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The Complete Tax Guide To Charitable Donations

The Complete Tax Guide To Charitable Donations

Introduction

2020 was the first time ever that you could deduct 100% of your AGI (adjusted Gross Income) for charitable donations. This law is now extended for 2021.

This post will give you the latest information as to how you can deduct up to 100% of your 2021 income by making charitable donations and will also discuss even better options.

When finished, you will know how to maximize the tax benefits of charitable donations. If you are an eligible charity, you can advise potential donors on this.

You are welcome to contact me if you have any questions.

Who Can Benefit

You can benefit if you are an individual, church, minister, pastor, clergy or other charity and can use this data to help make a better world. Those receiving this article are invited to share the articles with others.

I will be sending out further articles and videos on this and other topics. If you like this, please click on like. If you would like to be notified and receive similar content, please click on subscribe. Your feedback is always appreciated

100% AGI Deduction

Charitable donations in 2021 have been increased up to 100% of your Adjusted Gross Income (AGI) as part of the US Government CoronaVirus Tax Relief package.

You can potentially ZERO OUT your taxable income for federal income tax purposes by making charitable donations!!!!

But there is an Even Better Tax Deduction in certain cases. See “An Even Better Tax Deduction” sub-heading below. What’s better than 100%???? See below.

Please note that federal income tax is distinct from Social Security and Medicare and you may still need to pay for these.

Corporate Tax Deduction

Also C Corporations (not S Corporations) can deduct up to 25 % of their taxable income in 2021. This is up from 10% in prior years.

S Corporations by definition do not have taxable income and the profit will be taxed when it flows through to the personal tax returns of the shareholders through a K-1.

Thus the shareholders of an S Corporation can deduct charitable donations up to 100% of their personal AGI as covered above

How To Deduct Charitable Donations

Tax deductible donations are contributions of money or goods to tax-exempt organizations (charities) Tax deductible donations can reduce your taxable income. To claim tax deductible donations on your taxes, you must file a Schedule A with your form 1040 and itemize your deductions there.

For the 2020 tax year, there’s a twist: you can deduct up to $300 of cash donations without having to itemize. This is called an “above the line” deduction. So you can do $300 even if you do not itemize.

How much can I deduct?


For 2020, you can deduct up to 100% of your adjusted gross income via cash charitable donations. Cash donations include cash, checks, bank transfers and credit card charges. They do not include property or stock.

In 2018 and 2019, you were limited to a maximum of 60% of your adjusted gross income via charitable donations.

Prior to that, the limitation was 50% of your adjusted gross income.

If you are making a cash donation to a church or eligible charity, you are all set to take advantage of the 100% deduction in 2020.

Donations Example and Summary

Suppose you donate $200,000 and your AGI was only $100,000? Then you can deduct the $100,000 (reducing your federal income tax to zero) and carry over the rest.

  • The limit applies to all donations you make throughout the year, no matter how many organizations you donate to.
  • Contributions that exceed the limit can often be carried over and deducted on your tax returns over the next five years — or until they’re used up.
  • For the 2020 and 2021 tax year, you can deduct up to $300 of cash donations without having to itemize. This is called an “above the line” deduction.

An Even Better Tax Deduction

Being able to take 100% of your income as a deduction is amazing. But in the case of people who own their own business, stock, or real estate that has increased in value, there is an even better deduction.

Suppose you own a business or stock that over the years has appreciated in value. Or suppose you own real estate that you purchased decades ago that has gone up in value, from say $200,000 to $3,000,00.

If sold, this real estate would be subject to tax as a Capital Gain Tax on $2.8 Million in profit.

In the real estate example, the profit would be $2.8 million. In the stock example, suppose you also made a $2.8 Million profit.

Or you could have your own business ( which could be a Sole Proprietorship, LLC, S Corp or C Corporation). Probably it had zero value when you started. Let us assume you can sell it for $2.8 million, thus again a $2.8 million dollar profit.. Probably it had zero value when you started. Let us assume you can sell it for $2.8 million, thus again a $2.8 million dollar profit.

