© 2022 Milikowsky Tax Law
What happens if you miss a tax deadline? How long does it take before the IRS begins its collection action to collect your tax balance? How many fees will you have to pay?
Understanding and managing the nuances of tax law isn’t easy.
Understanding and managing the nuances of tax law isn’t easy. Whether you have failed to file your tax return on time, could not make a payment on time, or you are were assessed penalties by IRS, the best thing you can do is seek the assistance of skilled tax attorney.
The team at Milikowsky Tax Law has years of experience navigating complicated tax matters. If you have questions and need clear advice from tax attorneys who have business experience, and can provide value to resolve your matter, contact the team at Milikowsky Tax Law and access our expert resources for handling these situations.
What To Do After You Miss a Tax Deadline
When you’re running a business, it can be difficult to keep track of all the things you need to do — and when — to keep your company safe and in good legal standing. If you’ve missed the official deadline to file your taxes, you’ll need to speak to the IRS as quickly as possible. There will be a penalty for filing taxes late, but the sooner you address this issue, the better chance you have to minimize the amount of penalties you may owe and the collection action IRS can take (i.e. levies on bank accounts, liens, etc.).” The penalty for failing to file a timely return is generally higher than the penalty for failing to pay the full taxes owed. Thus, once you discover your tax returns have not been filed, you should act quickly to gather your records and work with your accountant or CPA to have the returns prepared and filed.
If you’ve missed a deadline, you probably have a lot of questions swirling in your head: How late can you file your taxes? What kind of consequences can you expect for being behind? Who should you contact first? Don’t panic.
Consequences of Missing a Tax Deadline
As soon as you realize that you’re late in paying your taxes, it’s important to seek help as quickly as possible. If you can pay the money owed quickly enough, you can reduce a lot of stress in dealing with the IRS. Even if you respond promptly, you should prepare to face a penalty for filing taxes late. This may include meeting with a trusted tax attorney and your own financial advisor to plan for the financial effects. Browse our resources below to help you understand what happens if you miss a tax deadline and how it will impact your finances.
- Check our article about the consequences of unpaid business taxes.
- Look at this insight into the result of unfiled tax returns.
- Remember that you’ll still need to pay taxes on time for a closed business.
What To Do If You Can’t Pay Your Tax Bill On Time
If you realize you cannot pay your taxes in full, you do have options, such as:
- Request an installment agreement with IRS or the California State tax agency;
- Contact IRS or the California state tax agency to request an extension to full pay the liability (not through a long-term installment agreement because you only need a couple extra months).
If you are having a financial hardship, you may qualify for an Offer in Compromise (“OIC”), which is a request to IRS to settle your tax liability for a lesser amount based on a “Doubt as to Collectibility” or “Doubt as to Liability.” These issues involve intricate tax laws, legal issues, and a thorough analysis of a person’s finances (including preparing a bank account analysis and financial statement). If your business owes taxes, the company’s legal tax issues and financial analysis must also be thoroughly analyzed. The best thing you can do is speak to an experienced tax attorney and develop a custom strategy for resolving your outstanding balance with the IRS.
- See our guide on what to do if you can’t pay your taxes on time.
- Read our article on what to do if you can’t afford your tax burden.
What Are Back Taxes?
Back taxes arise when your personal or business taxes are not paid in full by the due date. For income tax, payroll tax, and sales tax, these can be quarterly and yearly. Over time, they accrue interest, and can also come with a host of other penalties to consider. If you’re wondering what the penalty for filing taxes late might be, back taxes are a common consequence.
- Read our overview of what back taxes are and how they affect your business.
- Check out our guide on back taxes and learn how our team can help you resolve them.
- Browse our expertise and insights on outstanding tax balances, what you need to know about them, and how you can seek professional guidance.
Resolving Your Tax Debt
No one wants an ongoing tax debt to worry about when they are trying to run a successful business. There are several ways to resolve your tax debt, from agreeing to pay back a portion of the money owed each month (i.e. an offer in compromise), to requesting an extension of time to pay. Even if you owe the IRS more than you can afford to pay, there are solutions available — such as an offer in compromise. The best decision you can make is to start with an experienced tax attorney who understands your business and can offer clear solutions to resolve your tax issue.
If you recently received a letter from IRS, there are a few important steps you need to take to protect yourself.
The first step is to contact a qualified IRS Tax Lawyer.
