by Amanda O'Brien | Accounting News, News, Newsletter, Small Business, Tax
Few things create more stress for a small business owner than receiving a notice from the IRS. A tax debt can quickly become overwhelming, but the worst thing you can do is nothing.
The good news is that IRS debt doesn’t have to derail your business. The key is tackling the problem before it grows larger.
Sticking Your Head in the Sand Only Makes the Problem Worse
The IRS charges interest and penalties that compound over time. By ignoring manageable debt, you’re allowing it to balloon into something much more difficult to handle.
In some cases, the IRS may file tax liens, levy bank accounts, or withhold certain income. Even if those consequences seem far away, waiting too long limits your options and can make negotiations more difficult. If you owe back taxes, taking action sooner almost always means paying less in the long run.
Organize Your Financial Records
Before you can fix the problem, you need to understand it. Start by pulling together your financial records: tax returns, payroll records, expense receipts, profit and loss statements, bank statements, invoices, and any correspondence you’ve received from the IRS.
Having accurate records can help you understand how much you owe. And if the IRS requests documentation, you’ll be ready.
Work with a Tax Professional
Seek out a qualified tax professional who specifically understands IRS debt resolution. A Certified Public Accountant (CPA) or a Certified Tax Resolution Specialist (CTRS) can review your situation, explain your options, and communicate with the IRS on your behalf. Depending on your circumstances, they may help establish payment plans, request penalty relief, or identify programs that could reduce the overall amount you owe, like an Offer in Compromise.
Not all tax situations require professional help, but seeking guidance early can help prevent bigger problems later. And you can stay focused on running your business.
Communicate with the IRS
The IRS responds better to taxpayers who stay in contact than those who avoid communication. If you receive a notice, respond by the deadline, even if you don’t have all the information yet. A simple acknowledgment lets them know you’re responsive, and it can buy you time.
If you can’t pay your full balance, ask about a payment plan. The IRS offers installment agreements that let you pay down your debt in monthly payments. This at least keeps penalties from piling up and shows the IRS that you’re working to resolve the issue.
Create a Plan Moving Forward
Resolving back taxes is crucial, but you also need to come up with a plan to prevent future tax problems.
Review your booking systems, set aside funds for future tax obligations, and make sure estimated tax payments and payroll tax deposits are paid on time. Regular meetings with an accountant or tax advisor can also help identify issues before they become serious.
by Jean Miller | Accounting News, News, Newsletter, Small Business, Tax
A crucial tax benefit for businesses is on the verge of expiring. The Qualified Business Income (QBI) deduction, a significant component of the 2017 Tax Cuts and Jobs Act (TCJA), is set to end on December 31, 2025. Read on as we go over how this deduction works and how its impending expiration could affect small businesses.
What is the Qualified Business Income (QBI) Deduction?
The Qualified Business Income (QBI) deduction, introduced by the TCJA, allows eligible small business owners to deduct up to 20% of their qualified business income from their taxable income. This deduction is available to individuals who own pass-through entities, such as sole proprietorships, partnerships, S corporations, and some rental property owners.
How Does the QBI Deduction Work?
To qualify for the QBI deduction, business owners must meet several criteria:
- Type of Income: The deduction applies to income earned from a qualified trade or business, excluding investment income.
- Income Limits: For 2024, the QBI deduction begins to phase out for single taxpayers with taxable income over $191,500 and for married couples filing jointly with income over $383,900. Beyond these thresholds, the deduction may be subject to limitations based on wages paid and the value of qualified property.
- Specified Service Trades or Businesses (SSTBs): If a business falls under SSTBs—such as those in health, law, or consulting—the deduction may be limited or unavailable if the taxpayer’s income exceeds certain thresholds.
The QBI deduction also excludes capital gains or losses, dividends, interest income, and income earned outside the United States.
How Could the Expiration of the QBI Affect Your Small Business?
Let’s say you’re a small business owner who earned $150,000 this year. Without the QBI deduction, you’d be taxed on the full amount, minus any other eligible tax credits. Based on the current tax brackets, a single filer would fall into the 24% tax bracket for income between $95,375 and $182,100. Thus, you’d end up paying 24% on a portion of your income, totaling $36,000 in taxes.
With the QBI deduction, you can reduce your taxable income by 20%. This means instead of being taxed on $150,000, you’d only be taxed on $120,000. Despite remaining in the same 24% tax bracket, your tax bill would decrease to $28,800, which translates into a savings of $7,200.
