Approaching the Build Back Better Tax Act: How Should You Prepare?
If you haven’t already heard, new tax legislation is on the horizon and will make way for some changes when it comes to tax provisions. For small business owners, one of the biggest take-aways is that more examinations are coming. As the IRS’ funding is increasing significantly and they plan on hiring more examiners, businesses need to be prepared and up to date.
An Overview
As it is, the IRS has already been asking questions about virtual currency and have been scrutinizing the Earned Income Credit for years. Now, we encourage you to be prepared for even more questions. Not only is the IRS looking to earn more revenues on taxpayer penalties, they are looking to assess more tax preparer penalties.
A Comprehensive Go-to List of Documentation You’ll Need to Prepare
Donations
When it comes to donations, you’ll need good documentation. Ensure that you received confirmation of all your donations and that the letters, when applicable, have the phrase, “No goods of services were received in exchange” included at the bottom of this letter. If you did receive a gift (e.g. a t-shirt, a round of golf, a meal or a silent auction item), make sure the value of this item is backed out of the donation amount.
Partnerships
If you are currently involved in a partnership, make sure your partnership agreement is current and up-to-date with all details spelled out in writing. Do you allow for unreimbursed partnership expenses or special allocations? What happens when one partner/member wishes to leave? All these questions need to be addressed in an agreement with all the proper signatures in place. Leave no room for further questioning.
Company Expenses
Running a company comes with its own expenses where business can happen any place any time. Are you keeping track of all company minutes and proving you’re having your necessary board meetings? The IRS will want to see your official and legal records that indicate you’ve been having meetings to update your board members; failure to do so can put your business in risk of liability protection, tax advantages and other benefits. Be sure to keep on file any of the loans you have to or from a shareholder and how you are paying or receiving interest payments.
Corporate Culture
When it comes to expenses on corporate culture, there’s one word to remember: receipts. Whether it’s business lunches, business dinners, gifts to staff on their birthdays or to new employees, it’s always best to keep receipts on file to track every charge on the corporate card. Prove every expense and every transaction— you never want to have to explain the gaps in the balance sheet to your shareholders or the IRS.
Third Parties
Outside payment methods are becoming more and more popular, especially when working with third party contractors and vendors. If you are using Venmo, Zelle, PayPal, etc., be sure you are noting down each payment. When working with vendors, ensure you are tracking each one for potential 1099s filing requirements and filing ALL required 1099 forms. Do you have current W-9 forms on ALL your vendors? Be sure to keep all contractor agreements and workman’s comp insurance on file— and that your policy does indeed cover a subcontractor. If so, does your subcontractor carry insurance for anyone that they bring to your location?
Roth IRA
The future of back-door Roth IRAs is uncertain. 2021 may be the last year that this will be an option and the amount a taxpayer can have in a traditional or Roth IRA may have a maximum.
Estate Taxes
Another uncertain item is what the estate tax exclusion will be in the future. Currently this is set at $11.7MM, but may be reduced to $5MM. When was the last review of your estate plan? Are you prepared for the reduction? Talk to a CPA or accountant to be prepare for all avenues.
Beyond the Check-List…
Of course, like with any act, there are many changes that can go on for pages whether it be the impact on the capital gains rates, tax brackets, RMDs (Required Minimum Distributions from retirement accounts) and energy savings credits.
It’s unclear today how the Build Back Better Tax Act will impact your tax bill. With any act in its beginning stages, these are not finalized as of today. This act has only been revised through the House of Representatives; it will be interesting to see what the Senate will have to say.
In the meantime, stay alert for the passing of the Build Back Better Act, keep your documents in order and filed, and always remember that we at Jeanine Hemingway CPA are here for your support.