In any of these cases in 2020, you could sell the  asset  for $2.8 million dollars profit, donate that $2.8 million dollars to charity and reduce all that taxable income to zero!  

Great Deal! But….

What Could Be Better Than That?

Do not sell the property. Donate it to Charity and let the Charity sell it!!!!!!

You make 0 income off the sale of the property and have a $2.8 million dollar deduction.
That is right! You made no taxable profit off the sale and you get a tax deduction! Now it will be limited to 30% of your AGI, But the sale itself was not part of your income. And you can roll it over into the next five years if you cannot use it in the first year. Now, if you make $466,666 per year in adjusted gross income, you could zero out your income for the current and next five years!!

Yes, That is right. You donate 2.8 million dollars by donating unsold stock, an unsold business, an unsold property worth $2.8 million and then for the current year and five succeeding years you could pay no income tax.

And your Charity Got 2.8 million dollars!!

Of course, you have to have enough income to deduct it against!

YES! That is correct! You get $2.8 million dollars in deductions you can use over the current and next five years!! And you got ZERO taxable income on the sale.

This applies to lesser donations as well, but it is only useful if it exceeds your standard deduction.

Other Options

You can play with various ways.Suppose you want to make a big donation but also you need money to live on

You could donate 2,153, 849 worth of stock to an eligible charity. $646,151 you could sell directly (30% of the donation) generating income from the sale to you of this amount.

So you have $646,151 of tax free cash from the sale. And you also have $2,153,849 -646,151=$1,507,698 available to deduct the next year and following four years, up to 30 % of AGI per year.

There are many other ways to do this. Maybe you donate a percentage of your stock, company or real estate and your charity gets a $100,000 donation and you get a $30,000 deduction which you use to reduce your taxable income from your wages.

Huge Tax Savings Are Possible

I realize that this may seem a bit mind boggling, and not everyone is a tax professional or has a degree in Mathematics like I do. But I am giving the details here so you can get the idea HUGE TAX SAVINGS ARE POSSIBLE.

Better Part of Valor-Get An Expert Side Check

I highly recommend before you implement such a strategy you contact myself or another trusted tax professional who is familiar with charitable donations.

As a disclaimer, taxes and mathematics are often very confusing and misunderstood subjects to a high percentage of the American people, and so before you fully implement the strategy, have someone who is a tax expert and you trust look at it.

This is important. I have had many tax clients totally misinterpret something they read or heard which they did not understand, and then got far-fetched ideas. Discretion is the better part of valor here. So contact me or a trusted tax advisor before you proceed

But hear me clearly. If you have stock, a business, or property that has gone up in value, you may be eligible for a dramatic tax break. And if what I am saying here seems confusing or far-fetched, check it out with me or a trusted tax professional

One again, you are welcome to contact me.

How To Claim Tax Deductible Donations On Your Tax Return

  • Itemize: When you file your tax return every year, you’ll need to itemize your deductions in order to claim tax deductible donations to charity. That means filling out Schedule A. Remember you can deduct up to $300 of cash donations without having to itemize.
  • Analyze costs and benefits ahead of time: There is no reason to itemize unless you get above the standard deduction. The table below gives the standard deductions for 2019 and 2020.
Filing status 2019 tax year 2020 tax year
Single $12,200 $12,400
Married, filing jointly $24,400 $24,800
Married, filing separately $12,200 $12,400
Head of household $18,350 $18,650

Things to remember about tax deductible donations

Tax deductible donations must meet certain criteria:

1. Donate to a qualifying organization

  • Your charitable giving will qualify for a tax deduction only if it goes to a tax exempt organization, as defined by section 501(c)(3) of the Internal Revenue Code. Examples of qualified institutions include religious organizations, the Red Cross, nonprofit educational agencies, museums, volunteer fire companies and organizations that maintain public parks.
  • An organization can be nonprofit without 501(c)(3) status
  • You can verify an organization’s status with the IRS Exempt Organization Select tool.

