FAQ Page

TAX PREPARATION

Should I prepare my own taxes on Turbo Tax?
If you are Self-Employed or own Rental Property you will want to engage a professional to make sure you are reflecting all business deductions and calculating depreciation correctly.  Also, if you have moved states, Turbo Tax may NOT be able to generate multi-state returns.  Foreign tax filings are too complicated for most taxpayers.  If you do opt to self-prepare your tax return, have a tax professional look it over.

What is the role of a professional Tax Advisor?
Tax professionals will make certain your tax return is filed correctly, ensuring you are paying the legal minimum tax to the IRS and to the correct State.  A great attention to detail is important as mistakes can be costly.  A good Tax Advisor should be able to spot audit red flags and will make suggestions on ways to save on taxes too.

What is the difference between business and individual Taxes?
Individual Taxes refers to the 1040 series of tax forms and includes Schedule C, Profit or Loss from Sole Proprietorship.  Sole proprietorship is the simplest form of business with one owner.  Business Taxes usually refers to Corporations (1120 series) and Partnerships (Form 1065), which are separate legal entities and file separate tax forms.  Profits then flow to the Individual via a Schedule K-1.  Though the business is required to file a return, it doesn’t pay any tax.

What is difference between Form 1099 and W-2?
If you have received a 1099-Misc from your employer, this means you are considered a free-lancer, are subject to the self-employment tax and must report the gross amount on Schedule C.  Unlike form W-2, no income taxes have been withheld and remitted to the IRS or State on your behalf by your employer.  Though you are now subject to greater taxes, form 1099-Misc and Schedule C do allow for claiming business deductions to help reduce taxes.

What is Self-Employment Tax and how is it Paid?
This tax is imposed by the IRS at 15.3% for individuals engaged in business and is used to fund Social Security and Medicare.  The tax is applied to your business net profits.  You are expected to estimate and pay this tax quarterly throughout the year, along with your regular tax.  Your tax filing in April should be a reconciliation of your net income, tax calculation and your estimated taxes paid in.

What expenses can I deduct for my Business?
Schedule C filers can deduct all ordinary and necessary business expenses.  It is important to correctly categorize your expenses on the Form and retain back up support.  Some overlooked expenses include the home office, depreciation, travel and meals.   It may be necessary to issue 1099’s to recipients for amounts paid for professional fees and contract labor.

What can I deduct for my Rental Property?
Schedule E filers can deduct all the expenses associated with renting their investment property, including interest, taxes, repairs, utilities, etc.   If you are just renting out a room in your house, then you must allocate these expenses for the percentage share that applies to the rental portion.  Though most rental properties generate tax losses due to depreciation, the loss may be suspended rather than currently deductible as a passive activity.

What is Qualified Business Income Deduction?
This is a new and favorable tax cut, whereby certain tax filers can deduct up to 20% from their net profits.  The write-off is in addition to all other deductions they would be entitled.  The deduction may be limited or phased out for some taxpayers based on income level.  The QBI Deductions does not reduce the self-employment tax.

TAX PLANNING ADVICE

What is the best way to save for Retirement?
One of the retirement distinctions of being self-employed is that you can contribute considerably more to your retirement than if you established an IRA or contributed to your employers 401k.  Once you establish your self-employed retirement plan, you can contribute 20% of your net profit up to a maximum of $57,000 and don’t have to fund the account until you file your tax return.

Do I need an LLC for my Business?
Many sole proprietor taxpayers opt to set up an LLC for appearances and for liability protection.  There is no tax consequence, unless you make an election with the IRS to be taxed as a separate entity and file a business tax return.  The S-Corp Election is a self-employment tax savings strategy that may benefit certain taxpayers.

What is the S-Corp Election?
Taxpayers that have an LLC may opt to file Form 2553 with the IRS and treat their entity as a separate entity for taxes.  Dual sets of tax returns are then required (one for business and one for personal).  The owner would be required to take a salary from the company via a W-2.  The remaining profit would flow through to the individual, and not subject to self-employment tax.