For businesses with larger earnings, the benefits are even more substantial. Suppose your business earns $600,000 in income. Without the QBI deduction, you’d be taxed on the entire $600,000. At a 35% tax rate for single filers with this level of income, you’d face a tax bill of $210,000.
Applying the QBI deduction allows you to reduce your taxable income to $480,000. This adjustment results in a tax bill of $168,000 at the same 35% tax rate. Therefore, the QBI deduction saves you $42,000 in taxes each year. For high-earning businesses, such deductions can lead to significant tax savings.
The Impending Expiration and Its Impact
Unless Congress extends or modifies the QBI tax provision, it will expire at the end of 2025, and business owners will no longer benefit from this valuable tax break. The impact on small business owners could include:
- Increased Tax Liability: Without the 20% deduction, business owners will face higher taxable income, leading to potentially higher federal income taxes. For many small businesses, this could mean a substantial increase in their overall tax burden.
- Strategic Tax Planning: Business owners should consider how the expiration might affect their long-term tax strategy. The loss of this deduction may impact decisions related to business expansion, compensation structures, and other financial planning aspects.
- Legislative Uncertainty: The fate of the QBI deduction is still subject to legislative changes. While there is potential for an extension or modification, business owners should prepare for the possibility that the deduction may not be available beyond 2025.
Preparing for the Change
Given the potential tax increase, small business owners should take proactive steps:
- Consult a Tax Professional: Tax advisors can help navigate the complexities of tax planning in light of the impending expiration. They can offer strategies to mitigate the impact and prepare for future changes.
- Review Financial Projections: Business owners should analyze how losing the QBI deduction will affect financial projections and budgeting, and adjust business strategies accordingly.
- Stay Informed: Keeping current with legislative developments and changes in tax laws will help you adapt your financial plans effectively.
by Jean Miller | Accounting News, Business Growth, News, Newsletter, Small Business
Small businesses often face cash flow challenges that can threaten their financial stability, so it’s crucial to implement effective strategies for long-term cash planning, ensuring sustainability and success. Read on as we explore actionable steps that small businesses can take to navigate cash flow hurdles and establish a solid foundation for financial health.
Boost Cash Reserves and Working Capital
In the case of unforeseen financial challenges or emergencies, it’s typically advised that businesses set aside enough cash to cover three to six months’ worth of operational costs. These reserves act as a safety net and provide liquidity to cover unexpected expenses so that the business can continue operating smoothly without having to rely on external financing.
In addition to emergency cash reserves, small businesses need to have a positive working capital balance to fund day-to-day operations and meet short-term financial obligations.
Strategize Investment Planning
Capital expenditure planning helps small businesses manage their cash flow, optimize their use of financial resources, and ensure that investments are made in line with the organization’s growth plans. Such expenditures can include physical expansion of office space, replacing broken or outdated equipment, or purchasing company machinery and vehicles. Strategizing these investments helps businesses bolster their long-term growth objectives while reducing possible expenses from outdated or malfunctioning equipment.
Diversify Revenue Streams
Business owners are always adapting to shifting regulations, ever-evolving technologies, and consumer behavior changes. Implementing a strategic plan to navigate potential challenges can boost small businesses’ resilience and secure cash flow over the long term.
An effective plan of action is to diversify revenue streams, such as introducing new products or targeting different customer demographics. By diversifying revenue sources, businesses can maintain a steady influx of income, even if one product or service underperforms.
Upgrade Accounts Receivable and Payable Systems
Businesses can improve cash flow by optimizing their accounts receivable and payable processes. This can be done by renegotiating payment terms, taking advantage of early payment discounts, providing convenient payment options, and ensuring adequate staffing for your collections department. These improvements can also lower operational expenses and strengthen relationships with customers and vendors.
Prioritize Cost Management
Established businesses know the challenge of cost escalation. Over time, operating expenses rise due to various factors such as system upgrades, vendor price hikes, increased raw material costs, and higher labor rates. Regularly assessing operating expenses helps to prevent them from getting out of hand. By optimizing operational costs, businesses can enhance cash flow and protect a strong financial bottom line.
Prioritize Tax Planning
Business owners may not find tax planning very exciting, but a tax planning strategy is essential for financial health – and will help to avoid unexpected tax burdens that can strain cash reserves. Consulting with a qualified CPA or tax professional regularly for tax projections can help mitigate potential tax surprises and ensure financial stability.