While IRS will occasionally audit businesses randomly, they usually audit an individual or business because your tax return contains an error or a transaction that is inconsistent with other businesses in your industry. Our San Diego IRS attorney explains what steps you should take to ensure you are protected.
Once you receive a notice that IRS intends to audit you, here are a few things you need to do:
- Find Out What Part of Your Tax Return Is Being Audited.
Many times, IRS will only question certain sections of your tax return, such as how you calculated and reported your gross income. This is especially true of self-employed individuals or business owners who are majority owners.
- Gather Your Documents To Prove Items on Your Tax Return.
Once you know the reason that triggered your audit, you need to be able to provide documents to verify your income, expenses, or other transactions reported on your tax return. There are alternative methods to establish your position if you lack direct proof; however, it is important to reach out to your vendors, banks, and other individuals and businesses who have records that are useful in your audit. Banks generally retain your records (i.e. bank statements, canceled checks, etc) for seven years. Businesses that you have done business with generally keep transaction records for 3 years.
- Don’t Ignore the IRS
While you may be tempted to ignore the IRS’ attempt to reach out to you, not responding by the specified deadline will make matters worse. If you do not respond to an audit notice, the IRS will eventually close the audit and assess your taxes based on assumptions the Revenue Agent made. IRS can also contact third parties (i.e. your neighbors, business partners, vendors) who have information useful in your audit.
- Call an Experienced IRS Lawyer
Having an expert by your side to prepare your legal defense, review your documents for potential issues, and handle all discussions with IRS will take a burden off your shoulders and can improve your chances of a successful audit resolution. Remember, anything you say or communicate to IRS can and will be used against you.
If you face an IRS tax audit alone, you are placing your business and assets at risk. Contact an IRS Tax Attorney today.
The Budget Reconciliation Act will re-fund the IRS with audits making up the lion’s share of the way the IRS intends to make back that investment in the Government Department. With the right financial and legal experts at your side, however, you can successfully navigate this complex process. Once you have received notice of an audit, contact our San Diego IRS attorneys! We can investigate your audit and determine your legal and business options.
The Small Business Administration (SBA) has forgiven over 98% of the total Paycheck Protection Program (PPP) loan value that borrowers requested them to forgive; recently, however, SBA has begun to issue more forgiveness PPP loan forgiveness denials.
Many of these recent denials issued by the SBA are not consistent with their own guidelines. Borrowers have received denial letters based on:
- Insufficient communication between SBA and lenders
- Misapplication of SBA’s Interim Final Rules (IFRs) or affiliation rules
- Mistakes by SBA surrounding the loss or misuse of borrower information
Borrowers should be aware that such denials are appealable. Consider challenging forgiveness denials if you believe SBA’s decision is in error.
Read our full guide to SBA’s PPP loan forgiveness denial below to learn more about how to appeal a denial, the criteria required for an appeal, and who can represent your company in the process.
How Do I Know if My Business’ PPP Loan Forgiveness was Denied?
If SBA denied your application, you will receive an SBA Final Decision Letter in the mail.
Learn more about what to do if your PPP loan is not forgiven, here.
How Do I Know Why My Business’ Forgiveness Application was Denied?
The first page of the Final Decision letter contains a section indented and in bold that provides the reasons SBA denied your request for forgiveness. It’s important to understand why SBA is rejecting the forgiveness application before taking action- such as appealing the denial.
Who Makes the Decision on PPP Forgiveness?
The decision to deny your PPP loan forgiveness can be made by:
- Your lender (i.e. bank, credit union)
- The Small Business Administration (SBA)
How Much Time Do I Have to Appeal a PPP Loan Forgiveness Denial?
You must respond to SBA and submit your appeal within 30 days of the date listed on your SBA Final Decision Letter. The timeline for SBA forgiveness appeals is inflexible. Once your initial 30-day period expires, you will lose your right to appeal SBA’s denial to forgive your PPP loan.
How Do I Appeal a PPP Loan Forgiveness Denial?
You must appeal denials of forgiveness to the SBA’s Office of Hearings and Appeals (OHA) within the 30-day period.
File appeals through OHA’s case portal. Filings for PPP appeals received in any other manner may be rejected and not docketed for processing.
SBA states that OHA has jurisdiction over appeals where SBA has provided the borrower with a PPP final loan review decision finding the borrower:
- Is ineligible for a PPP loan
- Is ineligible for the PPP loan amount received
- Used the loan proceeds for unauthorized uses
- Is ineligible for the PPP loan forgiveness amount determined by the lender in its full or partial approval decision issued to SBA, or
- Is ineligible for PPP loan forgiveness when the lender has issued a full denial decision to SBA.
