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Your Tip Earnings and Taxes

The internal revenue service takes a very simple approach to tips. It views all tips you make in your job as taxable income that must be reported and for which taxes must be paid. Put another way, the IRS has a simple but brutal view towards taxes.

Now tips come in different forms. Some are received directly from customers while others are automatically added to the customer’s bill. The IRS takes the position you must report and pay taxes on both amounts. This also includes taxes you earn through any group splitting where all tips are collected together and then split amongst the employees. On top of this, the IRS also takes the view that any non-cash tips such as tickets to something are also income that should be reported and taxes paid on. Put another way, the internal revenue services gets you coming and going. 

To make things a little more brutal, the internal revenue service requires you to take some steps in reporting tips. If your tips total $20 or more in any calendar month from a single job, you are supposed to report the total to the employer by the 10th day of the next month. The employer is then supposed to withhold federal income tax, social security and Medicare taxes from your paycheck. Keep in mind that the failure to do so can lead to the placement of a 50 percent penalty on your taxes. Obviously, the IRS is fairly serious about getting its money. 

Tips paid to waitresses, bartenders, barbacks and so on are a hot spot with the IRS and always have. Since tips tend to be given in cash form, the potential for forgetting to report them is particularly high. The IRS seems to think so and has shown a generally aggressive attitude on the subject. If you indicate you are a waitress or bartender on your tax return, but fail to report any tip income, it could be audit time.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Bad Debt Tax Deduction

Practically every small business has receivables that it cannot obtain from clients. If your small business doesn’t have any such receivables, consider yourself lucky. For those small businesses that suffer from uncollected receivables, solace can be taken from the fact you can claim a tax deduction

A small business can write-off bad debt losses if it meets nominal requirements. To claim such a tax deduction, the following must be shown:  

  1. The existence of a legal relationship between the small business and the debtor
  2. The receivables are worthless
  3. The small business suffered an actual loss

Proving there is a legal relationship between the small business and debtor is fairly simple. You must simply show that the debtor has a legal obligation to make a payment. Most businesses issue invoices or sign contracts with debtors and these documents suffice to prove the legal relationship. If you are not putting your business relationships in writing, you should begin doing so immediately.

Proving receivables are worthless is slightly more complex. A small business is required to show that the debt has become both worthless and will remain so. You must also show that you took reasonable steps to collect the receivables, but you are not necessarily required to go to court to meet this requirement. A clear example of where you would meet this requirement is if the debtor filed bankruptcy.

While proving that you suffered a loss may sound like the easiest requirement to meet, the issue is a bit more complicated. The Tax Code defines the loss as an amount that is included in your books as income, but is never collected. A classic example of such a situation would be a manufacturer that provides products to retailers on credit. The manufacturer can show a real loss if the retailer files bankruptcy.

Unfortunately, there is almost no way to claim a loss if you provide hourly services and use a cash accounting method. The IRS does not consider the expenditure of time and effort to be a sustained economic loss. 

Small businesses suffer all too often from uncollected receivables. If you failed to claim such losses as a tax deduction during your last three tax filing years, you should file amended tax returns to get a refund.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Top 7 Small Business Tax Tips

Here are seven ways for owners of small businesses to save money on their taxes.

 

  1. Incorporate Yourself: If you`re still a proprietor or partner of a business, it`s time to incorporate yourself. Not only will you limit your liability, but you may enjoy lower tax rates on small business income and other tax advantages as well. 

 

  1. Be Home Based: If possible, continue (or switch to) being a home based business. Not only will you keep your overhead down, but you will be able to write-off (or deduct) the business use of your home.

 

  1. Income Split: Pay reasonable wages to your spouse and children. In this way, you can legally divert income taxed at your higher rate to your family members that are in a lower tax bracket.

 

  1. Rearrange Your Affairs For Maximum Tax Savings: Can you make some changes to turn your hobby into a moneymaking business? Can you use that extra room in your house as a home office for your business? Can you arrange to use your car more for business purposes? Can you arrange for more of your entertainment expenses to be business-related? 

