* We charge for our services, including telephone or email consultations lasting over 15 minutes. For our rates, refer to our Policy Statement/Engagement Letter. *
** To become a client or to get our tax worksheets, go to the Tax Worksheets page. **
*** For more technical tax questions, go to the Tax Center page. ***
(During the next few months we will have a list of answers to the most frequently asked questions we receive in our practice. So keep checking back.)
1. Should I have my old CPA prepare my taxes or should I switch to you? Answer: You have to make that decision. What I can say is one client (see “Testimonials) wished she had not paid her former CPA his fee only to have us come along later and amend her tax return and recover $6,000 more in a refund than he recovered for her.
2. Is there really a difference between one tax preparer and another? Answer: Another client (see “Testimonials) learned there is a difference. Their former CPA prepared their tax return showing they owed the IRS $11,239. They called us and got a second opinion. We were able to reduce their tax bill by $6,964 – of which $5,013 was because we know the best method to use to deduct the free company car. Who do you think she picked to prepare their tax return?
3. What are your rates? Or, in other words, what do you charge to prepare my taxes? Answer: If you will review our Policy Statement, which you can download from the link above, you will see that we charge per hour for however long it takes to prepare, print, copy, and package your tax return. Without seeing your data to know how many forms and schedules we will be required to prepare, we cannot tell you in advance how long it will take to prepare your return or how much your bill will be. The average length of time spent preparing a typical tax return within our practice (husband, wife, own a home, and have a small business) is approximately 3 to 5.5 hours. Compare that to the National Society of Accountants’ 2017 survey results that the average fee charged for a Form 1040 and a state return was $176; a Form 1040, Schedule A, and a state return was $273; and a Form 1040, Schedules A and C, and a state return was $457.
4. How long will it take for you to prepare my tax return? Answer: We cannot definitively tell you in advance how long it will take because we do not have your data, nor do we know how long it will take to prepare the number of returns that are in line ahead of you. Please refer to our Policy Statement/Engagement Letter for a good explanation. Historically, and on average, if you submit your tax data to us within the first half of February, it has taken 2-4 weeks to prepare the returns ahead of yours; if you submit your tax data to us within the last half of February, it has taken 4-6 weeks to get to that data; if you submit your tax data to us within the first half of March, it has taken 6-8 weeks to get to yours; if you submit your tax data to us within the last half of March, it has taken 8-10 weeks to get to yours; and if you submit your tax data to us within the first half of April (the absolute worst time), it has taken 10-12 weeks to get to yours. After April 15th the waiting time decreases because we are usually preparing returns faster than they are coming into our office – until around August 1st, when the rush to submit tax data before the IRS’s final deadline increases.
5. Where do I report “Demos” on your worksheet? Answer: If you will notice on the worksheet after the words “Cost of Goods Sold,” it says “Demos are N/A.” The reason you do not need to report them to us is because they automatically get claimed when you count your ending inventory. It works this way – when you pull product off your shelf to demo it, because you cannot put it back on your shelf to re-use it, your inventory value decreased by the value of the product that was pulled off your shelf and demonstrated. At the end of the year when you do your ending inventory count, that now reduced ending inventory number will already have factored into it all your demos for the year. Also, it is better to use demoed product as personal use, for which you do get (have already gotten) a deduction, than to open a new item, for which you do not get a deduction, and use it for personal use.
6. How do I handle discontinued product? Answer: There is a distinction between discontinued product, which is still salable, and spoiled product, which is not. Discontinued product needs to be tracked as all other salable product. In other words, you simply include it with all other numbers for product that you sell, use personally, give away, and have left over on December 31st as ending inventory. Discontinued product, and even expired product, are still considered part of your inventory until you dispose of them. For that reason, you need to record all dispositions of product, whether sold, used personally, given away, stolen, destroyed, or thrown away. Moreover, it is to your advantage to reduce your inventory before the end of the year – first through selling it, second through giving it away, and third through throwing it away. Spoiled product, however, is not salable product. Because throwing out several hundred dollars of spoiled product can distort the “appearance of legitimacy” of your cost of goods sold, you should notate the event so that you can explain to the IRS, if necessary, why your cost of goods sold looks out of line.
