Tag Archive for: Financial Review

Paperworks and a calculator

Large or frequent cash transactions may make a business at higher risk of an IRS audit. While cash transactions are completely legal and a convenient industry standard for many businesses, frequently accepting cash payments can pose several challenges when it comes to preparing for tax season.

Business owners should note that cash-intensive businesses are more likely to be audited by the International Revenue Service (IRS) because IRS wants to verify income to ensure the business owner is paying the correct and full amount of taxes due. 

If you accept cash payments, read on to learn how to avoid red flags in your business taxes to ensure you stay compliant and avoid an IRS audit.

Document Cash Transactions

The federal government is committed to keeping close tabs on anyone who takes large cash payments. This helps prevent underreporting, tax avoidance, and fraudulent crimes.

When you handle cash payments as part of regular business operations, be cognizant of the requirements associated and always document transactions.

By documenting all transactions, you will be prepared to answer questions IRS asks. For instance, a business owner should be prepared to answer the following questions:

  • How is incoming cash handled in your business? What is the exact procedure for handling cash?
  • Are large cash payments being properly recorded? How are these transactions being reported?
  • If you are making large cash payments for necessities such as equipment, where is this cash coming from? Do you have sales records to show this?
  • Does your business use petty cash receipts for small purchases?
  • Is your business income proportional to your current lifestyle?

Record All Digital Cash Transactions

IRS will also be looking for digital cash since it can be used for tax avoidance, money laundering, and other illegal activities.

If your business participates in online transactions, be sure to keep these records complete and up-to-date. Forms of digital cash may include:

  • E-money
  • Electronic cash
  • Cryptocurrency
  • Services like PayPal and Electronic Funds Transfer

Submit Form 8300 Within 15 Days

Reporting large cash payments involves filling out specific paperwork with IRS. Form 8300, the IRS large cash payments form, includes a few essential details, including your address, tax identification number, name, and transaction details.

Unlike other tax documents, Form 8300 must be submitted within 15 days of receiving a large cash payment, not only at year-end tax filing.

Report Large Cash Transactions

Federal law requires businesses to report cash payments over $10,000 to IRS. If you currently receive cash payments over $10,000, consult your CPA on your legal obligations for reporting.

Report Foreign Cash Transactions

Even if your larger payments aren’t in American dollars, IRS requires reporting. IRS includes foreign currencies in its considerations of cash payments.

If you accept large cash payments in any currency, you will need to keep track of those items. This may include:

  • Bank drafts
  • Cashier’s checks
  • Traveler’s checks, and
  • Money orders

Inform Your Customers

As a business owner, you should inform customers that you have reported the transaction to IRS. Your customer maintains the legal right to know that you have shared the details of their payment with the government.

Keep Personal Funds and Business Funds Separate

If IRS chooses to audit a business, they will review both the financials of the business and the business owner. Because of this, business owners should keep their personal and business financials separate.

Further, business owners should record the correct transactions coming out of each account and be able to justify business transactions. 

Business owners may choose other methods to separate their personal cash transactions and business transactions, such as:

  • Using a business credit card
  • Applying for trade credit with vendors and suppliers
  • Getting an Employer ID Number (a business tax identifier) and using it for banking, loans, and other business transactions
  • Utilizing a business accounting software system

Hire a CPA

Business owners may choose to enlist the support of a registered CPA to help manage cash transactions. CPAs will be aware of IRS rules and regulations—and how these rules apply to your business.

How to Prepare if Your Business is Audited

If you do end up the subject of an IRS audit, remember that documentation is everything. The more thoroughly you document your transactions, the easier it will be for your tax advisors to craft a strategy that will navigate an IRS investigation smoothly.

A business owner may choose to prepare for an audit by:

  • Gathering records to document income and expenses, such as bank statements, credit card statements
  • Collecting payroll records
  • Obtaining receipts from vendors and/or suppliers
  • Organizing documents for tax-deductible expenses like insurance, rent or mortgage payments, utilities, etc.
  • Hiring a tax professional to guide them through the IRS audit process 

Read on to learn how to respond to an IRS audit.

Hire a Tax Professional

Seeking expert legal counsel is essential in the event of an audit or other investigation. While your CPA can provide general advice and accounting expertise for filing your returns, you will need a tax attorney who is well-versed in tax law to represent you in legal matters involving IRS.

The attorneys at Milikowsky Tax Law have years of experience addressing legal tax matters, IRS, audits, EDD audits, and more. On top of our legal expertise, we have been small business owners ourselves—so we understand firsthand the challenges and requirements of managing small business taxes.

If you need support in navigating your IRS audit or for legal advice to help reduce your risk of being audited in the future, contact Milikowsky Tax Law today.