2. Document your contributions

Keep track of your tax deductible donations, no matter the amount. If you made a monetary contribution, qualifying documentation includes a bank statement, a credit card statement and a receipt from the charity (including date, amount and name of the organization) or a cancelled check. If you made a contribution as an automatic deduction from your paycheck through your keep copies of your W-2 or pay stubs showing the amount and date of your donation.

  • Cash or property donations worth more than $250: The IRS requires you to get a written letter of acknowledgement from the charity. It must include the amount of cash you donated, whether you received anything from the charity in exchange for your donation, and an estimate of the value of those goods and services. You must receive the letter of acknowledgement by the date you file your taxes.
  • If you deduct at least $500 worth of noncash donations, you will need to fill out Form 8283. You do not need to fill out this form for donations of $500 or less.
  • Additionally, you must attach an appraisal of your items to the form if they’re worth more than $5,000 total.

3.Tax deductions for volunteering

IRS rules don’t let you deduct the value of your time or service, but expenses related to volunteering for a qualified organization can be tax deductible donations.

  • Expenses must be directly and solely connected to the volunteer work you did.
  • Your tax deductible donations can include mileage you drive to charitable events and volunteer opportunities, or mileage you used to bring items to a donation site.
  • You can either deduct your actual expenses using receipts for gas and similar costs, or you can take the standard mileage deduction. For 2020, it’s 14 cents per mile when you use a vehicle in service of a charitable organization.
  • Keep your receipts or records if you plan to deduct your actual expenses as you may need these if you are audited. If you pay all of your donations on a credit card or by check and can show who donations are for.

Limitations on Charitable Donations

You may be limited to 20%, 30% or 50% depending on the type of contribution and the organization (contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations come with a lower limit, for instance). IRS Publication 526 has the details.

Conclusion

We live in troubled times. Many Americans believe their Church of their Charity is a better repository for their dollars than the Internal Revenue Service.

Our Lawmakers seem to agree. So do I.

Use this data! Make your donation to a better world! And get a tax break as well!

The most important take-aways from this article are:

  1. You can deduct up to 100% of your Adjusted Gross Income in 2020.
  2. If you contribute a capital asset like a business, stocks or real estate to the charitable organization, then you make no income on the sale and you get the full charitable donation up to 30% of your Adjusted Gross Income.

If you have any questions, comment blew.

You are welcome to share this article.

You are welcome to contact me via Social Media or email.

I will be happy to answer questions. You can also request a free consultation on any of the above or call me at 1 877 758 7797 or 6702 464 1818.

For further tax education, you can visit my websites at www.torchlighttax.com or www.guarddogtax.com or my youtube channels for GuardDog Tax and Torchlight Tax.

Also, if you are a minister or pastor or a lay minister, feel free to use this data to encourage your congregation to make donations..

You are welcome to post a link to this article on your website.

You are welcome to share this link with friends or your congregation.

You are welcome to refer your congregants to me for tax help or to answer their questions on taxes or charitable donations.

You are welcome to contact me personally for tax help. Many ministers overpay their own tax bill as they do not understand all the deductions they can take or that they are entitled to a tax-free ministerial housing deduction.

If you are interested in how business leaders and professionals are successfully coping with the Covid 19 Pandemic and the resulting governmental regulations, check out The Torchlight Network on YouTube.

If you would like to be interviewed on the Torchlight Network, and feel that your successful actions in dealing with the Covid-19 pandemic and as we come out of it would help others, then contact me on this as well.

Is the Obamacare Tax Penalty Dead?

Is the Obamacare Tax Penalty Dead?

As a practical matter the Affordable Care Tax Penalty is dead. Legally it still exists and is the law of the land, but if the taxpayer does not wish to pay the penalty, he does not have to.

How does this work? How did it happen?

When Obamacare was launched on March 23, 2010, one of its features was it would start penalizing taxpayers for not having minimal essential health coverage. These penalties were phased in and then increased on a gradient over time.

The tool to enforce the penalty was the IRS. Taxpayers would report on their individual tax return whether they had health care coverage or not. The IRS also has been requiring that tax professionals file their clients returns electronically. So tax professionals have been using various large software companies such as Intuit to prepare tax returns and file them electronically. Now, the individual tax preparer, when filling out the tax return, was required to answer the health care question. If he did not answer the question, it would show up as an error on the tax return. And it would block electronic filing.