Learn more about how to appeal an SBA PPP forgiveness denial, here.
What Information Do I Need to Provide in the Appeal?
The criteria for an appeal filed with the SBA are strict. According to SBA, appeals must contain:
- A complete, detailed statement as to why the SBA loan review decision is erroneous, with accurate information and legal arguments supporting the statement;
- No more than 20 pages (not including attachments)
- Clearly labeled exhibits and attachments
Due to the strict criteria of the appeal, we recommend hiring a qualified attorney to represent your business and help you to create a strong, successful appeal.
Who Can Represent My Business in the Appeal Process?
An identified legal representative of the business or a qualified attorney must represent the appeal since the SBA PPP loan is a business loan and not a personal loan. To represent your business, one must be:
- A shareholder owner
- An officer, or
- An attorney
Who Can’t Represent My Business in the SBA Appeal Process?
The following positions are not legally entitled or allowed to represent businesses in the SBA appeal process:
- Certified Public Accountants (CPAs)
- General Employees
What if I Lose My Appeal?
Any appeal denied in the Office of Hearings and Appeals will have to go to a higher court. Why? Because SBA is a federal agency. The process of going to federal court can be extremely tedious and expensive due to the strict regulations.
To avoid the costly and time-consuming process of going to the federal district court, we recommend hiring a qualified attorney to make sure you’re building a strong appeal for your business.
While each case is unique and this is not an indication of success in other cases nor a promise of results, our team at Milikowsky Tax Law has extensive experience in government audits and cases involving government entities from IRS to SBA and CSLB.
Contact Milikowsky Tax Law and learn how we can help.
In the final part of our three-part series “how to respond to an IRS audit in 2022,” the IRS Audit Attorneys here at Milikowsky Tax Law focus on the actual response to Internal Revenue Service (IRS).
Watch the video below to learn more from Milikowsky Tax Law’s Founder and Managing Attorney, John Milikowsky, as he explains how to craft the right response.
The Initial IRS Audit Letter
When IRS sends the initial IRS audit letter, they send Letter 6323 initiating the audit. This initial letter gives small businesses 10 days to contact the assigned revenue agent. The reason for the quick turnaround time is to schedule an appointment with the assigned revenue agent to go through a litany of questions to determine the following:
- What income do you have
- What sources were they from
- Whether you have cryptocurrency
- What form of bank accounts did you use
- And more
What Should You Do After Receiving IRS Letter 6323?
After receiving IRS Letter 6323, review your business’s tax return before meeting with a tax attorney. Partnering with a trusted tax attorney will help guide you to understand the scope of what this audit involves. Moreover, this tax attorney can help create your response to the initial letter within the 10-day timeframe.
What Happens If I Don’t Respond to IRS Letter 6323?
Failure to respond to IRS Letter 6323 in a timely manner will result in an Information Document Request (IDR). The IDR includes bank statements along with any other information relating to what is reported on a tax return—or includes whatever additional information IRS has in their database.
Businesses that fail to respond to IRS requests typically result in the following: The government agency will estimate the business’s income along with disallowing most, if not all business expenses and any other deductions. The business’s income is typically a higher amount than what is reported on the income tax return. Why? Because IRS doesn’t have the source information.
Anticipate IRS summoning your bank account because they don’t need a court order to do so. A revenue agent can send a signed document to your bank requesting all of your bank statements, canceled checks, and deposit items in order to estimate what income should be.
They don’t, however, have the ability to receive the source documents for your expenses. If it relates to your business or charitable contributions, the agency will not look into that—which means they will be disallowed.
More times than not, failure to reply to IRS Audit Letter 6323 does not benefit your business. After the audit review, if you do not respond to IRS Letter 6323, the government agency will calculate a much higher number for taxes due than what’s on your tax return. Because of this, it’s encouraged to respond to IRS in a timely manner.
Another negative consequence of failing to respond to IRS is it can increase the scope of the audit to other issues that IRS may not have been originally looking at, as well as additional years than originally intended.
What To Do If You Receive Audit Letter 6323?
If your business receives Audit Letter 6323 from IRS, contact a tax attorney and your CPA. They will help defend your business against the consequences of an IRS audit.