Interested in learning more? Read on for our ultimate guide to tax law for small business owners.

A lot of paper and an eyeglass

When you fall significantly behind on a government tax bill, whether that tax bill is attached to  your company or personal taxes, Uncle Sam looks for other ways to collect. One method includes staking a claim in your business interests.

Not only can the government put a tax lien on the tangible assets of your business, like your building and inventory, but it may put a lien on your intellectual property and financial assets as well. That means that your patent and stocks cannot be sold without settling your tax bill first. 

Want to sell your business or offload some of its assets? For anyone looking to buy, tax liens represent a major hiccup. But if you follow the proper steps, you can still sell your business successfully without placing a burden on the new owner. 

What is a Tax Lien?

A lien is a process that gives another entity the right to take possession of something that belongs to you until your debt to them is paid. Contractors can put a lien on a home for an unpaid final invoice, and the federal government can put a lien on your business when you have failed to pay a tax bill.

How Tax Liens Affect Sale of Business Assets

A tax lien could put your business in a tricky financial situation or make it harder to sell. IRS will post a public “Notice of Federal Tax Lien,” so all of your creditors will know about it. 

The good news is that since April 2018, the three major credit reporting agencies have agreed not to include federal tax liens on your personal credit report. While that is a bright spot in an otherwise dark time, don’t forget, you will still need to find a way to settle your tax bill, to ensure the government will not seize your business.

Can You Sell an Asset with an Attached Lien?

You can sell a property or other business asset with an attached lien as long as the government gets their fair share. In an ideal scenario, your business equity is more than what you owe to the government. In this scenario, you can fully satisfy the tax lien with profits from the sale and still have something left over for yourself. 

For instance, say you owe a tax lien of $50,000. If you sell your business for $400,000, and spend $200,000 settling other debts, then you can pay off your tax lien and still have $150,000 left over.

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 get a portion of the remaining equity after senior debts (such as a mortgage), commissions, and other debt are paid. 

If, for example, the federal government has a tax lien of $100,000 against your business; the sale price is $300,000; and the loans and debts senior to the federal tax lien are $200,000. After sale settlement costs and commissions of $25,000, only $75,000 remains. 

Even though you owe $100,000, the government may allow the sale to go through and collect the available $75,000. Depending on the type of discharge you apply for and whether you are a sole proprietor, the government will either apply the remaining $25,000 lien to another asset or discharge the entire lien. Either way, the business is now free of the lien and can be sold free and clear to the new owner. 

Tips for Dealing with IRS for Sale of Business Assets

Any sale of a business asset or property that has an attached lien will involve extensive communication with IRS. While there are many forms to fill out and submit, going through the process the right way will help relieve you of the lien sooner than later. 

6 tips for navigating the sale of a business asset that has a federal tax lien:

  1. Assess the amount of the tax lien. If you are currently on an installment plan to pay off the tax debt and owe less than $25,000, IRS may agree to withdraw the lien altogether. Refer to this IRS Withdrawal Application, or speak with a professional tax attorney to determine whether you have a case to ask IRS to withdraw the lien.
  2. If you are not on an installment plan, set one up — and be consistent in your payments — in order to show your good faith in repaying the debt. Your good faith payments may help your case if and when you need to apply for discharge in order to sell your assets. 
  3. Submit all required paperwork to IRS at least 45 days before the sale or settlement meeting of a property or business asset. Allowing the federal tax lien to linger unaddressed could ultimately delay a sale. 
  4. Read IRS Publication 783 to see examples of different types of discharges. There are six unique provisions that may be available to you. Working with a legal tax expert will help you understand which types of discharge are best for your individual situation.
  5. Determine if your business sale will fully satisfy the tax debt. If not, you need to file Form 14135 with IRS to apply for a discharge (you can also find this form at the end of Publication 783).
  6. Consider filing for subordination. This allows other creditors to collect before IRS, and it may expedite a sale. An approved subordination signals to other creditors that they will not have to battle with IRS over who gets paid first. Use IRS Form 14134 to apply for subordination. An experienced tax attorney can help you file for subordination and make a case to IRS. 

3 things NOT to Do When Selling or Buying Tax Liens

Knowing how to manage a tax lien is just as important as knowing how not to manage one. Making the wrong move could lead to complications and disrupt your sale. Here are some common mistakes to avoid.