So the tax professional, or individual doing his own taxes with a program like TurboTax, would be forced to answer the question, and the computer software would generate the ACA Penalty Tax and it would be part of the tax return that was filed electronically with the IRS.

Then on January 20, 2017, Donald Trump issued an executive order re the Affordable Care Act which directed federal agencies to exercise authority and discretion available to them to reduce potential burden. 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.

Well, OK. But has anything changed. Not yet, but …

If the IRS had not earlier mandated that electronic and paper returns answered the Health Care question, then who had???

How were these health care questions being forced to be answered?

It was because the tax software companies were requiring the questions to be answered to get the tax return filed. If the ACA question was not answered, the program would flash an error message and the electronic filing of the tax return would be blocked. And so the individual taxpayer filling out his tax return on-line or the tax professional doing the same thing with his computer program were complying not to the IRS, but to a tax software program.

And now, on February 18, 2017, the true masters have spoken from the top of Mount Intuit. The following communication was sent to me by Intuit ProSeries, which is an advanced Intuit tax software program for tax professionals, sort of a TurboTax on steroids. Intuit is probably the top tax software firm. Here is what Intuit ProSeries decreed:

“The IRS has announced that it is currently reviewing the Jan. 20, 2017 executive order to determine the implications to the Affordable Care Act and the tax filing seasons.The recent executive order directed federal agencies to exercise authority and discretion available to them to reduce potential burden. 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.In compliance with this and to reduce taxpayer burden, in a March 2nd software update, ProSeries will begin permitting individual income tax returns to be filed electronically without indicating if the taxpayers had health care coverage last year.”

What does this mean?? Well, as near as I can figure out, it means intuit has abandoned enforcing the ACA Penalty. Donald Trump started the ball rolling with an executive order. The IRS canceled plans to mandate compulsory answering of ACA question in 2017. Intuit killed off the ACA penalty with a software modification.

If taxpayers do not answer the question and admit to no health care, how do they get penalized???

This is good news for those who would otherwise be paying the penalty, and perhaps bad news for those who would have liked to use these penalties to fund and enforce the Affordable Care Act.

If you have any questions or comments about this article or your own tax situation, feel free to contact me at Torchlight Tax using social media, email or phone.

In closing, I ask you this. Who is running this country??

What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!

How to File an Amended Tax Return

How to File an Amended Tax Return

Of course we all want the original return to be perfect. But sometimes you receive data that changes the return after you have filed. Maybe you made a mistake. Maybe your tax preparer did. Maybe you falsely reported income on your return, and realize you could be caught. What do you do? File an amended return!

(Note: Contacting an Enrolled Agent/Lawyer first may be advisable for dealing with tax or legal consequences.)

An amended return is done to correct or make changes in an original tax return. If you made a mistake in your filing status or failed to take a deduction or apply for a credit, you can file an amended return. One client filed an amended return to change his filing status to Married Filing Jointly and received a substantial refund. Another had done an earlier year tax return, but neither the client nor her tax preparer had realized that paying her son’s college tuition the year before made her eligible for a $2500 education credit. By filing the amended return in a timely fashion, she was able to get that $2500 refund check due to the education credit she was entitled to.

How Do You File Your Amended Return?

The amendment is done on a Form 1040X on paper (not E-file). When we do your taxes at Torchlight Tax Solution, we have all the forms needed right on our computer system. If you go it alone, you can get the needed forms from the IRS. In addition to the 1040X, attach any needed forms or schedules to the amended return.

As this is an amended return, you are already correcting an error. You do not want to make an error correcting an error. So honestly look at why the error was made. If the person doing the return did not know what he was doing, you may want to get someone else. If you were that person, the same applies. It has been said that knowing when you don’t know is a point of wisdom.

You need not file an amended return to correct math errors because the IRS automatically makes those changes for you.

If you are amending more than one tax return, prepare a 1040X for each return and mail them to the IRS in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. DO NOT try to save stamp money by putting multiple forms in one envelope. One form might be totally overlooked when the envelope is opened. This is not theoretical. It has actually happened.