By partnering with a tax attorney and your CPA, you recruit a team of experts who:
- Comb through your source documents
- Understand each of your deposit items in your bank account
- Ensure accurately reported income
- And more
This way, you are prepared to fight back from IRS claims and come out unscathed on the other side.
An added benefit of partnering with an attorney is protection through attorney-client privilege. If your business misfiled taxes, accidentally or purposefully, you are protected by attorney-client privileges.
Communication with a CPA is not protected in the same way. A trusted CPA, especially if your case leads to any type of fraud or criminal investigation, could be summoned before a grand jury, along with the information requested from him or her.
From day one, speak with a San Diego tax attorney to make sure you have the best strategy implemented, and that your communications are protected.
For more information regarding IRS audits, read our article explaining five signs your business is prepared for an audit by IRS.
IRS Letter 6323 and Bank Deposit Analysis
In part two of our three-part series “how to respond to an IRS Audit in 2022” we discuss IRS letter 6323 and the bank deposit analysis. For every audit IRS opens, they conduct a bank deposit analysis to determine whether you correctly reported your income on your income tax return.
Watch John Milikowsky, Managing Attorney and founder of Milikowsy Tax Law explain more on IRS Letter 6323 and their bank deposit analysis below.
What is a Bank Deposit Analysis?
During a bank deposit analysis, IRS adds up all of the deposits from all of your bank accounts: both personal and business. Once gathered, they compare the amount they calculate to the amount you reported on your income tax return.
Keep in mind that there are, of course, non-taxable deposit items. Provide these source documents to IRS to ensure the numbers match. Such items include:
- Transfers between bank accounts
- Drawing money from a line of credit
- Insurance proceeds (which are generally non-taxable, although they may be in certain citations)
If you don’t provide all of your bank statements to IRS- including both business and personal accounts- IRS will summon your bank directly to receive your statements and deposit items.
Learn more about IRS looking into your bank deposits here.
The agency summons your statements because they need to confirm whether you’ve accurately reported income on your tax return.
The best practice to prepare for an audit in 2022 is to collect these items ahead of time, and then review the statements with your CPA and tax attorney. If during your review you determine that there’s a significant difference between income reported and actual income found after review, it will need to be explained.
The gap in reported pay versus actual pay sometimes occurs accidentally (or intentionally in the case of fraud) by miscalculating income because you left out some income. If this occurs, it can lead to a grey area where the support of an experienced tax attorney will help defend your business. Any communication you have with your tax attorney is attorney/client privilege- which means it is protected information. IRS does not have access to it.
Review your deposit analysis ahead of time with your CPA or tax attorney to implement a strong strategy for your specific case. If there is an explanation for why the income wasn’t reported, make sure you clarify why it occurred before IRS provides that information to you. If the agency finds the discrepancy first, it puts you at a disadvantage to then review source records and then come up with an explanation.
For more information, read our last part of the three-part series in “how to respond to an IRS audit in 2022” here.
IRS Letter 6323 and What to Do Before Contacting IRS
Small business owners should be prepared in case the Internal Revenue Service decides to audit your business. Watch part one of our three part series for advice on how to defend your business against a battle with IRS. In this video, our founder and managing attorney, John Milikowsky explains five things to do before you respond to an IRS audit letter.
Identify the Taxpayer
Before diving into your audit letter, first identify who the taxpayer is on the top left corner of the letter. If the letter is addressed to you as an individual, IRS is primarily looking at your 1040 return.
This can include other companies you own or control where the income and/or losses are being reported on your individual return.
If the letter addresses your company’s name, then you can expect a broader audit. A broader audit can impact other shareholders and partners.
Identify the Revenue Agent
After identifying the taxpayer, review who the revenue agent is. The revenue agent can be located either inside of your city or outside of your city.
If the agent is located outside of your city, we recommend you question why.
Recently, we defended a client in a battle against IRS. The client is based in Los Angeles, but their revenue agent was based in Chicago, Illinois. This identified larger issues at play- IRS was potentially looking at not only this tax return but possibly other tax returns as well. In this case, they could be part of a broader, national audit.
Identify the Tax Year Being Audited
Confirm the tax years IRS is auditing. Ask yourself, “Is it a single-year audit?” or “is this audit for more than one tax year?”
Typically IRS will audit three years of tax returns. Initially, they may begin with a single-year audit. Depending on the results of the audit, they’re may explore other years to identify a trend.
