PPP and COVID-19 Tax Updates and Information

Blog

Open Mon-Fri, 9am-5pm
Office: (212) 279-9800
info@robertprussocpa.com

Client Portal

Tax FOMO: Are You Losing $1,000s in Tax Savings?

Posted on February 13th, 2019

The Power of Hiring an NYC CPA (And What Could Happen if You Don’t)

You know about FOMO or “fear of missing out” when it comes to skipping a good NYC party. You should also have a very healthy fear of losing out on tax savings. How? By trusting anyone other than a qualified NYC CPA to handle your taxes!

Now, if you have a very simple tax return, it’s perfectly fine to go the do-it-yourself route. However, if you’re a small business owner, make over six figures, or have multiple investments, at least meet with an NYC CPA – and do it ASAP…before the tax year really gets going.

Want proof of the power of meeting with an NYC CPA? We’ll share 3 examples of what could happen if you don’t…

Quick Note: These examples are based on real scenarios, but names, businesses, and other details have been changed to protect privacy.

 

Scenario #1) Sarah Lost $40,000. Ouch.

Meet Sarah: a very successful graphic designer who operates as a sole owner LLC. Sarah had a strong year in 2019. In fact, her net income after expenses from her business was an impressive $220,000 and her taxable income was $212,000.

Sarah has always done her own taxes using online programs, but as 2020 gets underway, she decides to turn to an NYC CPA. After all, she’s heard about a big 20% tax deduction for qualified business income (QB1), so she’s excited to hear what the accountant has to say…

“Sorry, Sarah, you are ineligible for the 20% tax deduction.”

How it Happened

Sarah lost out on thousands in tax savings, just by having only a few extra bucks in net income! How did it happen? Sarah made the mistake of going a whole tax year without getting professional advice. If she had come to an NYC CPA like Robert P. Russo CPA in early 2019, we would have explained the new 20% QBI deduction to her.

How We Could Have Helped Sarah

As her NYC CPA, we’d ask Sarah for her sales projections for the year. We’d warn her that if she anticipated that her taxable income over is over $210,700 – she was in the “danger zone” of losing out on the deduction. Here’s why: When the new Tax Cuts and Jobs Act (TCJA) was signed into law in 2017, NYC CPA and accountant firms jumped into action, ensuring they understood the new law.

The most important caveat? The 20% deduction begins to phase out when QBI goes over that year’s threshold. Here are the latest thresholds for review:

2019
Filing Single: $160,700-$210,700
Married Filing Jointly: $321,000-$421,000
2020
Filing Single: $163,300-$213,300
Married Filing Jointly: $326,600-$426,600

When the higher end of each threshold is reached? The 20% deduction just disappears unless certain conditions are met (which your NYC CPA can explain to you).

So yes, Sarah lost over $40,000 in potential tax savings simply because she generated a few extra bucks in income! Ouch.

How to Prevent It

To maintain the credential of CPA, an accountant must acquire at least 40 CPE (continuing professional education) credits each year. The best NYC CPAs go above and beyond, achieving over 100 hours like the CPAs at Robert P. Russo CPA.

Why does this matter to you? It means your CPA is attending seminars and training sessions to stay on top of the latest tax laws, like the new tax law.

What Sarah Could Have Done… 

Had Sarah met with a qualified NYC CPA in early 2018, they would have explained options to her to ensure she could take most or all of that 20% deduction.

For example, we would have told Sarah to consider forming an S-corporation or turning one of her freelancers into an employee. If you are in a situation similar to Sarah’s, don’t wait: contact an NYC CPA right now to explore your options

Scenario #2) Maurice Missed Out on Nearly $20,000 in Deductions and Write-Offs Over 10 Years

For the past decade, Maurice has been an independent contractor for a large company’s human resources department. He works from his rented apartment in a dedicated office, where he is on the phone almost all day – interviewing potential candidates.

Maurice’s friend keeps pressuring him to take the home office deduction (after all, that’s what the friend’s NYC CPA recommends!). Maurice also has a large phone bill, but he uses his phone for personal use as well, so he neglects to take that deduction as well.

How it Happened

Even though Maurice’s friend said his NYC CPA recommends the home office deduction, Maurice has heard rumors. Taking a home office deduction will trigger an IRS audit! Plus, he rents his apartment and doesn’t own it, so he can’t take the deduction anyways, right?

How to Prevent It

Any qualified NYC CPA will set the record straight: It’s a myth that the home office deduction draws the attention of the IRS. If you run your own business from home – whether it’s owned or rented – you should always take the home office deduction.

However, the IRS deems that a home office must be used “exclusively and regularly” for business purposes. Any good NYC CPA will make that very clear! No guest room, no child’s playroom…it must be 100% office space.

Next Steps to Take

Now, the next step is to decide how you will deduct your home office expense. You can either take a set $5 per square foot deduction for the size of your home office – up to 300 square feet.

The other option involves deducting a percentage of your rent or mortgage, utilities, repairs, and more, based on how much space your home office takes up. An NYC CPA can help you decide which method is right for you.

If you use the percentage method, here is what you can deduct at the percentage you have calculated:

  • Rent or mortgage
  • Homeowner’s insurance
  • Utilities: heat, electricity, garbage collection, security, property maintenance, water bills
  • Cellphone or landline fees (calculate how much is used for business vs. personal).

What Maurice Could Have Done Instead…

In the example of Maurice, had he gone to an NYC CPA 10 years ago, he could have saved thousands of dollars in home office deductions. Let’s say his home office is 150 square feet. Using the simple method, he could have deducted $750 each year over 10 years…that’s $7,500 in lost deductions!

Because Maurice didn’t get help from an NYC CPA, he never deducted his monthly phone bill either. He pays $100 a month for his phone bill, and uses the phone 90% for business. He could have written off $90 a month over 10 years…that’s over $10,000 in missed savings!

Scenario #3) Sean Lost Out on a $8,000 Tax Advantage (an NYC CPA Nightmare!)

By day, Sean is an investment banker. By night? He’s an author. In 2018, Sean spent over $10,000 on promotions, public relations, and advertising in an effort to attract a publisher. Unfortunately, Sean only generated $2,000 in income related to his writing (he was hired to speak to other aspiring authors).

Writing is more than a hobby to Sean, it’s a second job. But the IRS doesn’t see it that way. Without consulting with an NYC CPA, Sean tried to deduct that $8,000 loss on his tax return and the IRS said…no way, and applied the Hobby Loss Rules.

How it Happened

Because Sean had not met with an NYC CPA, he didn’t realize that his “second job” was just a hobby in the eyes of the IRS. Even though every dollar of the $10,000 Sean spent on promoting his writing was for a valid reason, he neglected to keep receipts, a record of meetings, and he didn’t have a business plan.

Sean didn’t meet a single one of the 9 factors that the IRS uses to determine business vs. hobby.

How to Prevent It

Yet again, it’s critical that you meet with an NYC CPA so that you can avoid losing thousands of dollars. Any good NYC CPA would have told Sean he needed to “carry on the (writing) activity in a businesslike manner and maintain complete and accurate books and records.”

He also should have sought advice from reputable sources like a local S.C.O.R.E office, to prove he was making an effort to be profitable.

By now, you should be feeling a little tax FOMO. That’s a good thing! It means you’re afraid of missing out on the tax advantages you deserve. You work hard for your money, a great NYC CPA will work just as hard for you…helping you take every possible tax deduction!

Contact Robert P Russo CPA PC to learn about ways we can help you save money through smarter tax decisions. We don’t want you to miss out!

Tags: ,

« »

Comments are closed.