7. Should I give away old product or should I throw it away? Answer: There is a distinction between discontinued product, which is still salable, and spoiled product, which is not. Spoiled product, however, is not salable product. Discontinued product, and even expired product, are still considered part of your inventory until you dispose of them. For that reason, you need to record all dispositions of product, whether sold, used personally, given away, stolen, destroyed, or thrown away. Moreover, it is to your advantage to reduce your inventory before the end of the year – first through selling it, second through giving it away, and third through throwing it away. See your Director first, of course, and follow her advice. Our simple rule for operating a retail sales business is 1) sell all you can sell – even at a discount if you have to, 2) give away usable product that you cannot sell, and 3) throw away all unusable product that has spoiled.
8. Will I get audited for filing an extension? Answer: No. Extensions are becoming more and more common. In fact, more of our clients file extensions than file before April 15th. In addition, the IRS extended the extension period from 4 months to 6 months (until October 15th), because the 4 month extension did not give them long enough to get their tax information together and file their return.
9. Is there a fee for filing an extension? Answer: No. In fact, it is not only free, but it is automatic. That means you do not have to have an excuse to request an extension, and it is automatically granted. However, you should know that if you file an extension and it turns out that you owe tax, you will be penalized for filing late and for paying the tax late. If more than 60 days late the minimum late filing penalty is $210 or 100% of the tax owed, whichever is less. The maximum combined penalty for filing late (4.5% per month for up to 5 months) and paying late (.5% per month) is 25% of the tax owed, and additional late payment penalties of .5% per month if payment of the tax extends beyond 5 months. In other words, FILING AN EXTENSION DOES NOT EXTEND THE DATE TO PAY THE TAX. ALL TAXES DUE MUST BE PAID BY APRIL 15TH, WHETHER YOU FILE AN EXTENSION OR NOT.
10. What happens if I wind up owing taxes on my return and cannot pay the amount in one lump sum? Can I make payments to the IRS? Answer: The IRS has already thought of this possibility. That’s why they have created a Form 9465 that you can file with your tax return to request of them: 1) how much you wish to pay them now, 2) how much you wish to pay them every month, and 3) on what day of the month you will make your payments. Be forewarned that the IRS charges a set-up fee of $105. Provide us those 3 pieces of information, and we will file this form as part of your return. However, if you can your tax bill within 120 days, you do not have to set up the installment plan and can save the $105 set up fee.
11. How many years can I show a loss? Or, I heard I must show a profit 3 out of the last 5 years in order to claim a loss from a business. Is that true? Answer: According to section 183 of the Internal Revenue Code, if a loss is attributable to an activity “not engaged in for profit,” the loss is not allowed as a deduction against other income. However, an activity is engaged in for profit if the taxpayer entertained “an actual and honest, even though unreasonable or unrealistic, profit objective in engaging in the activity.” Our experience has been that 99% of our clients enter into business with the expectation and the objective to make a profit. Therefore, be sure you can prove you are working your business in a business-like fashion so as to try to make a profit. The IRS has a list of tests to try to determine this. See our Hobby Loss Questionnaire to see if you can legitimately pass these tests.
12. Can you sign the tax return for me? Answer: No. That is illegal. I would go to prison if I did.
13. Can you check on my refund or otherwise talk to the IRS for me? Answer: The IRS’ Tele-Tax Refund Information phone number is 1-800-829-4477. Or, use the IRS’ “Where is my refund?” tool, to which you can link from the green section on the left side of any page of our website. One client called the IRS main phone number at 1-800-829-1040 (best time to call is either 7:00 AM or 6:00 PM on Thursdays or Fridays) and asked for the Accounts Management (Refunds) Department. No, we cannot talk to the IRS for you. The IRS will only talk to the taxpayer(s) without specific authorization or power of attorney from the taxpayer(s). Ever since serving as power of attorney for a client whose exposed lack of ethics nearly cost us a large fine and a reprimand from the IRS, our company policy has been to NOT serve as power of attorney for ANY client. However, we will tell you what to say to the IRS, how to respond to an IRS notice, or what questions to ask them. We will even accompany you to an audit within the Dallas/Ft. Worth metroplex, but that is a separate engagement that requires a separate signed Audit Engagement Letter from you.