IRS can audit as far back as 6 years, if there’s gross understatement of income. If there is fraud involved, IRS can audit an unlimited number of years.
Typically, if IRS is looking at a 5-year block of time, they are looking at a potential fraud issue- which could lead to a criminal investigation. Before they can determine if a case involves fraudulent activity, IRS will review your returns in detail to identify any incriminating information.
Identify the Issue(s) that Triggered the Audit
Read the audit letter to identify what issue(s) are being identified for audit. This is not an expensive all-inclusive list, however, it is a starting point for IRS.
During an audit, IRS always reviews income on tax returns and evaluates if that information reported was accurate, not understated. How do they evaluate your income statement is accurate? IRS does so by conducting a bank deposit analysis: they collect all of your bank statements, both personal and business, to determine whether you reported the correct amount of income.
When assessing income, there are times income for an individual may be reported in a business account or vice versa. During the audit, IRS ensures they capture all of your transactional information, and that it’s accurately being reported. Anticipate IRS asking for:
- Bank statements
- Cancelled checks
- Deposit images
IRS also looks at your expenses. When looking at your expenses, they are looking for source documents, such as, invoices. They are checking payments, to verify that you not only incurred the expense, but also that you paid for it.
The purpose of gathering this information is to verify the deposits are income and not non-taxable income such as insurance proceeds that would not normally be taxed. The only way IRS can reach that bottom line number is by reviewing the source documents.
Identify the Response Deadline
IRS will identify a deadline by which you must respond to their letter by. Generally, the revenue agent will give you 10 days to respond to the initial letter- you are not yet providing the documents requested. This initial response serves the purpose of:
- Contacting the the revenue agent
- Scheduling an appointment to provide the requested records
During the first appointment, you will go through an interview with your assigned IRS agent. Your agent will walk through a whole litany of questions to understand:
- The scope of what income looks like for you
- Whether you received an inheritance for instance
- Whether you received any large transfers
- Whether you have any cryptocurrency
- And more
Best practice is to contact a tax attorney to review the questions ahead of time. Credibility is one of your most valuable assets during an audit. When you first meet with IRS and communicate with them, their agents will judge whether you’re credible and whether the information you’re providing is forthcoming and truthful. If IRS deems you are not, they will launch a deeper dive.
For more information on IRS audits in 2022, read the second part of our series by clicking the link here.
Internal Revenue Service (IRS) will flag businesses for an audit when the agency finds suspicious activity in your business’ tax returns. The suspicious activity may be innocent in nature, but IRS performs an audit to ensure your business paid the required taxes.
Though, occasionally, the agency will randomly audit businesses. This instance is less likely, but can still occur. It’s important to make sure your business is ready no matter the circumstances.
Oftentimes, businesses are more susceptible to an audit if they:
- Have foreign assets
- Have a cash business
- Are self-employed
- Have a home-based business
- Claim a disproportionate number of deductions
- File incorrect or incomplete returns
- Have a large number of cash transactions
- Earn less than $25,000 or more than $500,00
- File a Schedule C
- Claim a vehicle as 100% business expense
- File taxes late
The rate of audits rose by 50% in 2021, and are projected to stay on this upward trend as the government searches for ways to fund the proposed Build Back Better Bill. How can you prepare for a potential audit before it occurs?.
Signs Your Business is Prepared for an Audit
1. You Keep Organized Records
Recordkeeping is a fundamental part of being prepared for an audit. Keeping receipts, expenses, pay stubs, income, and other financial documents well-organized helps show the auditor proof of monetary movement that supports your tax file.
This documentation can be physical or electronic – as long as it’s there. Best practice is to keep the original and provide copies to the auditor in case of accidental damage or misplacement.
Audits typically go back three years, but at Milikowsky Tax Law we recommend you keep financial records up to seven years back.
2. Your W-2 employees and 1099 workers are correctly classified
W-2 employees and 1099 workers perform different roles for your business. Therefore, they must be classified accordingly. Misclassification can lead to fines, penalties, and even jail time.
Why? Because misclassifying an employee as a 1099 independent contractor strips the worker of employee benefits, and the government of payroll taxes associated with having a W-2 employee.
W-2 employees are hired for specific jobs, work set hours, receive benefits, and have taxes withheld from payroll.
1099 independent contractors work on a contractual basis, are paid a set fee, do not receive benefits, do not have taxes withheld, and have more work flexibility.
