bAD DEBT Expense



Hear me out please. I am going to address bad debt expense to clear up a common misconception and hopefully I can write this an understandable way. This seems to come up every year and it is a difficult concept for some to grasp.

What is Bad Debt Expense?

What is Bad Debt Expense? I will quote the IRS:

If someone owes you money that you can't collect, you may have a bad debt. Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. 

What is not a deductible Bad Debt Expense?

If you are a cash basis taxpayer and someone fails to pay an invoice that you sent them, that is not a bad debt expense that you can deduct on your tax return. I know it is bad that you did not get paid for the work that you did or a product that you sold. I get it. But unless you are an accrual basis taxpayer that reports all invoiced sales as revenue then you generally don't get to deduct a bad debt expense for someone who fails to pay your invoice. As the IRS quote includes "to deduct a bad debt, you must have previously included the amount in your income."

What you get to deduct

What do you get to deduct? You get to deduct any expenses associated with the sale at the time the expenses were incurred except for inventory. For inventory you get to deduct it at the time of the sale. In this case, as a cash basis taxpayer you don't record the sale but you do record the cost of goods sold for any inventory that was sold. 

What is the end result

The end result of some one not paying your invoice is you get to deduct all the expenses incurred for the sale. You don't get to take bad debt expense, as a cash basis taxpayer, but then again you also did not record the income because you did not receive payment of your invoice. As a cash basis taxpayer your taxable income is the revenue you received less the expenses that you paid, in general terms. That is it. That is the way it works. I know many don't like it and it may not seem fair to you and it is not fair. The part that is not fair is that you did not get paid for what is rightfully yours. And if you had previous recognized the income on your tax return as an accrual basis taxpayer then you would get to deduct it but the end result for the accrual basis taxpayer is the same as it is for the cash basis taxpayer. You don't end up after the bad debt deduction with any revenue related to that sale because you recognized the revenue in the year of the sale and then took the deduction for the same amount in the year you recognized you could not collect it and the deduction was the same amount as the sale (usually). For both the cash basis taxpayer and the accrual basis taxpayer after everything gets recorded you  wind up with your expenses associated with the sale as deductions and that is it. The revenue if recorded gets offset by the bad debt deduction. If no revenue was recognized there is no bad debt expense. That is it.

I hope this helps but it is a concept that can be difficult to understand once you have it in mind that you, as a cash basis taxpayer, should be able to deduct bad debt expense. I get it, that part, but you can see this explanation from the IRS if you still don't understand it.

Get Help

Taxes are very involved and as shown above it can get complicated and that is where I come in to the picture. With your tax returns there may be a lot to discuss and strategies that can be pursued.  I have been through this before and I would be glad to help to you if you have a complicated tax return. To get started use my email address below to arrange an appointment to have an initial consultation. We can do the consultation over the telephone, or using Zoom, or another option. 


Posts - 2020 Tax Returns







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Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

What To Do If You Can't Pay The Taxes?

 


With hard times, like the pandemic, many will have difficulty paying their taxes. What can you do? You have options.

File Your Return

Things will get worse if you don't file your return in a timely manner. You are required to file your return correctly and in a timely manner. If you fail to do so, not only will you have taxes to pay, but you will add to it the failure to file penalty, the failure to pay penalty, and interest. Both the penalties and interest can continue to accrue until you pay your taxes in full. 

Payment Options

Get a Loan to Pay Your Taxes

If you can get a loan at a reasonable rate and pay your taxes you will probably be better off than making payments to the IRS. If your taxes are not paid in full you will be looking at, assuming you filed on time, a failure to pay penalty and interest. Typically, you will be better off getting a loan to pay your taxes again if it is at a reasonable interest rate. This is usually your best option and usually you will wind up paying less than making arrangements with the IRS. Of course you can pay me to help you make arrangements with the IRS to pay your taxes but unless you are really financially make payments then you are probably better off getting a loan than you would be making payments to the IRS. This assumes we are talking about the current year taxes. 

For taxes on prior years, after the penalties have been fully accrued then your best option may be to arrange to make payments with the IRS. Also if you are unable to make the payments due to a financial hardship you may want to explore some the options list below under Other Options.

Pay What You Can

By filing your return you open up many options that are only available if you are in compliance with income tax obligations. But before we address those options you can buy some time to pay your taxes. You can typically file your taxes and pay what you can by the April 15th deadline. Even if you file an extension your taxes are still due by April  15th as the extension is for filing your tax return and not for the actual payment of the taxes. 