14. How long do I have to keep my tax returns? Answer: You should keep your tax returns for at least 7 years, if not forever. If you ever used part of your home for an office, you will want to keep information pertaining to your home such as original purchase price, closing costs to buy, refinance, and sell, and cost of improvements until such time as you sell it. Likewise, keep records on investments for as long as you hold the investment. However, once you receive a year-end statement, you can throw away the previous 11 monthly statements. Keep all other records such as bills, bank statements, etc. for 7 years. We keep copies of our clients’ returns for 10 years.
15. What percentage of your clients get audited? Answer: Approximately 2/10ths of 1 percent of our clients get audited compared to the national average of approximately 1%.
16. I just received an email from the IRS. Should I open or answer it? Answer: Definitely not! It is a scam. The IRS NEVER communicates with taxpayers via email. Delete that email.
17. Will you notify us, either by phone or by email, that you received our tax data or any other paperwork that we send you? Answer: Due to the large number of clients we have to juggle in various stages of processing at any one particular time, it is impractical to keep up with each individual special request. Instead, we ask that you allow sufficient time for delivery of your paperwork to us, and then follow it up with a phone call or email asking us if we received it. Or, an alternative would be to send your paperwork to us either overnight so that you can track delivery of it, or request delivery confirmation, which costs only a little extra.
18. Is money I receive as a gift taxable? Answer: Gifts are not taxable to the recipient, but instead are subject to tax to the giver. Moreover, a taxpayer can give away as much as they want. Yet once they have given over $11,400,000 in “taxable gifts” during their lifetime, they have to start paying a gift tax. However, the IRS currently allows a taxpayer to exclude up to $15,000 per person each tax year before it is considered a “taxable gift” and they are required to file a gift tax return. Therefore, a taxpayer could give away $120,000 to 4 children and their spouses (8 people x $15,000 each) in one year – $240,000 within 2 days if they give away $120,000 on December 31st of one tax year and $120,000 on January 1st of the next tax year – without having to file a gift tax return.
19. For how long am I required to report my cosmetics business if I am no longer conducting it? Answer: As long as there is ending inventory on a tax return, it automatically carries over to beginning inventory on the next year’s tax return. That provides the IRS a check point where they are able to cross check the next year’s tax return to make sure a Schedule C for that particular business is being included on the return. If a Schedule C for that particular business is not included on the next year’s tax return, such an omission – because of the existence of ending inventory on the previous year’s tax return – can easily be caught, which can readily trigger an IRS notice. To prevent triggering an IRS notice, you must report that business on Schedule C as long as you hold ending inventory, or until such time as you dispose of all inventory – either through sales, gifts, theft, destruction, or thrown away. Once the inventory is reconciled to “-0-,” then we cease to report the business, because it has been fully closed and all assets disposed of.
20. When should I file for Medicare B? Answer: As soon as you are eligible.
21. Is interest on a home equity loan deductible? Answer: As of the Tax Cuts and Jobs Act, for tax years 2018-2025, taxpayer is allowed to deduct the interest on home equity debt on up to $100,000, as long as the taxpayer uses the loan proceeds to acquire, build, or substantially improve the personal residence that secures the loan.
22. If I put a magnetic sign on my car, can I write off 100% of my car since I am advertising 100% of the time and places my car gets driven? Answer: No. The IRS wins this argument every time. The sign is doing the advertising, not the car. The only way to determine the business use percentage of your car is through a mileage log documenting the miles vehicle driven for business purposes divided by the total miles vehicle driven for all purposes during the entire year. And then you can deduct the business use percentage of your car’s operating expenses, depreciation, and interest on a car loan.
23. Who is considered a dependent? Answer: If your child was a full time student for any part of 5 months last year, lived with you more than half the year (away at college counts as living with you), and he/she did not provide more than 1/2 of his/her own support, he/she qualifies as your dependent child. Or, if any person lived with you ALL year, his/her gross income was less than the dollar amount allowed for that tax year’s dependent exemption, and you provided more than 1/2 of his/her support, then he/she qualifies as your dependent under the qualifying relative test.