The “right of control” helps business owners determine worker’s status by answering three criteria:
- Behavioral Control: Are you in charge of the manner in which workers perform their duty?
- Financial Control: Do you pay regular wages and have the ability to fire the employee?
- Relationship to business: Is the employee an essential part of helping your business run?
Assembly Bill 5 (AB-5) implemented at the beginning of 2020, set regulations for 1099 independent contractor classification. Under the new law, all workers are considered W-2 employees unless the independent contractor meets all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Correctly classified W-2 employees and 1099 workers help you avoid further investigation and penalties in an audit.
3. You Use Deductions Claims Appropriately
Tax deductions are implemented to help businesses reduce their taxable income, but what qualifies as a proper deduction? Under IRS, the deduction must be ordinary and necessary.
According to IRS, “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
A few deductions small businesses can claim include:
- PPP loans
- EIDL and EIDL advance funds
- Office supplies
- Home office
- Repairs and maintenance
- Employee benefits
- Employee bonuses
- Employee wages
- Employee education
- Insurance premiums
- Charitable donations
- And more
When looking at claims, IRS matches claim amounts to total income received. If your total claims filed are too high, IRS will suspect some deductions were falsified.
Accurate claims combined with receipts that prove purchases set you up for IRS audit success.
4. You Filed Accurate Taxes
Accurate business tax files strengthen your case during an IRS audit. The auditor is looking for errors, omissions, and potential fabrication during the audit process.
Oftentimes, audits arise because simple mathematical mistakes throw off numbers. By double-checking your return and using exact numbers when you file your taxes, your business will be better prepared for a potential audit.
During the process, they will crossmatch your business returns and look to see if your business reports match the total income reported by you and by your W-2 and 1099 workers.
5. You Know When to Use a Trusted Attorney
A trusted tax attorney can help build your case in the face of an IRS audit. Their expertise will help you:
- Prepare legal defense
- Review your documents to identify potential errors or issues
- Handle discussions with your auditor
- Represent your business before IRS
- Develop legal theories that may include “reasonable cause” defense
- Help you improve the chances of a successful audit
Have more questions about IRS audits? Read our article here answering the top 7 questions we receive about IRS audits.
What Taxes Does My Small Business Have to Pay?
Small business owners may have to pay additional taxes on top of income taxes depending on if you have employees, how you classify your business, and your business expenses.
The various taxes your small business may have to pay include:
- Income taxes
- Employment taxes
- Estimated Quarterly Taxes
- Self-employment taxes
Everyone who is either a 1099 worker or a W-2 employee who made any type of income files income taxes for the previous year. This rule also applies to small businesses because the government uses income taxes to fund federal programs. Failure to pay income taxes will lead to fines, penalties, and potentially jail time.
Determining your small business tax rate depends on the amount of income you receive, and which tax bracket you then fall into. The seven brackets are: 10%, 12%, 22% 24% 32% 35% and 37%.
Remember that there are federal income taxes and state income taxes. All states require state income taxes, with the exception of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
The Internal Revenue Service (IRS) offers a six-month extension for business owners who need extra time to file their taxes. Although IRS may grant an extension, that doesn’t always mean your business won’t be subject to late-filing penalties. Use the extension only when necessary.
Businesses with employees are required to pay various employment taxes:
- Federal Income Taxes – taxes withheld from the employee’s wages using their W-4 and withholding tables. Business owners/employers deposit withholdings.
- Federal Unemployment Tax – taxes only paid by the employer.
- Social Security & Medicare Tax – the employee has this amount withheld from their paystub and the employer must match the amount withheld.
Estimated Quarterly Taxes
For most employees, estimated taxes are automatically withheld, however, this is not the case for small businesses. Each quarter, as your business earns money, you’re expected to pay estimated taxes. Use IRS form 1040-ES to find estimated quarterly taxes.
Those who do not file quarterly taxes are subject to fines, penalties, and interest.
Quarterly taxes are due on the same day each year with the exception of weekends – in which case the due date falls on the following business day. 2022’s quarterly taxes are due on:
- April 18th
- June 15th
- September 15th
- January 15th
Self Employment Taxes
Self-employment taxes are used for business owners who are, self-employed. Those who run their own businesses don’t automatically have taxes withdrawn from their paycheck.
Only those who meet one of the following criteria must pay the self-employment tax:
- Net earnings are $400 or more
- Earnings from a church or church-controlled organization exceeded $108.27.
