Taxpayer Frequently Asked Questions for Individuals and Business Owners

General

When should I hire a CPA for tax advice/assistance?

A few common reasons: your financial situation is becoming too complex; you started a new business; you would rather spend your time elsewhere; you used to be an employee with a W-2, but now you’re self-employed; you’re concerned about the accuracy of your tax return.

What value does a tax accountant provide?

CPAs can provide valuable advice for changes in your financial situation (buying or selling a house, changing jobs, getting married, having kids). Taking advantage of legal tax deductions, credits, and planning strategies can help save money, manage cash flow, and protect the wealth you have accumulated.

How is the cost of the services determined?

There are certain fixed costs to a project; processing fees, administrative costs, etc. The remainder of the bill is based on the hours of work that go into a given project or tax return. As the complexity of a project increases, so does the time needed for research, analyzing the data, and completing the project. An estimate can be provided after discussing your personal situation.

What’s special about Boulay?

We are a full-service, client focused finance and accounting firm. Our focus is to protect your business; build your wealth; and secure your future. We are committed to give you the absolute confidence to make the best decisions and the peace of mind to know they are right.

What is the point of tax planning?

Tax planning helps minimize large taxable income spikes from year to year. Knowing when to maximize contributions to charity, retirement accounts, accelerate purchases, and how much to pay on your quarterly taxes can assist your long-term goals. Managing your cash flow, planning ahead for future tax liabilities, and avoiding tax penalties and interest are additional benefits.

Individuals

Should I itemize or take the standard deduction?

Take the larger total. Determine your total itemized amount – add up your mortgage interest, charitable contributions, taxes up to $10,000 (real estate and state income), etc. If the total doesn’t exceed your standard deduction, there isn’t any benefit to itemize, but it’s always worth checking.

Should I contribute to a Traditional or Roth IRA?

The biggest factor in this decision is your current tax bracket compared to your potential future tax bracket. A general rule; if you expect to be in a higher bracket in the future, taxes are “on sale” right now and you should contribute to a Roth with after-tax dollars. If you’re in some of your highest earning years, take the tax break now for an IRA deduction. Note that there are limitations on your annual contributions and it’s possible to be phased out of contributing to certain account types.

What is a charitable giving (donor-advised) fund?

These funds are typically used for “charitable bunching” strategies. You would contribute a larger amount in a single year (e.g. five years of your typical giving amount) in order to exceed the standard deduction, thus getting a tax benefit for itemizing. The fund then distributes this money to organizations of your choice. The distribution amount and timing is at your discretion. The years that you do not contribute to the fund (e.g. years two to five in this scenario), you take the standard deduction. This is an excellent strategy for a higher income year to avoid a peak in taxes.

Do I need to make estimated tax payments?

Are you receiving income that does not have taxes withheld on the payments? Then most likely, yes. Your tax is determined by your overall income, so if you have not covered your tax liability through withholding, you will likely be required to pay estimated tax.

I got a refund last year but owed this year. Why?!

A couple common reasons; withholding or itemized deductions. Most employers lowered the withholding percentages on paychecks due to the tax law changes that were expected to lower the tax rates for most individuals. However, if you lost out on a large deduction for state income or real estate taxes (capped at $10k) for example, your tax could have increased. Your employer doesn’t know your individual tax situation, so it’s best to review what percentage you expect to pay on your tax return and make sure your withholding percentage matches that. There were several other changes to the tax law that might be the cause – please consult your tax adviser if you have further questions.

Who should file an extension and how is that done?

Extensions provide an additional six months to file your tax return. This does not mean you have six months to pay in your expected tax bill, if any, at the original due date. If you need additional time to receive tax forms or accurately report your tax information, an extension might be right for you.

Business Owners

Can I take a deduction for meals and entertainment?

Meals that are purchased for business purposes are only granted a 50% deduction on your tax return. Entertainment expenses paid by the business are 100% nondeductible. Note that business related gifts to employees, clients, or prospects up to $25 each are still deductible.

Should I track my mileage during the year?

Have a personal car that you use for your business? Each business mile could get you an additional $0.575 (2020) of an expense. It adds up quick and there are simple apps to track this, so it’s worth checking. On the other end, do you have a business vehicle that you use personally? The miles used for personal reasons should be income to you if the company is paying for the vehicle and related expenses.

Should I purchase additional fixed assets before year-end?

Do you have a real business need for these assets? This should be made as a business decision first before taxes are considered. If you pay $100 for a piece of equipment that you don’t need just to save $30 in tax, is that a good business decision? Or should you take the $70 in after-tax profit and fund a different avenue.

What is Qualified Business Income (QBI)?

Sole proprietors and passthrough entities (S Corp and Partnership) could be eligible for a deduction for 20% of the taxable income from their business on their individual tax return. There are certain limitations based on the type of business, taxable income levels, and other business factors when calculating the deduction. Due to the complexity, it is recommended to consult your advisor for questions related to QBI.

Can I deduct my health insurance if I’m self-employed?

Yes. If you are not eligible to be covered by your spouse’s employer, and you pay for medical/dental insurance, you can deduct the insurance premiums as self-employed health insurance on your Form 1040.

How much should I pay for my quarterly tax estimates?

“Safe Harbor” for estimated taxes includes two methods. You’re able to base your estimated tax on 100% of your prior year tax, or 90% of the tax liability that you expect to have for the current year. That means if you had a great prior year, but this year has been sluggish and you don’t expect high income, you might want to use the 90% method and pay less each quarter. Alternatively, if you are having a stellar year compared to last, the minimum you should pay is 100% of last year, but for cash flow purposes you might want to increase your quarterly payments. Note that if you are a higher income taxpayer ($150,000), the prior year method changes to 110%.

What are some common business expenses that could easily be missed?

Think of the expenses that you pay for personally, but you use that item or service frequently for your business. Do you have a dedicated area used for your home office? Do you use your personal car for business trips and aren’t reimbursed? How about your personal cell phone used for business calls, emails, texts? If yes, you may be able to take a substantial amount of these costs as deductions for your business. Please consult with an advisor on the correct way to determine what can be allocated to the business.