23. If my dependent child had a part-time job last year, should I claim him/her on my return or should he/she claim himself/herself on his/her tax return? Answer: It is perfectly allowable for your dependent child who worked a job to file a tax return to get their refund but not claim their personal exemption AND for you to claim a dependent exemption for that child on your tax return. Nearly always it is more advantageous for the parent to claim the dependent exemption for the child on their return, because the parents are nearly always in a higher tax bracket than the child. IF YOU DO THIS, MAKE SURE YOUR CHILD CHECKS THE BOX ON THEIR TAX RETURN (FORM 1040EZ) THAT SAYS, “IF SOMEONE CAN CLAIM YOU AS A DEPENDENT, CHECK THE APPLICABLE BOX…” IF YOU DON’T, YOU COULD HAVE TO AMEND BOTH YOUR RETURN AND THEIRS, WHICH COULD DELAY YOUR REFUND BY UP TO 6 MONTHS.
24. If myself or one of my consultants are drawing unemployment or Social Security, will working a cosmetics business jeopardize receiving these income benefits? Answer: Not usually, because the condition for receiving those benefits is dependent upon the level of either wages or net profit from self-employment. Most cosmetics businesses, particularly in the first few years DO NOT report a net profit.
25. Do we count flexible spending account, or health savings account (HSA), dollars used toward medical expenses as a deductible medical expense? Answer: Here is a good article regarding HSAs FAQs About Health Savings Accounts. Do not count flexible spending account, or HSA, dollars, because they are BEFORE tax dollars that are being spent. What that means is, they reduce your net taxable wages by the amount of the flex spending dollars withheld. Therefore, because you already receive a tax benefit (in the form of lower taxable wages), you are not entitled to a second tax benefit through being able to count these flex spending dollars toward medical expenses (or child care expenses, for that matter). For reporting purposes, the flex spending dollars get reported through a lower taxable wages on your Form W-2. That’s when and how you get credit for receiving the benefit of your flexible spending account. The decision whether to pay directly for child care expenses or use dependent care benefits through your employer’s flexible spending account can be determined by the difference between your marginal tax rate and the rate of any child care credit for which you would qualify. If your marginal tax rate is 25% and your child care credit rate is 20%, it is better (you save more in taxes) to use dependent care benefits to pay for your child card expenses. However, be aware that the amount of dependent care benefits that exceeds the amount spent on child care is treated as taxable income. Therefore, you will want to allocate your flexible spending account funds toward child care only to the extent that you believe you will use them for child care, and leave the remainder for other things, such as medical expenses, that you might use and not waste the tax deduction.
26. Do we count flexible spending account dollars allocated toward dependent care benefits as qualifying expenses for the child and dependent care credit? Answer: Do not count flexible spending account dollars, because they are BEFORE tax dollars that are being spent. What that means is, they reduce your net taxable wages by the amount of the flex spending dollars withheld. Therefore, because you already receive a tax benefit (in the form of lower taxable wages), you are not entitled to a second tax benefit through being able to count these flex spending dollars toward child care expenses. For reporting purposes, the flex spending dollars get reported through a lower taxable wages on your Form W-2. That’s when and how you get credit for receiving the benefit of your flexible spending account. The decision whether to pay directly for child care expenses or use dependent care benefits through your employer’s flexible spending account can be determined by the difference between your marginal tax rate and the rate of any child care credit for which you would qualify. If your marginal tax rate is 25% and your child care credit rate is 20%, it is better (you save more in taxes) to use dependent care benefits to pay for your child card expenses. However, be aware that the amount of dependent care benefits that exceeds the amount spent on child care is treated as taxable income. Therefore, you will want to allocate your flexible spending account funds toward child care only to the extent that you believe you will use them for child care, and leave the remainder for other things, such as medical expenses, that you may use and not waste the tax deduction.
27. What is the best way for me to organize my receipts? Answer: For most cosmetics Consultants and Directors, we have found that the most time-saving, business productive method to use to organize your records is to use an accordion file that has each file slot labeled as one of the “Operating Expenses” on our “Cosmetics Business” worksheet. Then each day as you generate receipts, you place each one behind the previous receipts from its respective file category slot. This way you don’t have to get on a computer to input your daily expenses, which steals your time each day from doing the truly productive things in your business. At the end of the year you simply add up all the receipts from each slot to obtain each expense category’s total and write down that total on our “Cosmetics Business” worksheet. When adding up your receipts, we strongly recommend that you use an adding machine that has a paper tape so that 1) you can see if you have made a mistake in inputting the numbers to be added and 2) if you do make a mistake, you can simply subtract out the mistaken entry and re-enter the correct one. If you want a spreadsheet that will keep track of your cosmetics business income and expenses, then consider buying our Cosmetics Business Excel Spreadsheet for $25 (get Purchase Order).
