing higher-quality “reusable” plastic bags. But now it affects paper as well as plastic, and small business as well as big box chains. (See a great DNA Info article on the topic, here.)
And unfortunately, the rules surrounding this new ordinance are complex, and for most businesses, will be impossible to follow to the letter.
Here’s what I understand about how it’s supposed to work (please note that I’m not an expert and don’t work for the city — but unlike most folks, I forced myself to read the entire ordinance and all the information I could get my hands on, as well as called the City of Chicago’s Department of Finance to get clarification):
(Steps One and Two are to get retailers “caught up” with the tax for bags that are already in stock.)
1. For starters, each retailer must count all their bags — paper AND plastic — in stock at the end of day on January 31, 2017.
2. Then retailers pay the tax in advance on this existing inventory.
Supposedly, licensed retailers were mailed a “Floor Tax Return” by the City before December 31, 2016. If you did not receive one, but you do use bags, email revenuedatabase@cityofchicago.
A couple of important notes when filling out this return —
a) Once they get a copy of the return to you, you’ll see that you have to include your “Department of Finance Tax Account Number”. This is located in the bottom-left corner of your business license, under the mayor’s signature.
b) On Page 1, Section 1, Line 1, where it asks for the number of checkout bags on-hand, only note the number of bags that a) you intend to use in the City (if you sell at conventions in the suburbs, for example, don’t count those), and b) don’t fall under one of the exceptions (e.g., separating frozen goods, produce or bulk items, household products; selling to SNAP recipients — see #6 below).
c) If you’ve called your bag wholesaler and have determined that they either do or do not intend to charge the city bag tax moving forward, it’s a good idea to note this information on the bottom of Page 1 of the Floor Tax Return, in Section 2, where they ask for the wholesaler’s information. The city will be following up with these vendors, trying to convince them to charge the tax.
Fill out and mail in the Floor Tax Return with a payment of 5-cents per bag by March 3, 2017 (7-cent tax minus a 2-cent credit for your troubles). It’s a $100 fine if filed late — even if you had zero bags in stock at that point (but you do use them); even if your store did not sell or use checkout bags prior to February 1, 2017 (but you plan to in the future); and even if the store decides NOT to use any bags moving forward (but you used to). If you didn’t use bags before the tax and won’t use them moving forward, you’re exempt from filing the form.
The floor tax return, site schedules (a page for each of the retailer’s various locations — must be filled out even if there is only one), and payment must be mailed to:
Chicago Department of Finance
City Hall, Room 107
121 North LaSalle Street
Chicago, IL 60602
(The rest of the steps are how this will work moving forward.)
3. Wholesalers of paper AND/OR plastic bags (not retailers) must register with the City by February 1, 2017.
4. Wholesalers of paper AND/OR plastic bags (not retailers) must charge their customers (the retailers) 7-cents-per-bag minus a 2-cent credit for the retailer’s effort, and remit that 5-cents-per-bag to the City using Form 2737. (I don’t know of any clients who received this, and I cannot find a copy online; I presume the City only sends it out if they determine you are a bag wholesaler.)
5. The retailers pay this net 5-cents-per-bag tax as part of the invoices from the wholesalers for buying paper AND/OR plastic bags.
(This is where it gets complicated.)
6. There are a million exceptions for bags that are exempt from the tax — so the retailer will need to apply to the wholesaler for a credit for each of these exceptions, to be applied to the next invoice — but how in the world are they going to be able to track them or document them in case of a City audit? Examples include:
Paper and plastic bags ordinarily intended and designed for use by customers inside a store to:
– package loose bulk items, such as fruit, vegetables, nuts, grains, candy, cookies or small hardware items
– contain or wrap frozen foods, meat or fish, whether prepackaged or not
– contain or wrap flowers, potted plants or other damp items
– segregate food or merchandise that could damage or contaminate other food or merchandise when placed together in a bag
– contain unwrapped prepared foods or bakery goods
As well as:
– plastic bags with a retail price of at least fifty cents ($0.50) each
– bags that are used to carry items purchased with SNAP (food stamps)
Retailers should take a credit for these tax-exempt paper and plastic bags on the next bill received from their wholesalers. The wholesaler in turn should claim a credit for the tax amount refunded to their retailers on the next monthly payment to the City. On this topic, the City says, “It shall be presumed that checkout bags sold or used by wholesalers and stores are subject to the tax imposed under this chapter until the contrary is established. The burden of proving that such checkout bags are not taxable hereunder shall be upon the person so claiming.”
7. The retailer is permitted to pass along the 7-cents-per-bag tax to the end consumer, in which case the bag tax needs to be stated separately on the receipt to the consumer; I recommend that retailers work with their accountants or bookkeepers to make sure this is set up correctly in their POS systems. The City has provided a lovely placard to post for your customers so they understand what’s going on.
(Remember, this is a 7-cent tax minus a 2-cent credit for the retailer’s troubles, so the amount collected from consumers is 7-cents, but the amount remitted to wholesale bag sellers or, in many cases, directly to the City, is a net 5-cents.)
8. However, the retailer may choose to absorb the cost themselves, in which case it does not have to be stated separately on the receipt.
(This is where it gets even more complicated.)
9. However, either way, it is the retailer’s responsibility to make sure that their wholesalers who sell them bags are in fact charging them the bag tax. But this has a couple serious drawbacks:
(a) If the retailer buys bags online or in a non-traditional outlet, the chances are pretty low that the wholesaler will be registered to collect and remit sales tax, leaving the retailer in the position where they have to do all of it voluntarily, filing Form 2737 with the City, which is even more time-consuming than the rules and process I noted above.
(Note: if you are a retailer in this situation, you must contact the City of Chicago’s Business Contact Center at 312-747-4747 or by e-mail at RevenueDatabase@cityofchicago.org to register to collect and remit the bag tax. However, I was told by the City Department of Finance that they would prefer not to have thousands of small businesses registering with them; they’d rather convince the wholesalers to charge the tax. They said if you don’t receive an affidavit from the City asking you to register, you’re off the hook as long as you’ve declared your wholesaler to them on the Floor Tax Return, step #2 above.)
However, to be safe — in the case where your wholesaler refuses to charge the tax — I recommend switching vendors. A client has recommended Howard Packaging in Skokie as one who both charges the tax and values working with small businesses.
(b) If the retailer isn’t passing the tax along to customers, then the entire point of the tax — to create an incentive for consumers to bring their own bags — is moot. It will just be a revenue-raiser for the City and nothing more.
Supposedly, there are ways to pay this tax through aldermanic offices and chambers of commerce (I will be shocked if this turns out to be true — please let me know in the comments section below if you hear of it), and those same groups have free reusable “ChiBags” available for retailers to give away to customers throughout February and March.
For the record, other non-taxable examples of bags and bag usage include:
– bags provided by a dine-in or take-out restaurant to contain food or drink purchased by the restaurant’s customers
– bags provided by a pharmacist to contain prescription drugs
– bags sold in packages containing multiple bags intended for use as garbage bags, pet waste bags or yard waste bags
– bags of any type that customers bring to a store for their own use or to carry away from the store goods that are not placed in a bag provided by the store
– newspaper bags
– dry cleaning or garment bags
– plastic liners that are permanently affixed, or designed and intended to be permanently affixed, to the inside of a particular bag
And if you’re interested in the history of this fiasco, as well as how it affects small businesses, contributes to income inequality, and lines the pockets of the city and of big box stores — well, there’s lots of that here:
– Excellent “DNA Info” article on the topic
– Daily Herald article discussing policy matters
– Fuller Tax Blog “Complete Guide” to the bag tax
– Chicago Tribune article