Dollars & Sense
Projections, IRS Audits, and Independent Contractors
INCOME TAX PROJECTIONS
A tax projection is a mini tax return using actual results from current operations annualized to reflect what a full year result would be. When doing a tax projection, your tax professional uses that profit, annualizes it and uses the expected profit for the year with current tax information such as equipment changes to calculate and project your tax liability for the year. Having this information before the end of the year can mean the difference between success and failure for many of you.
As a business person, you need to know in July or August whether you will owe money the following April to the IRS or if you are going to be receiving a refund. You need these answers in order to be able to plan your business decisions for the next six or twelve months concerning the purchase of a new truck, doing a major overhaul, fixing up your home, planning retirement or just taking time off. Your tax position can best be determined by your tax preparer so that potential problems can be spotted or estimated tax payments can be adjusted. A projection based on your actual operations through June can leave you enough time until the end of the year to do proper tax planning.
ARE YOU ASKING FOR AN IRS AUDIT?
How is your income tax return picked for an audit? The most common way a return is chosen for audit is not because of one item, but by a group of items such as various deductions being too high compared to the amount of income that the taxpayer has reported. Individual areas that might result in an audit are mortgage interest being too high relative to the amount of your income, travel expenses too high, and meal deductions too high. Another method that the IRS uses to determine whether or not to audit an income tax return is commonly known as the “red flag” theory. Under the “red flag” theory, the IRS may pick your return for audit because of one particular item on the return. Business use of home, though a legal deduction, may cause your return to be audited.
Your tax advisor should be able to guide you in what direction to go. If you have an unusual situation where your deductions are not in synch with the amount of income that you report, but you have support for your deductions, then by all means claim those deductions. For example, if you are a family of four and you have a mortgage of $15,000 interest expense, property taxes and a reasonable amount of charitable donations, you should at least have the income to support those deductions and maintain a reasonable standard of living. Generally speaking, a tax return has to make sense. Your income and deductions should be in line with your standard of living.
The IRS actually compiles statistics as to what the average tax return looks like. For instance, if your adjusted gross income is between $30,000-$40,000, they are looking at a property tax deduction of approximately $2,700, mortgage interest in the amount of $5,500, medical and dental expenses in the amount of $3,100 and charitable donations in the amount of $1,200. If your adjusted gross income is $40-$50,000, your itemized deductions would include taxes of $3,300, mortgage interest of $6,000, medical and dental expenses of $4,100 and charitable donations of $1,700. Again, these are averages and if your mortgage interest happens to be more in the same adjusted gross income bracket, then you claim it.
EMPLOYEE VS INDEPENDENT CONTRACTOR
For truckers, the issue of independent contractor is a constant one. Based on common law to determine whether the employer/employee relationship exists, it focuses on whether the employer has the right to control not only the result of the worker’s service but also the means by which the worker accomplishes the result. Currently, the IRS uses a 20 factor test to determine whether a worker is in fact an employee or an independent contractor. The test would be satisfied if the worker has a significant investment in the equipment, will incur significant unreimbursed expenses, agrees to perform services for a particular amount of time, or to complete a particular result, is paid on a commission basis. The services to be performed by the worker must be performed pursuant to a written contract between the worker and the service recipient and the contract should provide that the worker would not be treated as an employee. The independent contractor should be using their own equipment.
This article has been presented by PBS Tax & Bookkeeping Services, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153. See our website at www.pbstax.com.
Please remember everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.