28. What constitutes inventory that I have to count? Answer: You are required to count all salable Section 1 product – whether discontinued, limited edition, in the Look Book, or not – as inventory. Even if it is on display or expired (but still usable, and thus salable), as long as you can and intend to sell it, it is inventory. Now if it is Section 2, demos, personal use, spoiled (not usable), or on display and you do not intend to sell it, then it is not considered inventory product for resell.
29. Can I get a last minute tax deduction by placing an order at the end of the year? Answer: Yes, if I am preparing your tax return. Place an order on or just before December 31st so that you do not take physical possession of the product until the next year. Be sure you pick up your order AFTER January 1st. That way you get to deduct the order without having to count the product as part of your ending inventory, because the lower your ending inventory the higher your Cost of Goods Sold.
30. What are the different tax costs in hiring a babysitter, a day care center, or a nanny for caring for my child(ren)? Answer: When you pay child care expenses to an agency (daycare business), they pay and withhold the social security and medicare taxes for their individual child care provider employees – you pay none of those taxes. When you hire an individual child care provider who performs the work from their home, they are self-employed contractors and are responsible for paying their own social security and medicare taxes through self-employment taxes. And when you hire an individual child care provider who performs the work in your home (babysitter or nanny) and you pay him/her over $1,800 during the year, you become responsible for paying their social security and medicare taxes through household employee taxes reported on Schedule H of your personal income tax return. In all these scenarios, you are still eligible to claim a child care credit on your taxes. So, you still get the dependent care tax credit, but depending on the type of child care provider you choose to hire, the level of tax responsibility and cost will vary.
31. What is the difference between repairs and improvements? Answer: Repairs are corrections made to existing buildings, furniture, or equipment that do not increase the value of the underlying asset being repaired. Improvements are upgrades to existing land, buildings, furniture, or equipment that does increase (improve) the value of the underlying asset being improved. In other words a repair fixes what was already there to begin with; most of the time, an improvement is going to replace or add to what was there. For example, replacing a few slats in an old fence would be considered a repair that does not increase the overall value of the fence, but replacing the entire old fence with a new fence would be considered an improvement because it does increase the value of the property upon which the fence sits. This would work the same way for fixing an old broken air conditioner (no increase in value to the A/C or home) vs. replacing it with a new air conditioner (a definite improvement to the value of the home); or, spot painting nicks or smudges on the walls in your home (repair) vs. putting a fresh coat of paint on the entire room(s) in your home (improvement). Generally, replacing entire units – whether they be hardware, ceiling fans, or garage door openers – would be considered improvements to the underlying asset (the home in this case). For those who operate an office from their home, home repairs are reported to us under “Repairs…” in the Office In Home section of our worksheet for your business or ministry, and all improvements – whether equipment, home, or car – are reported to us on the Depreciation Worksheet. Of course, car repairs are reported as “Repairs…” in the Car Expense section of our worksheet for your business or ministry, and improvements are reported to us on the Depreciation Worksheet. Equipment repairs are reported to us as “Repairs…” under the Operating Expenses section of our worksheet for your business or ministry and deducted per the business/ministry use percentage, just as all improvements are depreciated per the business/ministry use percentage.
32. What information do you need me to provide in order for you to report the sale of my home on my income tax return? Answer: If we have claimed an office in the home for your residence, then I should have the adjusted basis of your home – consisting of original purchase price, plus closing costs to buy and re-finance, plus all the improvements made to the home during the period of ownership – in your computer tax file. Upon sale the only things I should need in addition to this information I already have are the sales price, closing costs upon sale (provide settlement statement), and expenses incurred to fix up your house and get it ready for sale. I recommend you write down a list of the fix up expenses and provide me that total, along with the settlement statement from the sale of the home. If I don’t already have the home in your computer tax file, then I need all of the above information. IF YOU HAVE NOT USED YOUR HOME AS AN OFFICE OR FOR RENTAL USE, AND YOU HAVE LIVED IN IT MORE THAN TWO YEARS, AND YOU DID NOT INCUR A GREATER THAN $250,000 ($500,000 FOR MARRIED FILING JOINTLY) CAPITAL GAIN, THEN YOU DO NOT HAVE TO REPORT THE SALE BECAUSE YOUR CAPITAL GAIN IS EXCLUDED FROM INCOME, AND ANY LOSS FROM THE SALE OF A PERSONAL RESIDENCE IS NOT DEDUCTIBLE.