 

  1. Document Your Expenses Well: Do you document your expenses well so that they would survive a tax audit? Have you kept a mileage log so that you can prove the percentage of business use you claim for your vehicle? Have you kept receipts for all your entertainment expenses and listed the business purpose on the back of each receipt?

 

  1. Be Punctual: File all returns and pay all taxes due (income, payroll, sales, et cetera) on time. This way, you avoid expensive late filing (and payment) penalties and interest. 

 

  1. Develop a Tax Planning Mindset: Some people only worry about their taxes during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern. Do you make business and personal purchases, investments, and other expenditures with tax savings in mind?

 

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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The Purpose of Your Accountant

An accountant is a licensed professional who has gone to hell and back to gain their designation as a certified public accountant. The testing for the certification is beyond brutal. If an accountant is certified, it means they are extremely versed in the tax code, finances and tax issues. 

 

Many people are under the mistaken belief that accountants simply provide tax return preparation services. The stereotypical view involves a person dropping off their receipts a month before tax returns are due and the accountant doing the best he or she can to prepare a tax return while limiting the amount of money you owe the government. This occurs, but people are wasting money if this is how they are using their accountant. 

 

Accountants have expertise in the tax code. You should use this. Ideally, an accountant will aware of all aspects of your financial life. They should also be aware of significant events in your private life, such as the fact you are about to have a child. The reason this is important is it gives the accountant the ability to solve your tax mystery. 

 

Solving a tax mystery simply refers to an accountant figuring out the best way to limit your taxes. As you know from police shows on television or mystery novels, finding as many clues as possible is the way to solve the mystery. The accountant needs to do the same with you and you need to help them. Each part of your finances represents a clue to solving the mystery of how to cut your tax bill. 

 

Once an accountant has all the clues, he or she can do their job. They will give you specific direction on the steps to be taken to save money on your tax bill this year. Equally important, they will give you advice on how you are going to save taxes in future years. Depending on your situation, they may even recommend a long-term tax strategy for stuffing away money to pay for your kids’ college tuition or your retirement. 

 

The purpose of using an accountant is not just to put tax returns together. They put together tax strategies to save you money this year, the next and throughout your life.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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What Is A Dependent For Tax Purposes?

What are the qualifying characteristics of a dependent for tax purposes? Following is a general explanation on how to determine dependents, and how it relates to your tax status, liability and the credits you can claim on your tax return.

There are a few assessments that a person must pass in order to qualify as a dependent on a U.S. tax return. For starters, individual must be the taxpayer’s child, stepchild, foster child, sibling or stepsibling, or a relative of one of these, and the individual must live at the taxpayer’s residence for greater than 6 months of the tax year. There are exceptions for children of divorced parents, kidnapped children, and for children who were born or died during the year. 

The individual must be under the age of 19, or 24 if a full-time student. Finally, the individual must not have contributed more than one-half toward his or her own support during that year in order to qualify as a dependent. Other qualifying points include, U.S. citizenship and single status or married filing as a single person. 

If the individual fulfills all of these requirements, then any of the applicable deductions, exemptions, and credits can be used for them. Some of these include dependent daycare expenses, child tax credits, medical expenses, earned income credit, and various itemized deductions. Determining eligibility often means the difference between owing money to the government and receiving a refund from them. 

The child and dependent care expenses cover things like daycare, after school programs, private childcare services, etc. Any qualifying children the child and dependent care expenses must be under the age of 13. 

The child tax credit is similar to the earned income credit because it is a straight credit. Taxpayers with a qualifying dependent that is under 17 years old may only take the child tax credit. 

Determining if you have any dependents that you can claim on your annual tax return might take a little work, but it can be well worth it in the long run. You could be rewarded with a nice tax refund, thanks to the credits, exemptions, and deductions that your dependent(s) will give you the opportunity to claim.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Your Appeal Rights When Fighting The IRS

Are you in the middle of a disagreement with the IRS? One of the guaranteed rights for all taxpayers is the right to appeal. If you disagree with the IRS about the amount of your tax liability or about proposed collection actions, you have the right to ask the IRS Appeals Office to review your case. 