Taxes and your Business Structure
Each type of business structure has different tax implications. Understanding your specific business structure and the tax payments associated with it is essential to filing your taxes properly.
An unincorporated business, with one sole owner, is automatically classified as a sole proprietor. In the U.S over 23 million businesses are considered sole proprietorships. As a sole proprietor, you assume all financial and legal obligations of your business.
Filing taxes as a sole proprietor is fairly simple. You report your business income and losses on your personal tax return through a Schedule C, therefore your company profits are added to the income on your personal tax return.
This business structure also allows you to deduct 20% of your business’s net income from your taxable income, which, in turn, reduces your tax liability.
If your business is structured as an S Corporation, you limit the risk of double taxation by passing income to shareholders. These shareholders report the business income, expenses, losses, and deductions on their tax returns.
As one of the most common business structures for small businesses, it allows for similar advantages to a traditional corporation, with additional tax flexibility.
This business structure is also eligible to make use of the 20% tax deduction mentioned above.
This business structure, also known as a traditional corporation, is made up of a shareholder, board of governors, officers, directors, and employees. C corps are the only business type that pays taxes on the company level. Shareholders of these corporations must pay personal taxes on dividends.
Limited Liability Companies (LLC)
An LLC is one of the most popular business structures among small business owners. LLCs are only taxed on the individual level. Members of the LLC only pay taxes on the individual level, similar to an S Corp or sole proprietorship.
If you have a multiple-member LLC, you have the choice to be taxed as a partnership or as a C Corp. If you choose to be taxed as a partnership, the members of the LLC will report their share of the business income in their personal tax returns.
When are Small Business Taxes Due?
As mentioned above, small businesses owe estimated taxes quarterly. Tax days that fall on a holiday or a weekend will push until the next business day. Merchant Maverick provides a chart, seen below, of when taxes are typically due annually.
How Do I File My Small Business Taxes?
When filing business taxes, you can file them yourself, or use a trusted accountant or CPA. The benefit of working with a tax professional is that their experience will help you file the right forms, and help you avoid unnecessary fines and penalties.
When filing your return, you can use electronic resources to help you organize and file. Let’s break down the different steps to file your small business taxes.
- Know when your taxes are due – deadlines are not flexible
- Gather business tax information: business name, address, EIN, financial reports, expense records deduction records, payroll documentation
- Organize tax deductions (more below)
- Calculate taxes owed
- File all of the appropriate tax forms for your business
- Double-check your file yourself or with an accountant
Click here for a list of IRS’s most popular tax forms, and their associated instructions.
Small Business Tax Deduction Tips
Taking advantage of tax deduction opportunities can help your business save money. It can help lower tax debt to reallocate resources into growing your business.
In 2018, the Qualified Business Income Tax Deduction went into effect. This tax reform allows small business owners to deduct up to 20% of their total income if they meet certain requirements laid out by IRS.
Various deductions small businesses can claim include:
- Home office deductions
- Startup expenses
- Travel expenses
- Employee salaries, wages and benefits
- Charitable donations
- And more
Will My Taxes Trigger an audit?
There is no guarantee that your business tax files will or will not trigger an audit by IRS. However, they are keeping a more watchful eye this season as the government searches for funding for the remainder of the current administration’s proposed Build Back Better Bill.
- Failure to report income on a W-2 or 1099 form
- Failure to report all of the income received by your business (under-reporting)
- Amending a tax return to claim a refund
- Businesses who report losses for more than a year
- Businesses that are a hobby instead of a business
- Filing honest mistakes
- Using 501c write-offs
- High business expenses
What happens if I don’t pay my business taxes?
Failure to pay business taxes will result in fines, penalties, and potentially jail time. If your business fails to pay taxes due, IRS will send a notice in the mail that outlines the payment due date, and response due date. Ignoring their notices can increase fines and penalties. Click here for our full guide on do’s and don’ts when receiving an IRS notice.
Late penalties vary, but typically the fees include a 10-25% penalty applied to each month taxes are not paid. Oftentimes, there is an additional $135 penalty with interest.
In certain circumstances, your business could be subject to the Federal Payment Levy program that authorizes the government to suspend certain benefits from businesses (such as military retirement benefits, select federal salaries, and more).
The agency will assess the penalty on a case-by-case basis. In some instances, the government will issue a business tax lien as repayment for taxes owed.