If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. (You may cash your original refund check while waiting for the additional refund.)

If you owe additional taxes with Form 1040X, file it and pay the tax as soon as possible to minimize interest and penalties. Generally, to get a refund, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. Special rules may apply to certain claims. You can find these rules on the 1040X instructions, or take advantage of your free consultation at a TAX Solutions office.

You can track the status of your amended tax return for the current year on the IRS site. I recommend keeping a copy of your amended return/returns and checking the IRS site at least three weeks after filing using the “Where’s My Amended Return” tool on the IRS website.

Tax Law and Regulations can be a complicated labyrinth to the regular taxpayer. You may plug away for hours only to find yourself at a dead end. It may be wise to get an expert’s assistance. Maybe you are going to have a substantial liability and an Enrolled Agent can get it reduced by an Offer In Compromise. Perhaps you have a debt you cannot pay, and an Enrolled Agent can get it relegated to uncollectible status.

Perhaps the income the debt is based on is bogus and is not taxable income at all, and thus the debt is invalidated. There are many scenarios that require expert skill. One of my clients, for example, was not getting the full advantage of his deductions because he was subject to the Alternative Minimum Tax. One of his deductions was for State Income Tax. In amending his return, I had him not take that deduction, as it did not reduce his tax bill. Next year, when he gets a substantial state refund, it will not be taxable income. Had I taken the deduction, it would have been taxable income and he would have paid thousands of dollars on it in taxes the next year.

Filing an amended return may be aggravating experience to many a taxpayer. Sometimes it may result in substantial savings. If you feel confident in your tax expertise, you are welcome to go it alone.

I do not recommend this. Instead, here is what you do. Call or email us for your FREE consultation. One of our Enrolled Agents will review you situation and recommend solutions based on this. You can still go it alone, but chances are our expertise will save you money and worry. Our fees are a bargain compared to the money and aggravation you save.

What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!

What is Self-Employment Tax?

What is Self-Employment Tax?

If you’re self-employed, you pay the self-employment tax on your income. This tax applies to sole proprietors, partners, or LLC members. It does not apply to Corporations.

The self-employment tax is the government’s way of collecting Social Security and Medicare taxes from your self-employment income. Tax owed is in addition to any income tax. In 2016, the Social Security tax is 12.4 percent on the first $118,500 in wages. The Medicare Tax is 2.9 percent on all your income – there is no ceiling. An additional .9 percent is charged on your income over $200,000 ($250.000 if married filing jointly).

If you’re an employee, a portion of your wages is hit with a Social Security tax. In general, half of these federal employment taxes are withheld from your paychecks while the other half gets paid by your employer. However, you pay the extra 0.9 percent Medicare tax if you are a high earner. Your employer doesn’t owe any part of this.

What you pay in self-employment taxes is likely to increase. As the Social Security tax ceiling increases to account for inflation, more and more of your income will be subject to the 12.4 percent Social Security tax.

Thus, we are looking at a 15.3% tax on most people’s income. It is not as obvious for the employee. For the self-employed individual, the 15.3 % tax can be VERY obvious come tax time, especially if he did not plan or set aside for it. Please note there is no “standard deduction” or “exemption” on self-employment income. The tax starts on your first dollar of net self-employment income.

Joining the ranks of the self-employed can be pretty heady stuff. Increased independence. No boss to report to. No fixed ceiling on your income. The opportunity to create a business you are proud of.

What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!

What is an Enrolled Agent & Do I need one?

What is an Enrolled Agent & Do I need one?

“An enrolled agent (or EA) is a federally authorized tax practitioner empowered by the U.S. Department of the Treasury to taxpayers before the Internal Revenue Service (IRS). Enrolled agent status is the highest credential awarded by the IRS.” Enrolled agent – Wikipedia, the free encyclopedia

“An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.

Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.” — Internal Revenue Service

Do you need an enrolled agent?

f you were going to court and were potentially liable for tens of thousands of dollars or even jail, would you hire an attorney? Or would you represent yourself?