During their contact with taxpayers, IRS employees are required to explain and protect these taxpayer rights, including the right to appeal. The IRS appeals system is for people who do not agree with the results of an examination of their tax returns or other adjustments to their tax liability. In addition to examinations, you can appeal many other things, including: 

  1. Collection actions such as liens, levies, seizures, installment agreement terminations and rejected offers-in-compromise,
  2. Penalties and interest, and 
  3. Employment tax adjustments and the trust fund recovery penalty.

Internal IRS Appeal conferences are informal meetings. The local Appeals Office, which is independent of the IRS office, can sometimes resolve an appeal by telephone or through correspondence. 

The IRS also offers an option called Fast Track Mediation, during which an appeals or settlement officer attempts to help you and the IRS reach a mutually satisfactory solution. Most cases not docketed in court qualify for Fast Track Mediation. You may request Fast Track Mediation at the conclusion of an audit or collection determination, but prior to your request for a normal appeals hearing. Fast Track Mediation is meant to promote the early resolution of a dispute. It doesn’t eliminate or replace existing dispute resolution options, including your opportunity to request a conference with a manager or a hearing before Appeals. You may withdraw from the mediation process at any time.

When attending an informal meeting or pursuing mediation, you may represent yourself or you can be represented by an attorney, certified public accountant or individual enrolled to practice before the IRS. 

If you and the IRS appeals officer cannot reach an agreement, or if you prefer not to appeal within the IRS, in most cases you may take your disagreement to federal court. Usually, it is worth having a go at mediation before committing to an expensive and time-consuming court process.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Profit and Loss

It might seem like a no-brainer to define just exactly what profit and loss are. But of course, these have definitions like everything else.  Profit can be called different things, for a start. It’s sometimes called net income or net earnings.  Businesses that sell products and services generate profit from the sales of those products or services and from controlling the attendant costs of running the business. Profit can also be referred to as Return on Investment, or ROI. While some definitions limit ROI to profit on investments in such securities as stocks or bonds, many companies use this term to refer to short-term and long-term business results. Profit is also sometimes called taxable income.

It’s the job of the accounting and finance professionals to assess the profits and losses of a company. They have to know what created both and what the results of both sides of the business equation are. They determine what the net worth of a company is. Net worth is the resulting dollar amount from deducting a company’s liabilities from its assets. In a privately held company, this is also called owner’s equity, since anything that’s left over after all the bills are paid, to put it simply, belongs to the owners. In a publicly held company, this profit is returned to the shareholders in the form of dividends. In other words, all liabilities have the first claim on any money the company makes. Anything that’s left over is profit. It’s not derived from one element or another. Net worth is determined after all the liabilities are deducted from all the assets, including cash and property. 

Showing a profit, or a positive figure on the balance sheet, is of course the aim of every business. It’s what our economy and society are built on. It doesn’t always work out that way. Economic trends and consumer behaviors change and it’s not always possible to predict these and what income they’ll have on a company’s performance.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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What are Independent Auditors?

Independent CPA auditors are like referees in the financial reporting arena. The CPA comes in, does an audit of the business’s accounting system and methods and gives a report that is attached to the company’s financial statements. Publicly owned businesses are required to have their annual financial reports audited by independent CPA firms and any privately owned businesses have audits done as well because they know that an audit report will add credibility to their financial reports.

An auditor judges whether the business’s accounting methods are in accordance with generally accepted accounting principles (GAAP). Generally, everything is in place and the financial report is a reliable document. But at times an auditor will wave a yellow or red flag. Some indicators of potential trouble include when the business’s capability to continue normal operations is in doubt because of what are known as financial exigencies, which could mean a low cash balance, unpaid overdue liabilities, or major lawsuits that the business doesn’t have the cash to cover.

An auditor must exercise professional skepticism, meaning the auditor should challenge the accounting methods and reporting practices of the client in order to make sure that its financial statement conforms with accounting standards and are not misleading – in short, that the financial statement are fairly presented. Indeed, the words “fairly presented” are the exact words used in the auditor’s report.