What business records do I need?

You will need an IRS tax identification number (EIN) for the business to open a business bank account and business credit card.  Keep a ledger of your income if it differs from the amounts received into your bank account.  You must keep the actual receipts for your purchases and not just your credit card statements.  Keep these records for 3 years in a safe place.

TAX PROBLEMS

What happens if I don’t file my Taxes?
If you fail to file your tax return, the IRS will likely send you a letter of Inquiry.  If you fail to respond, the IRS may assess tax based on income information provided by third parties, without regard to any deductions.  The IRS will impose a Failure to File Penalty of 5% percent per month for a maximum 5 months to your balance.

What happens if I don’t pay my Taxes?
If you File but don’t Pay your taxes on time, the IRS will send and Account Statement with applicable finance charges.  The IRS charges a Failure to Pay Penalty of 1/2% per month in addition to interest charges.  If you do not set up a payment plan, the IRS may seek to levy your bank account or garnish your wages.

What happens if I make a mistake?
Mistakes can be either tax favorable (you overstated your tax) or unfavorable (you understated your tax).  You may seek a refund of overstated tax by filing an amended tax return (Form 1040X) and have 3 years to do so.  If you have understated your tax and get Audited, the IRS may impose a Negligence Penalty of 20%, in addition to regular finance charges.

Can I reduce the Amount I owe?
The most straightforward way to reduce a proposed amount of tax owed is to provide the supporting information requested.  This may include filing supplement tax forms and schedules.  Penalties can be reduced by showing reasonable cause, whereby you demonstrate that you used all ordinary business care and prudence to meet your tax obligations but were nevertheless unable to do so.

What should I do If I get a Letter from The IRS or State?
You should open any tax correspondence immediately and read it carefully.  The letter will have important details of the information requested, how to respond and the due date.  Do not procrastinate as Failure to respond will not solve your problem.  Often, any proposed tax balance stated in the Letter is overstated or incorrect.  Seek professional tax help if you have questions.

Why did I get Audited?
The IRS matches your filed tax return with income information provided by third parties.  If there is a discrepancy, the IRS will likely send you a CP2000 Notice.  The notice will have a proposed tax balance and explanation.  Common examples include the failure to report sales of assets (your home or stocks) and failure to include income.  The proposed balance is often incorrect and can be reduced dramatically.

INTERNATIONAL TAXES

I work Overseas…How do I File?
If you are U.S. Citizen working overseas you are still required to file a tax return, though you may not owe any income tax.  The Foreign Earned Income Exclusion of the tax code provides if you spend at least 330 days in a foreign country, you may be able to exclude your foreign earned income from U.S. taxation.  If you do not qualify for the Exclusion, you may be able to claim a credit for any foreign taxes paid.

Do foreigners here in U.S. need to file Taxes?
Foreigners located in the U.S. may be required to file a U.S. tax return.  Your immigration status and time spent in the U.S. will be used to determine whether you should file as a Resident or Non-Resident and which tax form you may need to file (1040 or 1040NR).  You will need to apply for an Individual Tax Identification Number (ITIN) in order to process the tax return.  Careful attention should be paid to an applicable Tax Treaties with foreign Countries.

STATE TAXES

The State says I owe Taxes…What do I do?
If you received a Tax Notice from the state, you should read the correspondence carefully to determine your course of action.  Do not assume the balance due is correct and that you should just pay it as notice balances can often be reduced or eliminated.   Some states, including the District, may outsource their collections to a third party collection agency.   You will want to call immediately to set up a payment plan on your terms to prevent forced collection activities and additional penalties.

What is the difference between Domicile and Residency?
Taxpayer’s should understand the distinction between Domicile and Residency for state taxes.   Domicile has to do with where one intends to be situated (even if you are not currently there) and Residency deals with days spent in a certain state (without regard to your past or future intent).  It is quite possible for a taxpayer to be domiciled in one State while a Resident of another and subject to taxes in both jurisdictions.   Taxpayers can take active steps to change their domicile to avoid double taxation.