If you are self-employed or have freelance income (e.g., consulting fees) and your federal tax return is currently on extension, there is still time to contribute to a Simplified Employee Pension (SEP). In fact, you have until October 15, 2014 to set up and fund a plan for tax year 2013.
A recent survey showed that seven out of ten self-employed individuals are not saving regularly or at all for their retirement. If you fall in that category this may be the opportune time for you to reconsider your saving strategies and take a proactive approach towards your retirement goals.
A SEP IRA has a broad appeal among self-employed taxpayers for its numerous benefits:
Example – Tax savings with the maximum contribution of $51,000 –
If you are starting a new business, have been a small business owner for years, or simply have some consulting income on the side, don’t overlook the great benefits of a SEP IRA. Contact your Aronson tax advisor or Lex Ruygrok at 301.231.6200 for more information.
Does your job require travel away from home? Expenses for temporarily working away from your home are deductible if properly documented.
In summary opinion 2014-10, the Tax Court ruled in favor of the taxpayer, that his six-month work assignment, which was over 1,000 miles away from his home, was temporary. However, his expense deduction ended up being sharply limited because the taxpayer could not produce the proper documentation as required under the code.
Time and again, we read about and meet with taxpayers who have incurred legitimate expenses, but fall short on the documentation front. Proper substantiation is crucial. While it does not require expensive solutions, it does require time and discipline.
Substantiation means proving what the expense was (via a receipt) and its business purpose (via contemporaneously noting this, if not evident from the receipt. Expense substantiation for travel away from home must meet the extra substantiation requirement outlined in Reg. §1.274-5T(b)(2). The following is excerpted directly from this regulation:
The key to compliance is contemporaneous substantiation. The IRS and courts take a dim view on reconstructions of mileage logs and expenses long after the fact. Making this part of your routine will go a long way to successfully defending such deductions in an audit, as well as helping to ensure that all expenses are captured. There are even apps available for smartphones that provide the ability to record these expenses as they occur.
For further information or if you are faced with an IRS audit on this or any other issue, please contact Larry Rubin, CPA, Aronson’s tax controversy practice lead, at 301.222.8212.
Faris R. Fink, IRS commissioner of the Small Business and Self-Employed Division, announced that 2014 will be the year the IRS moves its examination focus from C corporations to flow-thru entities. A flow-thru entity is any business whose tax is imposed at the owners’ level, on their individual income tax returns. Such entities include partnerships, limited liability companies, and S corporations.
In 2011 the average audit rate for corporate and individual returns was about 1%. For flow-thru entities, it was about 0.4%, reflecting the IRS’s long-standing focus on corporations. Given the rising number and complexity of flow-thru entity returns, however, the IRS believes that the level of noncompliance, unintentional or otherwise, needs to be more formally addressed. Flow-thru returns also provide a gateway to examining the owners’ individual returns and related entities.
Past efforts at targeting the noncompliant, while not imposing exam-induced hardships on the innocent, has been a challenge for the IRS. Various TIGTA (Treasury Inspector General for Tax Administration) found that the incidences of no-change exams was over 50% for flow-thru entities, significantly higher than for individuals and corporations.
While the IRS works out how they are going to do a better job at selecting returns more likely to bear fruit, we expect agents to concentrate on the following, among other areas:
Submitting a tax return to the IRS is the first step in a potentially disastrous relationship. Investing the time necessary to prepare a return that will withstand IRS scrutiny is the best defense, not only to achieve a no-change audit but to also eliminate the risk that other returns will be pulled into the exam. At minimum, you should understand what aspects of the return carry risks of an adverse finding, and make an informed decision on those tax positions prior to filing.
For further information or to discuss your specific situation, please contact your Aronson tax advisor at 301.231.6200.