If you had to prepare documents that would determine if you were owed thousands of dollars, or had to pay out thousands of dollars, would you have an expert prepare them or at least review them? Or would you go it alone and hope for the best?

If someone was billing you and demanding payment, and you disagreed with the amount or payment terms, would you only ask them how to sort it out, or would you seek independent informed counsel?

The above questions are analogies as to why you may need an enrolled agent. You would not go to court with the potential of tens of of thousands of dollars loss without an attorney who knows the ropes to advise you and protect your rights. You would not represent yourself in an important court case unless you were a legal expert. You should not go before the IRS without an Enrolled Agent to advise you and protect your rights. You should not represent yourself before the IRS if the matter is serious and you are not a tax expert. But people do this all the time with the IRS. It is not a matter of the IRS being evil. It is matter of the person not being represented by someone who knows the rules.

I will give you a real-life example. One retired gentleman came to see me. He had enter into an instalment agreement to pay off an 8 year old debt with penalties and interest to the IRS. It is true that he had incurred a legitimate debt. He had sold a business and not paid the IRS their due. After a near brush with death and months of hospitalization, he invested his business sale savings into renovating his home for sale. He fully and expected to sell the house and pay off the IRS with plenty of money to spare. Disaster struck in a septic tank failure. The house became unsalable. He lost the house and all his savings. He had no money to pay the IRS what he owed them.

Eight years later, an IRS representative convinced him he had to enter into an Instalment Agreement–that he had no choice. He came to me with a problem as to how he would survive while making this payment. His only income was Social Security, and with the IRS monthly payment, he could not pay the rent for his small apartment, food, utilities, medical and life basics. Being in his late 70s, going back to work was not a realistic option. I had him sign an IRS Form 2848 Power of Attorney so I could represent him before the IRS. I knew what he did not know and the IRS had not told him. His income was below the level that the IRS, by their own regulations and the laws of this country, could collect. He had no property they could legally seize. So his debt goes into un-collectible status, and he continues to live modestly but in reasonable comfort and security. In two years, the debt disappears forever as the 10 year IRS Statute of Limitations is up. (And I feel good and sleep well, because I helped a nice old guy–who had paid plenty of taxes in his decades of work– live out his life in reasonable comfort and dignity.)

Another Real Example

Another friend, with a large tax bill unpaid from 8 years before, wanted to settle with the IRS. I told her to get me certain data. She did not call me back with the data. She called the IRS and asked for help. They recommended an Offer In Compromise. When I talked to her next, she was all set to do an offer and compromise and did not think she needed assistance. Maybe not. But the IRS had not explained to her that by the Statute of Limitations her bill was about to disappear.

Let me expand on this analogy. You are driving on a dark night going downhill, sober, not speeding and your brakes fail and you crash into another car at an intersection, and the drunken felon who was speeding in that car is killed. You feel bad. You should have maintained your brakes better. You realize you should have done something more effective than honk your horn as you approached the intersection with no brakes. Now, if the other driver had not been drunk and speeding himself, he might have been able to avoid the accident. But you still know you did wrong. The DA comes to you and tells you you are being charged with murder in the first degree. You think of your two kids and your wife and and wonder how they are going to get along. You say to the DA “But he was drunk and speeding and a recently-fired 45 caliber gun was found in the car which was linked to a drive-by shooting two miles away two minutes before” The DA says “Those allegations may or may not be true, but are not relevant. You did not stop at a stop sign and he is dead. You are guilty of murder.” You say, “This is terrible. My wife. My kids. You have got to help me. What can I do?” The DA says “Gosh, I feel sorry about your kids. Tell you what, you sign this confession right here and right now, don’t bother with engaging a lawyer as we are giving such a good deal, and I will let you cop a plea for 3rd degree murder. You can be out in ten years, catch your kid’s college graduation.” Since the DA is being so helpful, you thank him for letting you live and do not spoil the deal by engaging a lawyer of your own, as there is no need.