If the government agency decides your business purposefully evaded paying taxes through fraudulent actions like falsifying deductions, this can lead to criminal exposure and criminal charges. This offense can lead to $10,000 in fines and up to five years in prison. At times, both can be implemented.
What is a business tax lien?
A tax lien happens when the government legally claims your property because you did not pay tax debts. IRS will issue your liability and will send a Notice and Demand for Payment. Failure to pay the full amount by the due date will trigger the government to notify creditors that the government now has the legal right to your property. The property the government can claim includes:
- Personal property
- Real estate
- Financial assets
- Intellectual property
Paying your debt in full within 30 days of the notice is the best way to remove a tax lien. Other ways to reduce the impact of a lien include:
- A discharge of property: This removes the lien from a specific property.
- Withdrawal: This removes the public Notice of Federal Tax Lien.
- Subordination: This allows creditors to move ahead of the IRS.
Can I sell my business with a tax lien?
Yes, you can sell your business with a tax lien. IRS will post a public “Notice of Federal Tax Lien,” so all of your creditors will know there is a lien on your business when you are trying to sell.
As of April 2018, the three major credit reporting agencies have agreed not to include federal tax liens on credit reports.
You can sell a property or other business asset with an attached lien as long as the debt is paid. Ideally, your business equity is worth more than what is owed to the government. In this scenario, you can fully satisfy the tax lien with profits from the sale and still pocket a profit.
In some cases, the sale of business assets does not necessarily have to fulfill the entire lien in order to be sold. IRS will release a lien to allow a sale as long as they receive a portion of the remaining equity after senior debts (such as a mortgage), commissions, and other debts are paid.
Selling a property with a lien will require extensive communication with IRS.
Follow these tips for selling a business asset with a tax lien:
- Assess the amount of the tax lien
- If you are not on an installment plan, set one up
- Submit all required paperwork to IRS
- Read IRS Publication 783 to see examples of different types of discharges
- Determine if your business sale will fully satisfy the tax debt
- Consider filing for subordination
- Never try to circumvent your tax lien
- Do not submit incomplete or inaccurate information to IRS
- Be sure to submit information for anyone who is representing you
For more tips on what to look out for this 2022 tax season, read our article here.
The U.S. Small Business Administration (SBA) is currently going through loan forgiveness applications to approve or deny claims. Businesses that filed for a PPP loan during the COVID-19 pandemic and used the funds correctly can apply for loan forgiveness.
According to SBA, the loan is eligible for forgiveness if, “during the 8- to 24-week covered period following loan disbursement:
- Employee and compensation levels are maintained,
- The loan proceeds are spent on payroll costs and other eligible expenses, and
- At least 60% of the proceeds are spent on payroll costs.”
Many businesses, however, who used the funds correctly, may receive a letter of denial from SBA. Continue reading to learn more about what to do if SBA denies your forgiveness claim.
WHAT TO DO IF YOU RECEIVE A LETTER OF DENIAL
If you received a letter from the SBA denying your PPP loan forgiveness request within the last 30 days, the clock is ticking. You have 30 days to respond and file your appeal. The timeline for SBA forgiveness appeals isn’t flexible. Once your initial 30-day period expires, you will lose your right to appeal SBA’s denial to forgive your PPP loan.
Steps to Appeal
Watch our full video to learn more tips about how to appeal an SBA PPP loan denial.
The following steps are not a complete guide; rather, a summary of action items.
- Review “Final SBA Loan Review Decision Letter”
- Confirm your deadline to appeal the SBA decision
- Gather your documents and facts to identify issues to raise in your appeal
- Review SBA’s prior legal decisions and rulings
- Draft your appeal (max 20 pages) and include exhibits (your evidence) and SBA’s Final Loan Review Decision Letter
- *You must include your legal arguments, facts, and legal authority to support your position to show SBA’s denial was “clearly erroneous” (there are additional requirements – see SBA’s website)
- Create an online account at appeals.sba.gov
- Answer all questions truthfully and completely when responding to SBA’s online questionnaire
- Identify a legal representative for your business to handle the SBA appeal
- Upload your appeal, exhibits, and SBA Final Decision Letter
We strongly recommend obtaining an attorney to represent your company, prepare, and file your formal appeal. Note that a CPA is not authorized to represent your business during the appeals process.
The ONLY individuals who can represent your company in the appeals process are:
- An owner
- A company officer
- An attorney
For more information on what to do if your PPP loan is not forgiven, read our article here.