Request More Time to Pay

If you don't pay all of your tax due by April 15th then certain things will happen. After you file and pay what you can the IRS will send you a notice for the taxes, penalties, and interest due to date. Typically, if you need more time you can call the IRS and ask them for more time. In the past they have given taxpayers 120 days until which they will not proceed with collection activity (normally this is the case, but of course I have clients who claim they never got the first letter which is a subject for another post) but the interest and penalties can continue to rack up during this time. Then, after the extension of time, you can look at other payment options. Sometimes taxpayers choose this route because they expect they will be in a better position to pay due to a job or bonus or some other event. 

Installment Agreement

If you still can't pay the full amount due you can typically work out an install agreement with the IRS. There are two types of Installment Agreements: one where you automatically are given a certain number of months to pay without providing any information and another where you have to provide your full financial picture to the IRS. For both of these options you must first be in compliance with the IRS, which means having filed your tax returns and have been making required payments.

Keep in mind, even with the installment agreement the penalties and interest continue to run. You may be able to get an abatement of penalties but that is a different topic.

Other Options

If an Installment Agreement won't work for you, you may be able to get put in a currently uncollectable status or get an offer in compromise. Again to get pursue either of these options you must be in compliance with the  IRS and you will need to submit detailed financial information to the IRS. For these options there are strategic decisions that are very important to help you get the best result. 

Get Help

These options are very involved and there is a lot to discuss and strategies that can be pursued. Which ever option you wish to pursue you may want help working this out with the IRS. I have been through this before and I would be glad to help to you. To get started use my email address below to arrange an appointment to have an initial consultation. We can do the consultation over the telephone, or using Zoom, or another option. 


Posts - 2020 Tax Returns







Posts - IRS Collection Issues and Options:







Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Stimulus Payments: What if a Taxpayer Died in 2020?

 




Recovery Rebate Credit

With Stimulus Payments (officially called economic impact payments) made to taxpayers in 2020 and early in 2021, many taxpayers have questions about different scenarios. One question is what if a taxpayer died in 2020, should they have received the stimulus payments? What if they got the first one but died before the second one was sent out and they did not receive that one?

The Stimulus payments are dependent on meeting the qualifications. One of those qualifications relates to 2020 income, so the reconciliation of the Stimulus Payments will be reconciled on the 2020 tax return with the Recovery Rebate Credit. If a taxpayer qualified but did not receive a Stimulus Payment or Payments they can still get the payments by filing their 2020 income tax return. 

If someone received more than they qualified for the 2020 form 1040 says on lines 17 and 20 of the Recovery Rebate Credit Worksheet that "you don't have to pay back the difference." 

But if a taxpayer was entitled to an amount that they did not receive they will now be entitled to receive a credit for it on line 30 of form 1040.

What About Someone Who Died in 2020?

If they meet the qualifications they or their estate can receive the Recovery Rebate Credit if they did not receive the amounts they were entitled to. In addition to the income qualifications even if a person died in 2020 they could have been entitled to the Stimulus Payments and if they did not receive them they can now get a credit on their 2020 tax return, as long as they could not be claimed as a dependent on another person's 2020 return and their return includes a valid social security number. 



Get Value From Your CPA

There are a lot of people who prepare tax returns. From experience I know that many won't have conversations with you about your options for filing your tax returns, and this year more than ever you should be talking to your CPA about Stimulus Payments and Charitable Contributions among other things.  If you have a complicated tax return and want someone to help you beyond preparing your tax returns then call the CPA Superhero for help you making strategic decisions for your business, yourself, and your family. Email me today to arrange to have a conversation about your situation. My email address is listed below. 


Posts - 2020 Tax Returns







Posts - IRS Collection Issues and Options:







Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Bonus Depreciation Decisions for your 2020 Tax Returns: Conversations You Should Be Having With Your CPA



 A funny thing happened in the actual application of bonus depreciation for my clients early on this tax year. Clients have elected not to take full advantage of the bonus depreciation this year when they could have taken bonus depreciation to generate a loss which could not only eliminate their income taxes this year but also allow them to carryback a loss generated to get refunds on prior year tax returns by amending those returns . The bonus depreciation would have improved their current cash flow. But so far all of my client who could have done this have opted out of doing this. Why would they do that? We will address that but first how does bonus depreciation work and what choices does a taxpayer have and finally why would taxpayers opt out of bonus depreciation?