Maybe I am being a bit melodramatic. But if you are having a problem with the IRS about taxes, don’t you think it would be prudent to ask for help from someone who is not part of the IRS and whom you can hire to protect your rights? The IRS says “Per law 4857 and legal precedent of Wacko vs Fruitcake, your statement that the printing press you bought was tax deductible is false and you owe us ___”. You do not know what the IRS is talking about. You don’t speak tax. But you had prudently engaged an EA. Your EA says “Look here. Law 4857 only applies to foreign held corporations and this is a domestic LLC, and Wacko vs Fruitcake was about a KKK member who deducted the wood used for burning crosses on negros’ lawns. This does not apply here …. Let me show you the actual rulings that apply. I have them right here….”

The Price of Not Knowing

One last example. You would not draw up a legal agreement committing yourself to tens of thousands of dollars of payment without knowing fully what you are agreeing to or whether the document was legally correct. Well, what about the guy who files his taxes with Turbo Tax because it is easy to do and he can slip in some nice deductions, but he does not know what all the words mean on the tax form and he does not know exactly where to enter . . .. Besides, his tax bill is only $40,000 and that was already withheld from his wages, so he will even get a refund. “Yeah,” he thinks, “I can do this. No need to hire a pro.”

And then he gets a notice and finds himself under an IRS audit by mail because he entered a forgiven loan correctly as income but in the wrong place. Luckily, he had the good sense to call me, an enrolled agent. When I review his taxes I discover he filed and paid over $10,000 in State Income taxes to a state he no longer worked in. He does not owe that state income tax! Now, this is a real example, It happened. I was able to correct his initial error, put his income in the right place under the right heading, and file an amended return with the IRS and the state and request a $10,000 refund. (By the way, there is nothing wrong with Turbo Tax. But the person using it has to know what he is doing.) Filing his own tax got him an IRS audit by mail and if left uncorrected would have cost him 10 Gs.

One last tip. There are many tax preparers out there with no formal training in tax. And there are many very high-quality computer programs that print out very professional looking completed forms and tax analyses, but are really only as good as the data was input correctly by someone who understands tax. The untrained preparer may have a nice office and friendly manner. An untrained person who is unethical can even get you large refunds. Inflated expenses and spurious deductions and credits are not hard to put into a tax return. If your refund is too good to be true, it may be. Of course, if the IRS audits you, you wind up with penalties and interest and a vastly increased bill. Indeed, if you did not carefully read what you sign, the preparer who made up a fraudulent return may say, “but he told me his start-up company lost 50,000 dollars and these expenses were what he told me. He was lucky he had not quit his day job. Look. He even signed the return.” It is not hard for anyone to call himself a tax specialist. There is no mandatory training or exam they have to pass to say “expert” or “pro” or “specialist”. Lawyers, CPAs and Enrolled Agents DO have to pass rigorous exams and do lots of continuing professional education every year to maintain their license.

And you have to be one to call yourself one, or it is a crime. The EA has the advantage of ONLY doing taxes and so all his exams and continuing education is on taxes. I would personally recommend only using a licensed professional. I am sure some un-licensed tax preparers do a good job even if they are not an EA, CPA or Lawyer. But if they really know taxes, they should be able to take and pass the EA exams.

Lawyers, CPAs and EA also are part of professional organizations and hold a valuable license that they keep by maintaining an ethical standard and quality of product. A competent tax pro knows his long term prosperity is only guaranteed by good ethical work. If you like your un-licensed tax preparer, encourage him to take the exams to become an enrolled agent. He simply has to demonstrate he knows his business on taxes to pass the exams.

Can You Afford Not to Have the Right Representation?

So, do you need an EA? Maybe not. You are single making $10 an hour in wages, have no dependants, no house, are not going to college. Heck, file direct with the IRS or use Turbo Tax. You probably do not need an EA. If you have a CPA who specializes in taxes (not just one who does Corporate Audits), and he always does a good job and he is always helpful, knowledgeable and ethical then fine. If you have a lawyer representing you before the IRS and just won your case, fine. You may not need an enrolled agent (EA).

However, if you are in any of the following categories, you probably DO need an EA, and should call us to schedule a free consultation. We will review your situation and advise you on your options.