A good auditor needs technical know-how, but also needs to know how to be tough on the accounting methods of the client. His job is to be the agent of the shareholders and other users of the business’s financial report. It’s incumbent on an auditor to strictly uphold GAAP, and not let any irregularities slide. 

There are a number of well-known companies that engaged in accounting fraud recently and that fraud was not discovered by the CPA auditors. Enron is one of these companies. In this case, the auditing firm, Arthur Anderson was found guilty of obstruction of justice because it destroyed audit evidence.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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When to Use a Certified Public Accountant

A Certified Public Accountant, or CPA, can help you make sure that your small business accounting or individual taxes are accurate and complete.  Some businesses are small enough, such as home-based businesses, that a Certified Public Accountant is not needed for most accounting tasks.  However, there are times when a business or individual should use a Certified Public Accountant.

If you have a small business, and you have discovered that an error in your bookkeeping exists, it can often be difficult to locate where and when the error was made to correct the mistake.  A Certified Public Accountant has special training and education to find these errors through an external audit process.  It is vital that these errors be corrected because the books you use in your business are used to determine taxes and business decisions. 

These records also allow investors to see how well your business is doing so that you can get more backing to help your business grow.  A Certified Public Accountant can find and correct any errors in your bookkeeping, and help you organize your bookkeeping so that you or the Certified Public Accountant can easily generate financial statements and reports.  These financial statements and reports prepared by a Certified Public Accountant are the documents that most banks and investors want to see before making any financing decisions.

If you are starting up a home-based or small business, you should seek the guidance of a Certified Public Accountant.  The Certified Public Accountant can help you set up a double-entry method of accounting with a journal and ledger, as well as a chart of accounts to help you use these tools effectively in your business.  The Certified Public Accountant can also advise you as to what taxes you will be responsible for paying throughout the year.  Quarterly taxes are often required of businesses and self-employed individuals.  To avoid penalties, late fees, and a large tax bill at the end of the year, you should contact a Certified Public Accountant for this information.

Any individual that is self-employed should seek out the services of a Certified Public Accountant when it is time for tax return preparation.  Tax laws change every year, and a Certified Public Accountant can help you make sure that you are receiving all of the deductions you have available as a self-employed individual.

Any individual with children, who is separated or newly divorced, or who may wish to itemize deductions based on mortgages, medical expenses, and charitable contributions should also seek out a Certified Public Accountant for assistance in income tax preparation.  This is because the tax laws are very complex, and change often.  If you make a mistake and claim a deduction that you could not legally claim, the IRS may audit your return and cause you to pay back the refund amount, with penalties.  Additionally, if you make a mistake and do not claim a deduction that you could legally claim, the IRS will not attempt to correct the mistake, causing you to receive a smaller refund.  Either way, you lose money.  The best way to avoid these and other errors is to have a Certified Public Accountant prepare your income tax return.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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What Does an Audit Report Contain?

Most audit reports on financial statements give the business a clean bill of health, or a clean opinion. At the other end of the spectrum, the auditor may state that the financial statements are misleading and should not be relied upon. This negative audit report is called an adverse opinion. That’s the big stick that auditors carry. They have the power to give a company’s financial statements an adverse opinion and no business wants that. The threat of an adverse opinion almost always motivates a business to give way to the auditor and change its accounting or disclosure in order to avoid getting the kiss of death of an adverse opinion. An adverse audit opinion says that the financial statements of the business are misleading. The SEC does not tolerate adverse opinions by auditors of public businesses; it would suspend trading in a company’s stock share if the company received an adverse opinion from its CPA auditor.

One modification to an auditor’s report is very serious – when the CPA firm says that it has substantial doubts about the capability of the business to continue as a going concern. A going concern is a business that has sufficient financial wherewithal and momentum to continue it normal operations into the foreseeable future and would be able to absorb a bad turn of events without having to default on its liabilities. A going concern does not face an imminent financial crisis or any pressing financial emergency. A business could be under some financial distress but overall still be judged a going concern. Unless there is evidence to the contrary, the CPA auditor assumes that the business is a going concern. If an auditor has serious concerns about whether the business is a going concern, these doubts are spelled out in the auditor’s report.

 

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

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