Bonus Depreciation

Here is what the IRS published in IR-2020-216 explaining the recent developments in bonus depreciation:

The Treasury Department and the Internal Revenue Service today released the last set of final regulations implementing the 100% additional first year depreciation deduction that allows businesses to write off the cost of most depreciable business assets in the year they are placed in service by the business.

The 100% additional first year depreciation deduction was created in 2017 by the Tax Cuts and Jobs Act and generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify.

The deduction applies to qualifying property (including used property) acquired and placed in service after September 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property.

Traditional posts on income taxes include a history of developments in that area of taxation. I will spare you most of that, but you will notice the IRS included "used property"  which previously was excluded from bonus depreciation. 

There is more to this subject but the point of this post is to get to decisions that taxpayers can make about using bonus depreciation.


Net Operating Loss Carryback 

Some of my clients could have chosen to take the 100% bonus depreciation to create a net operating loss that they could have carried back up to five years to generate income tax refunds. Why would they chose not to take the full 100% bonus depreciation?


Decisions

First, my clients are not in need of cash right now. Second, they are expecting more revenue in the next few years and the depreciation will reduce their income taxes and self employment taxes in future years while the NOL carryback would not help them get a refund of self-employment taxes. Third, there is some concern that income tax rates may go up. One of my clients wanted to pay a reasonable amount of income taxes for 2020 because he feels the government needs the money. I don't hear that very often.

If you purchased equipment or had qualified improvement property you should be having a strategic conversation about your options with your CPA. As you can see you would want to consider your need for cash, the opportunities to carryback losses, and also what you expect your business will do in the next few years. A lot of this property is depreciated over five years typically. If you use the bonus deprecation this year then you will have used all of the depreciation for that equipment and not be able to benefit from depreciation for that equipment in future years. 

Additionally, a net operating loss carryback won't likely give you as a big of a tax break as you would get by saving the depreciation deduction for future years, especially if you are subject to self-employment taxes. However, if you need cash and if you expect lower profits in the coming years you may decide to take advantage of the bonus depreciation provision.

In hard times in the past I have helped clients who generated losses to carry them back and get refunds which were critical for them to survive financially at that moment. If you are in such a situation now bonus depreciation could be a financial lifesaver. But if not, you can chose to save some of that depreciation for future years.


What Do You Want Your Taxes to Be?

Just a side note here, you have options this year when it comes to Depreciation. The Bonus Depreciation will give you a 100% percent deduction of the cost of that asset. A section 179 deduction may also be available and you can chose how much of the cost to deduct this year. Finally, you can take just the standard depreciation deduction. For my clients I have been able to ask them how much do you want your taxes to be this year. Along with that is the cash flow consideration and how much will their taxes be in the next four years. So this year with Depreciation you will have choices and those choices can be very strategic and very important. 

Get Value From Your CPA

There are a lot of people who prepare tax returns. From experience I know that many won't have the conversation with you about your depreciation options and how they could impact you now and in the future. If you want someone to help you in your business beyond preparing your tax returns then call the CPA Superhero to help you make strategic decisions for your business, yourself, and your family. Email me today to arrange to have a conversation about your situation. My email address is listed below. 


Posts - 2020 Tax Returns







Posts - IRS Collection Issues and Options:







Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

2020 Tax Returns - Suspension of Limits on Charitable Contributions

 


Temporary Suspension of Limits on Charitable Contributions

In most cases charitable contributions that taxpayers can deduct on Schedule A are limited to a percentage of the taxpayer's adjusted gross income. For qualified charitable contributions made in calendar year 2020, however, the limitations have been changed to 100% of adjusted gross income. 

The IRS specifies the contribution must be: 

Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.

For more information see this irs.gov post. 

www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

Note there are penalties for overstating deductions on a tax return. 

Also, there is a new deduction for charitable contributions for those that do not itemize their deductions and for 2020 tax returns this deduction is limited to $300.

2020 Tax Returns

Tax returns will be more complicated for 2020. If you need the help of the CPA Superhero with your taxes this year I am willing to help you. I have clients all over the U.S. and in many foreign countries and for years my clients have been sending me their tax information digitally and we communicate via phone calls, emails, and video conferencing so the pandemic protocols are nothing new to me. I would be happy to help in this complex tax season. Contact me today using my email below to arrange an initial call to discuss your situation. 