  • You think your taxes are too high
  • You think your taxes may have been done wrong
  • You are spending too much time on your taxes
  • You have a large tax debt
  • You have defaulted on an offer in compromise or instalment agreement
  • You want to be represented before the IRS
  • You are self-employed and pay a lot of self-employment tax
  • You are under audit
  • You want someone to stand in your shoes before the IRS
  • You have not filed your taxes for some years
  • You think some returns need to be amended
  • You have received a letter or notice from the IRS
  • Your tax preparer has disappeared
  • You are confused about your taxes
  • You are worried about your taxes
  • Your books are a mess and you do not know what to do to file
  • The IRS seems to have different records than you have
  • You wake up at 3:00 am sweating because of tax nightmares
What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!

The Hidden Costs of Payroll and Bookkeeping

The Hidden Costs of Payroll and Bookkeeping

The visible costs of Payroll and Bookkeeping can be truly daunting. These two areas have been the bane of many small business owner. The visible costs include not just the cost of the service, but also the cost of not doing it right. All too often, the small business owner gets into tax trouble because of their books. They cannot file a timely return, or files an inaccurate one, and winds up with heavy tax penalties. Or perhaps he has tens of thousands of dollars of perfectly legitimate expenses disallowed because his bookkeeping did not support them.

Payroll can be even worse. The penalties for not forwarding payroll taxes are brutal. Every small businessman has heard these horror stories. The vigor of the IRS in pursuing unpaid Payroll Tax and the penalties exacted make routine IRS collection activities seem tame.

With visible costs like this, it is no wonder that Small Business owner turns to QuickBooks. It seems that you cannot even watch a sporting event on TV, without seeing a QuickBooks ad. How can he be safe and run his business without adequate bookkeeping and payroll? Well he can’t. For many small business owner, QuickBooks seems the answer. Their business is small, and they are or become adept at bookkeeping and payroll using Quikbooks or similar software. They can monitor their income and expenses, file their taxes, and carry on their business.

But what then are the hidden costs?

I will illustrate this by example, one businessman had built a small business grossing about $1.5 million dollars a year. He brought all his QuickBooks and bank and tax data in to our firm to do his taxes, and it was a mess. His tax return could not be filed without extensive bookkeeping, which he paid for. This cost is visible. Where then is the hidden cost?

He had spent 2-3 hours a day all year working on his books. He was the creator and production manager of his business, and had plenty of work to do. But he spent this daily time on his books, and he knew it was important. What did this cost his business? Probably $300,000 in lost income. When he was handling the production and sales of his firm, income flowed in.

What did he get for all this book work? Bad Books.

He even had a secretary who could have been trained up to handle the books.

The hidden cost of bookkeeping and payroll is two-fold:

  1. The income not generated because the owner or key manager is doing books or payroll when he could be running the business to make income.
  2. The profit lost because the bookkeeping is inadequate and the manager does not see exactly what is making money, and what is losing money, and thus cannot take appropriate informed actions to increase profits.

The visible costs can be high enough. Paying the bookkeeper or paying the IRS because of bad bookkeeping or payroll is easily, if painfully, visible. For some, the hidden costs may be small. Maybe you enjoy doing bookkeeping and payroll, and keep your records spiffy and up-to-date in just a few minutes per day (you know, like the guys and gals in the QuickBooks TV Ads). Maybe this does not affect your firm’s income at all.

However, if you make the business run and the income flow in, and are not a great bookkeeper, this hidden cost may be killing you. Your time might be better spent in making more money for the firm, or hanging out with the family.

What to do?

If you have any questions or need any bookkeeping or tax assistance contact Torchlight Tax for a free consultation. We are a tax firm, but we cannot do taxes when when poor bookkeeping obscures the income and expenses of a person or company. So we must be bookkeeping experts as well. No matter how bad your records are something can be done about it. It is far less expensive to pay the bookkeeper to get your books in order than to pay the IRS with bad books.

As the tax deadline approaches, contact us ASAP. We can still file for a tax extension for your C-Corp or sole proprietorship while we get your books in order so we can do your taxes.

One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!