33. Are funeral expenses tax deductible? Answer: No.
34. Are legal expenses tax deductible? Answer: Generally, legal expenses are NOT tax deductible, EXCEPT to the extent that they are incurred to collect TAXABLE income.
35. Are divorce expenses (legal and otherwise) tax deductible? Answer: Generally, divorce expenses are NOT tax deductible, EXCEPT to the extent that they are incurred to receive tax advice.
36. Are hair and nail expenses deductible in my cosmetics business? Answer: No. I know from personally asking an IRS auditor this question, and she said the only time hair and nail expenses are deductible is when they are incurred by a model IMMEDIATELY before a photo shoot. Moreover, the model MUST go directly from the hair and nail salon to the photo shoot without making any stops in between for personal activity.
37. Should I include storage space I use in my garage as part of my total business square footage used? Answer: If you include the square footage of space used in your garage for office space, then you must include the total square footage of the garage in with the total square footage of the climatized house, which may dilute the business use percentage. My advice is to only include the garage space used IF your percentage of business use of the garage is GREATER than the percentage of business use of the main home. If you drive a company car that is used predominantly for business, you could make the argument that the storage space for that vehicle used primarily for business should be included as business space for computing your office in home business use percentage.
38. How do I explain to a loan officer that my business income is actually higher than it looks on my tax return? Answer: I am glad you asked. I have written a letter to address that very issue. Click her for the Tax Advantages of Home Office.
39. How/Where do we report discounts, hostess credits, and/or non-recovered sales tax? Answer: Because we report all the money you collect in your cosmetics business (see “RECEIPTS” section), including sales taxes, we can recover all the sales taxes you pay to the company by taking a separate deduction (see “COST OF GOODS SOLD” section). Therefore, using this method of reporting both sales tax as income and sales tax as an expense, there is no non-recovered sales tax. We recover it all. Moreover, any discounts or hostess credits are captured in your “Net Sales Including Tax” figure. Your sales ticket already factors in any discount given to your customer. For example, if I sell $100 worth of cosmetics, give a 20% discount, and charge 8% sales tax on the full (undiscounted) retail amount, my sales ticket would report a total amount collected of $88 ($100 – $20 discount + $8 sales tax). So by adding up all your sales tickets – $88 for this one, you automatically account for any discounts (it works the same for hostess credits) and non-recovered sales tax (should you choose NOT to collect the full sales tax amount).
40. What do I do if I am a victim of identity theft through someone filing a fraudulent return in my name? Answer: This has become a serious problem for U.S. taxpayer and is one of the IRS’ primary objectives, although taxpayer reports of identity theft were down 50% in 2016. Here is a concise list of the steps to follow if this happens to you U.S. News and World Report article.
41. Are the costs for purchasing Director suits and the expense to dry clean them tax deductible as business expenses? Answer: If you wear your Director suit into an IRS office, you could show an auditor that inside the inner lining of the suit jacket it says “Made EXCLUSIVELY for Mary Kay Cosmetics.” That means NO ONE OUTSIDE OF MARY KAY can acquire the Director suit…just like no one outside of a police department can acquire a police officer’s uniform. In addition, just like when you walk through any downtown, you can distinguish between a police officer and a civilian citizen – or between the airline pilot on a plane and all the businessmen wearing suits on that plane, when you walk into the convention center at Mary Kay Seminar, you can distinguish between the Directors in their unique EXCLUSIVE suits, the National Sales Directors in their unique EXCLUSIVE suits, and the Consultants who are wearing “street wear” that any woman could buy at a department store. And since these ARE uniforms that distinguish your position within the company, then the cost for purchasing these uniforms is tax deductible, and the expenses incurred for dry cleaning on these special clothes categorized as “uniforms” are deductible as a business expense as well.