I also help people with IRS issues like back taxes and making arrangements to pay back taxes and in some cases settling them for less than what is due. If you need help with any of these types of issues please also contact me using my email below. 



Posts - 2020 Tax Returns







Posts - IRS Collection Issues and Options:







Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

What Should You Do With That Letter From the IRS



The CPA Superhero loves to help people in distress over their tax situation. Life happens to people and even good people get notices from the IRS. I have helped many people who have received letters from the IRS. Most people are really distressed about notices from the IRS but I am used to them and I can help with you with those notices. The key is to respond promptly, so rather than delay contact me today to set up an appointment for an initial conversation about your IRS notice. 

It is important to respond quickly to IRS notices because you are usually given opportunities that you can elect but you have to elect them within a certain numbers of days. So contact me today to discuss your notice and to keep your options open.

Be prepared too, because the first thing I am going to need in order to help you is a copy of your notice including all the pages. So if you can scan a copy and have it ready to send to me that will help you very much. 

Finally, know that most of the time the situation is not as bad as what people feel when they receive a notice from the IRS. Also, I am used to working with people in distress. Again, things happen to people and if you received a notice something happened and it is not the end of the world but it means we need to deal with it. But the hardest part is making the call, or in this case sending me an email to arrange an initial call to discuss your situation. So start now by emailing at jeff.jhtaxes@gmail.com to arrange an appointment  for that call via telephone, Zoom, Whatsapp or other options. 




Posts - 2020 Tax Returns







Posts - IRS Collection Issues and Options:







Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Deduction for Charitable Contributions - Without Itemizing


Charitable Deductions

New flash: On your 2020 tax return you may be able to deduct some charitable contributions even if you don't itemize deductions on your tax return. This is good news for those that don't benefit from using schedule A to itemize their deductions. Typically taxpayers don't use schedule A to itemize their deductions unless they have mortgage interest they can deduct in addition to real estate taxes and charitable contributions. In some rare cases individuals that have a lot of medical expenses (paid out of their own pocket) will itemize deductions also. And with a higher standard deduction starting with 2019 tax returns the number of people who used schedule A to itemize their deductions were greatly reduced. But now even if you don't use schedule A to itemize their deductions you may be able to deduct some of your charitable contributions.

In IR-202-264 the IRS announced:

Following special tax law changes made earlier this year, cash donations of up to $300 made before December 31, 2020, are now deductible when people file their taxes in 2021.

Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify for this new tax deduction. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87% of all filers.

Under this new change, individual taxpayers can claim an "above-the-line" deduction of up to $300 for cash donations made to charity during 2020. This means the deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations.

You will need to make sure that the charity is eligible for tax-deductible donations. Additionally, the IRS advises the following about cash donations and keep good records:

Cash donations include those made by check, credit card or debit card. They don't include securities, household items or other property. Though cash contributions to most charitable organizations qualify, some do not. Check Publication 526, Charitable Contributions, and the TEOS for more information.

Though cash contributions to most charitable organizations qualify, those made to supporting organizations and donor-advised funds do not.

The IRS reminds everyone giving to charity to be sure to keep good records. By law, special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining a receipt or acknowledgement letter from the charity, before filing a return, and retaining a cancelled check or credit card receipt. For details on these recordkeeping rules, see Publication 526, available on IRS.gov.

Realize to that there are penalties for overstating charitable contributions. 

What About Different Amounts Allowed for Different Filing Statuses?

There should be a larger allowance for a married couple than for an individual, but at this time the limit is $300 regardless of filing status. Subject to change, of course.

2020 Tax Returns

Tax returns will be more complicated for 2020. If you need the help of the CPA Superhero with your taxes this year I am willing to help you. I have clients all over the U.S. and in many foreign countries and for years my clients have been sending me their tax information digitally and we communicate via phone calls, emails, and video conferencing so the pandemic protocols are nothing new to me. I would be happy to help in this complex tax season. Contact me today using my email below to arrange an initial call to discuss your situation. 

I also help people with IRS issues like back taxes and making arrangements to pay back taxes and in some cases settling them for less than what is due. If you need help with any of these types of issues please also contact me using my email below. 



Posts - 2020 Tax Returns







Posts - IRS Collection Issues and Options:







Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com






Posts - 2020 Tax Returns


Posts - IRS Collection Issues and Options:







Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

bAD DEBT Expense

Hear me out please. I am going to address bad debt expense to clear up a common misconception and hopefully I can write this an understandab...