Maximizing Credits, Minimizing Risks: What Business Leaders Need To Know Ahead Of Tax Season – Forbes
Tax controversy and litigation attorney, The Law Office of Jason Carr, PLLC.
As we enter tax season, business leaders may feel uneasy—this year in particular. With the IRS adding more resources for audit enforcement and planning to double the number of audits, you may wonder if your business will face more scrutiny than in previous years. You may also wonder if taking advantage of legitimate business tax credits will put you at greater risk for an audit. As we approach April 18, how can you best prepare your tax returns—and your business as a whole—to stand up to the IRS? At the same time, how do you turn in a timely, well-executed tax return that maximizes available credits?
The answer is deceptively simple: Keep calm, and get organized.
The Importance Of Organization
As with many things, sooner is better. If you’re a business owner, you should start reconciling all your bank accounts as soon as possible. You also should start working with your accounting team, or with a CPA—and make sure that they have everything they need from you. There are no special hoops to jump through; rather, you need to take the (not particularly exciting, but absolutely necessary) steps to make sure all of your financial documents and bookkeeping are in order. If you have invoices (paid and outstanding) or receipts, get all of those together and appropriately categorized in advance of filing your returns. If you have employees or contractors, amass your 1099s and W-2s as well, and make sure your accountant has access to them. The more financial documents you have on hand, and the better organized, the easier the process will be for the accountant—and by extension, for you.
Ideally you’ve been doing this all year, as opposed to rushing to get everything organized in January and February. But if you’re just getting started, now is a perfect time to get everything organized and make sure your balance sheets are in order.
The Double-Edged Sword Of Tax Credits
Many company heads may be wondering whether or not they qualify for different business tax credits, such as ERC or research and development (R&D), and whether claiming these will put them at higher risk of being audited.
Broadly explained, the ERC—employee retention credit—is for businesses that, during the pandemic, kept their people employed, despite obstacles such as stay-at-home orders and mandates. One way to qualify for the ERC credit is called the “gross receipts test,” which applies to companies whose revenues declined by about 20% in 2020, and 50% or more in 2021. Most companies don’t qualify in this way. The other qualification test is called the “full or partial suspension of operations” test (FPSO), which considers state or government orders that were in place and their operational impacts. For instance, if you’re running a restaurant and there was a government order against indoor dining, and that accounted for 10% or more of revenues, the restaurant may qualify for the ERC.
R&D tax credits are more well-established, having been around for decades; these are dollar-for-dollar tax credits for improving processes and spurring innovation in areas such as technology. The scope of these tax credits is more limited: companies in industries such as marketing, for instance, would be less likely to be able to take advantage of them. Unfortunately, a lot of businesses are incorrectly advised about their eligibility for these types of credits, so it’s important to ensure that the work of your company actually fits this definition.
There are also other types of credits in exchange for things like providing childcare for employees, implementing employee health plans, or starting employee retirement plans. These credits are designed to help business owners and spur the economy, and in my opinion, if you and your accountant believe you qualify for them, you absolutely should take advantage of anything you’re eligible for—even if it slightly raises the risk of an audit. However, it’s important to make sure to get proper guidance on the front end and to have your bookkeeping in order so you can properly substantiate eligibility in the event of an audit.
The Correct Definition Of Receipts
A word about receipts: Unfortunately, a lot of business owners don’t seem to understand the definition of a receipt, at least in the eyes of the IRS. A lot of people think, “My credit card statement or bank statement will be good enough.” However, this isn’t the case when it comes to showing expenses in advance of taxes, particularly if you’re trying to demonstrate eligibility for certain credits such as R&D. You need the actual “old school” purchase receipts, printed out, that show the date of purchase, location, and item description. In other words, you can’t just file away a random Amazon charge as “business related.” The IRS has no way of knowing what items those credit charges are for without the receipts to go with them. A lot of people misunderstand this, much to their detriment.
Let’s face it: Most business owners are not accountants or CPAs. That’s why it’s important to surround yourself with the best advisors possible—people you can trust, who know what they’re doing, and are very experienced. If your bookkeeping is in-house, make sure you hire the best people.
At the end of the day, you’re the business owner and you’re taking responsibility for that tax return. You could claim you received bad advice, but ultimately, that’s not going to stand up during an audit.
The good news is, it always comes down to organization. As long as you focus on having everything in order so you can substantiate any claim or deduction, you are preparing yourself for an audit. Yes, admittedly, dealing with an audit is a hassle—but ultimately a painless process if you have all your ducks in a row.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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