42. Is mileage driving to and from work deductible? Answer: No. Those are considered “commuting” miles, and commuting mileage is NOT deductible.
43. Can I pay my kids in my business and deduct it? Answer: Yes. Payments to family members for work performed is income to that family member. However, if the family member’s income falls below the minimum amount required to file a tax return (typically, the annual standard deduction for a single taxpayer), then there is no income tax owed on the income, although there may be self-employment tax if the family member is treated as an independent contractor vs. as an employee. Children under age 18 working for parent-owned unincorporated businesses (sole proprietorships) are exempt from FICA (social security and medicare taxes) and FUTA (unemployment taxes), with the FUTA exemption extending until age 21. These exemptions do not apply to a parent-owned corporation. A child employed by a parent shifts income from the parent’s higher tax bracket to the child’s lower tax bracket. Although the child must actually render legitimate services as an employee of the business, actually be paid for those services, and the payment must be reasonable for the work performed. This strategy can be used to 1) have a way for your kids to work for their personal expenses (car, phone, insurance, etc.), 2) contribute to retirement plans for the kids, 3) reduce the parent’s income to qualify for certain tax credits, and more, due to the tax-deductibility of these payments.
44. My car dealer says I can deduct 100% of the cost of my car that I use in business as a business expense. Is that right? Answer: No. Your car dealer is probably not telling you two very important elements in claiming a business deduction for buying a car under Section 179 of the Internal Revenue Code. First, you may claim a Section 179 expense deduction for a business vehicle up to certain limits only to the extent (percentage) it is used for business. Secondly, your car dealer is probably not telling you that by taking a Section 179 expense deduction, you may be claiming multiple years worth of depreciation, and if you do not hold the vehicle for the required 6 years of depreciation or its business use falls below the percentage use experienced in its first year, then in that future year you will have to pay back the excess depreciation that you claimed in the vehicle’s first year.
45. Getting a large tax refund is a good thing, right? Answer: Although everyone likes getting a large amount of money from any source, and tax refunds are no different. Remember that the key word in “tax refund” is “re-fund.” That means you are getting back money that you had previously funded for a specific purpose, in this case taxes. Most financial experts will tell you that a tax refund is likened to an interest-free loan, and some will say that with getting back months later only a portion of what you paid in, you are actually losing money in the form of reduced purchasing power due to inflation. Many will advise you to change your withholding allowances with your employer to have them withhold less money for federal income tax, then take that additional freed up money and invest it in your employer’s 401(k) plan or your own IRA. And remember 401(k) contributions reduce your taxable wages, consequently producing a guaranteed return equal to the percentage rate of your marginal tax bracket.
46. Did the Tax Cuts and Jobs Act of 2018 remove the requirement that I have to count the inventory in my cosmetics business? Answer: There are several accounting and tax issues that complicate this question for the cosmetics business Consultant or Director. For instance, if I have a client who has had her cosmetics business for a long time and prior to 2018 had built up a $40,000 inventory (believe me, I have or have had clients like that), how can I justify that that inventory suddenly went away on 1/1/18, increasing her expenses by $40,000 and still clearly reflect the business income for this client? Or then there is the complication of changing accounting methods and the tax implications it triggers. Moreover, 99.9% of the thousands of cosmetics business Consultants or Directors to whom I have spoken do not use or consume (sell) 100% of the inventoriable items (Section 1) they acquire in the same year they acquire them. The argument for not counting inventory could be used with a manufacturing business that buys materials and supplies to produce a product and then inventories any leftover materials and supplies. They shouldn’t have to keep track of those excess materials and supplies that were not used in the manufacturing process during that year and record them as inventory. Instead, I see cosmetics business Consultants and Directors as pure retailers who buy a finished product at wholesale and inventory it until they can sell it at retail. As such, beginning and ending inventory valuations should be factored into an accurate computation of the Cost of Goods Sold deduction. For all these reasons, like other tax preparers who prepare tax returns containing a cosmetics business, I choose to require my clients to count their inventory every year and report it to me on our Cosmetics Business tax worksheet.
47. Are life insurance death benefit proceeds taxable? Answer: No. That is a unique benefit of life insurance proceeds when you are the (a) designated beneficiary.