  1. Never try to circumvent your tax lien. Some assume that a cash sale that never reports the lien means you will have money in your pocket before the government ever learns about the sale. This is highly risky. Your creditors are likely know about the lien and IRS will find out, they almost always do. 
  2. Do not submit incomplete or inaccurate information to IRS. It may feel like the government is asking for your most personal information on some of the required forms, but it is better to fill out the form correctly the first time rather than submit guesses or leave fields blank. Doing so will only delay or even sabotage your sale. Submit legible copies of all documents requested. 
  3. Be sure to submit information for anyone who is representing you. It is a good idea to have an experienced tax attorney represent you during a sale involving a federal tax lien. If you do choose to work with a tax attorney, submit IRS Power of Attorney Form 2848 with the required signatures so that your representative is able to support you in all matters related to the sale. 

To help you navigate the legal process correctly, reach out to a tax attorney who understands tax liens, the various forms of discharge, and can identify which type of discharge (if any) you are eligible for. Milikowsky Tax Law was voted one of San Diego’s best tax attorneys and is considered among the top San Diego law firms by the San Diego Business Journal. Our experienced team is ready to provide you the advocacy you need to sell your business assets that are under a tax lien. Call us for a consultation today.

The information contained on our website and in blogs is provided for information purposes only and does not constitute legal advice.

Sources:

https://www.fundera.com/blog/if-you-owe-uncle-sam-money-you-might-have-to-think-twice-about-getting-a-business-loan

https://www.nerdwallet.com/blog/investing/selling-real-property-attaching-federal-tax-lien/

https://www.irsvideos.gov/Professional/IRSLiens/LienSeg1_3

https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien

https://www.creditcardinsider.com/blog/what-is-a-tax-lien/

attorney and client

Summer is in full swing now and. if you’re a business owner with sales that are heating up, this is the perfect time to take stock of your business’ financial situation.

Mid-way through the year is the perfect opportunity to reflect and plan.  Look back and assess how you are performing against the financial goals that you set in January? Look froward and address questions such as: Could you benefit from cutting costs somewhere, or increasing cash flow somewhere else? 

Annual tax planning as part of your summertime schedule is sound business practice. Meeting with your CPA or bookkeeper for a mid-year review can be aid in  small business growth, and planning now may help you reduce your tax expenses at the end of the year. 

Be sure to address these 5 points during your mid-year review with your CPA.

Re-Consider Your Legal Classification

Businesses grow and evolve over the years. Small businesses generally grow faster than most because they have the freedom and agility to move into new markets and explore unique opportunities. If you started your company as a sole tradership or partnership as the beginning of the year, the developments you have seen since then could mean that your entity type no longer makes sense. 

Meeting with your CPA will allow you to assess your current standing and determine whether a change in entity is right for you. Making a switch now could save you thousands when it is time to send in your tax reports

Evaluate Your Recordkeeping

Recordkeeping can be particularly tricky for smaller companies. If you are a business owner running a start-up, you are likely responsible for wearing many corporate hats. With so many responsibilities to manage, things like accounts and receipts can easily slip through the cracks. 

To make the most of your tax deductions and reduce your risk of triggering an IRS audit, you need to maintain clear and reliable records. If your records are not up to date, or you are missing something essential, now is the time to fix it long before you need to correspond with IRS. Getting help from your CPA means that you can continue to focus on business growth, while they handle the number headaches.  

Plan Your Investments 

There are certain deductions a Small Business Owner  can consider, particularly in your first year of operation. If it seems like this year is going well, think about where you can invest in your future. For example, you might want to:

  • Buy new equipment. Stocking up on valuable equipment will help to future-proof your company and make your business run efficiently. 
  • Hire employees or independent contractors. Perhaps now is the perfect time to get some help running your company. Choose people who will add value to your organization, and be careful to classify them correctly to avoid any legal trouble on future tax returns.
  • Expand your R&D. No matter your industry, speak to your CPA or bookkeeper about investing in research and development for your organization. 

Think About Your Future

When you are in the midst of running an exciting, high-growth small business, it is easy to get caught up in the here and now. You are busy trying to make sure that your organization continues to prosper, but do not forget to think about your future 

If your company is turning a profit and you want to invest in your future, now is the perfect time to set up a retirement plan. Contributing to a new savings account for your retirement will help you to reduce your taxable income and give you a nest egg to rely on in the future. The contribution limits and specific rules can vary, so make sure you get guidance from your CPA. 

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Review Your Potential Tax Payments

Now is the  time to start thinking about taxes. Take a look at how much money your company has made thus far and assess your estimated tax payments to make sure that you are not underpaying. Getting ahead of your tax requirements now will stop you from facing surprises when tax season arrives. 

The more you start saving now, the better prepared you will be for the remainder of the year. If you are concerned that you may not be able to afford your tax burden for the upcoming tax season, or if you need legal tax advice, contact the expert tax attorneys at Milikowsky Tax Law today. 

The information contained on our website and in blogs is provided for information purposes only and does not constitute legal advice.