48. Are inheritances taxable? Answer: If you inherit cash, or personal property that you and/or your co-heirs subsequently convert to cash, THAT IS NOT TAXABLE. Alternately, if you inherit capital assets, such as real estate, stocks, bonds, or mutual funds, while the receipt of those assets into your, and potentially your co-heirs’, possession is NOT a taxable event, a subsequent sale of those capital assets IS a taxable event. The capital gain/loss must be computed between the stepped up cost basis of each capital asset on the date you, and potentially your co-heirs, inherited the asset and the sales price on the date of sale. Finally, if you inherit a retirement plan, you become responsible for the remaining tax liability of that retirement plan.
49. Should I enroll in the IRS’ monthly Advance Child Tax Credit payment program? Answer: The American Rescue Plan enacted in March 2021 called for an increase in the child tax credit from $2,000 to $3,000 per child under age 17 and to $3,600 for children under age 6. Moreover, the bill called for advances of this credit to be paid monthly beginning in July 2021 of $250 per child under age 17 and $300 per month for children under age 6. As a result, one half of the credit for tax year 2021 will be paid in advances, and the other half will be credited on the tax return upon filing. The IRS will use information from prior returns to determine each taxpayer’s eligibility to receive these advance payments and will automatically enroll them in the program. However, you may unenroll, if you so choose, by going to the IRS’ unenrollment tool. As one who values individual liberty, personal responsibility, and self reliance, and who has an aversion to bigger government with more of its control over our lives, my personal opinion is that I do not like the idea of citizens having one more way to receive money from the federal government on a regular basis and thereby be lulled into becoming dependent on government as their source of provision or feeling entitled to receive it.
50. Can you prepare my tax return if I have traded in crypto currency? Answer: What I learned at tax school was basically 3 approaches for handling a client who chooses to trade in crypto currency: 1) charge them $200-$300 per hour for the enormous amount of time it will take to compute their cost basis in the crypto (which I will not do); 2) have the client purchase software (one client used a software program called Koinly and seemed to like it) to compute their own cost basis of their crypto; or 3) tell the client to go somewhere else to have their taxes prepared. As noted, I will not be computing the cost basis for any clients; I prefer the second option; but I will accept the third option (go somewhere else) if the client chooses NOT to procure the software and compute their own cost basis themselves.
51. How can I speak to a live person at the IRS? Answer: The IRS will only talk to the taxpayer. However, I checked with the audit protection plan people at Protection Plus, who provide our audit protection for $54.95. Their representative gave me the following steps to pass along to you for how you can speak to a live person at the IRS. She did say that you might have better luck calling later in the week (Thursday or Friday) and later in the day,, because everyone is attempting to call in on Monday at 7:00 AM.
Call the IRS: 1-800-829-1040 hours 7 AM – 7 PM local time Monday-Friday
- Press 1 for English.
- After selecting your language, choose option 2 for “For answers about your personal income tax…”
- Press 1 “For questions about a form you have already submitted or …”
- Press 3 “For all other questions about your tax history or…”
- Press 2 “For all other questions about your tax history or payment…”
- IMPORTANT: When it asks you to enter your SSN or EIN to access your account information, do not enter anything.
- After it asks twice, you will get another menu
- Press 2 for “personal or individual tax questions”…
- Finally, press 4 and you get in line for a live person.
52. Why did I receive a Form 1099-K and do you need to see it? Answer: The Form 1099-K is reporting to the IRS (and you) the amount of credit card sales transacted within your business that were processed by the issuer of the Form 1099-K. As long as your total net sales transacted by cash, check, money order, Venmo, Zelle, and credit card (i.e,, all methods) exceed the amount reported on Form 1099-K, then I don’t worry about what’s on the 1099-K; I assume the number you report to me includes the 1099-K amount, and is the true total for all your sales within that business. In other words, I report the whole total – credit card plus all other methods, not just the credit card portion. Where a Form 1099-K can pose a problem is when a taxpayer has multiple businesses and they run their credit card sales for all the businesses through one credit card terminal. In that instance, you would be reporting part of the entire credit card transactions on a single business, and you might have a case where the sales for that single business would be less than what the IRS sees on the 1099-K, which would look suspicious to them – as if you were hiding, and not reporting, all your income. The solution in that case is to have separate credit card terminals, and corresponding account registrations, for each business so that you receive separate Forms 1099-K for each separate business.