We recently covered the cost of tax compliance in this recent article. The costs are a direct result of how companies face a myriad of tax compliance issues, even in the wake of tax reform that is supposed to boost bottom line results. The top ten federal tax compliance issues for businesses haven't changed much in the wake of this reform. These are:
- Compliance Costs. One of the biggest issues that businesses face regarding federal taxes isn't payment. It's the cost of compliance. And this burden hits small businesses proportionately harder than their larger counterparts. According to the IRS, companies with under $1 million in revenue bear nearly two-thirds of business compliance costs. If your firm has found a way to efficiently tackle federal tax law compliance, it is winning a majority of this battle.
- Business Organization. While the new tax law has made some changes, the tax code has historically offered more advantages to small businesses over larger ones. Small businesses can structure themselves in a way that allows them to avoid the double taxation associated with income earned by C corporations. When first organizing, a company should consider the tax implications of their choice. For example, pass-through businesses (sole proprietorship, partnership, LLC, S corporation) face just one layer of tax.
- Danger of Underpaying Taxes. When a company underpays its taxes, there are several potential issues present. First, small businesses are more likely to be in this situation because they often deal in cash. Some transactions might not be reported to the IRS, while expenses could be overstated at the same time. Whether inadvertent or intentional, these events put a small business at a disadvantage due to higher compliance costs and the potential for penalties.
- Changes to Section 179. Section 179 has always been a boon for small to mid-sized businesses, provided they understood its provisions and benefits. In the past, a business could "write off" the cost of certain property placed into service during the tax year, with some exceptions. The maximum annual deduction was $500,000 up to a phase-out of $2 million. Now, there are additions to what is allowed, as well as bonus depreciation for several years. The limits have also been increased to $1 million annually and a phase-out of $2.5 million.
- Expiring Provisions. When your business becomes accustomed to taking certain deductions or credits, it could find itself in trouble if those provisions expire and you aren't keeping track of these changes. For example, the end of 2019also marks the expiration of the work opportunity credit, new markets tax credit, and employer credit for paid family and medical leave. Certain incentives for investment in wind renewable power and the look-through treatment of payments made between controlled foreign corporations (CFCs) that are related, also expire at the end of 2019. There are other credits that expire in 2020, 2021, 2022, and 2023.
- Cash vs. Accrual. When it comes to corporate taxes and income & expense reporting, timing matters. The accounting method that your company chooses will dictate how you report to the IRS, but it must be consistent. The IRS allows a business to choose between a cash or accrual method if you meet certain conditions. As a small business, your average yearly gross receipts over the past three years must be between $1 million and $10 million. Under the cash basis, you record income as you receive the payments and expenses when you pay them. Under the accrual method, you report both as they are incurred, regardless of when the money comes in or goes out. Once you file a tax return using one method or the other, you must stick with that method unless given approval by the IRS to change.
- Employment Taxes. Businesses that have traditional employees will need to comply with a wide range of employment tax issues. For example, employers must make sure that they are properly withholding taxes from each employee's paycheck. This includes federal income, Social Security, and Medicare taxes. An employer must also pay those tax payments on behalf of employees. Failing to do this properly could lead to an audit and serious legal and financial issues. In FY2016, the IRS levied fines of over $6 billion on employers related to penalty notices on employment taxes.
- Independent Contractors. For businesses that hire contractors, there is another level of complexity come tax time. Even though your business has no obligation to withhold employment taxes, it must still keep track of expenditures and then report them annually via a Form 1099 (if the payments were $600 or more). You can certainly run into compliance issues if your idea of an independent contractor conflicts with the view of the IRS. If the IRS sees these workers as employees, you can expect to receive a demand for unpaid payroll withholdings.
- Timely Filing. One of the quickest ways to run afoul of the IRS is to turn something in late. If you are a U.S. business, there are many tax deadlines to comply with, and this is something that you entrust to your finance team. Assuming you operate on a fiscal year that is the same as the calendar year, your first tasks begin in January. (Note: these are 2018 dates.)
- January 31 - Deadline to mail employee W-2 and most 1099 forms.
- March 15 - Deadline for S corps (Form 1120S) and partnerships (Form 1065).
- April 17 - Deadline C corps (Form 1120)
- Estimated Quarterly Tax Payments (Form 1040 ES) are due: Apr. 16, June 15, Sept. 17, Jan. 15, 2019
- State Changes. Even though it's not a federal tax compliance issue, the response of individual states to the recent tax law changes has been swift in some places. Several states are imposing their own healthcare reporting requirements after the federal government nixed the Affordable Care Act individual mandate. Some states are also considering, or have already passed, employer payroll taxes to mitigate the new federal limitation on state and local tax deductibility.
Steps Businesses Can Take for Tax Compliance in 2018 and Beyond
As business owners and managers, you have a responsibility to meet a wide range of challenges associated with running your business, serving customers, taking care of employees, and remaining compliant with applicable regulations. Paying taxes is a fact of life and understanding IRS rules is essential to the success and longevity of your business.
Before you can even begin to tackle state-specific regulations, your company's financial team must first understand the federal requirements for your business. Your company's CFO is ultimately responsible for ensuring that your company follows the rules at every level, while at the same time making sound financial and strategic decisions for the business. Having the right expert tax resource on your team is essential.
There are now more automated systems in place to help companies stay compliant with federal taxes. For example, there will be deadline reminders as well as updates for tax law changes in most systems. Your company should also consider having compliance "check-ins" throughout the year with your tax expert to review any evolving issues or opportunities.
As your company grows, it's filing requirements are going to evolve. Likewise, the tax code in this country has scheduled changes, and there may also be some additions that are passed during the year. Staying up to date on these matters is not only your responsibility but also the best way to ensure the longevity and profitability of your business. Your finance leader should maintain open and ongoing communications with your tax expert throughout the year.
Do you have more questions? Let us know. We would be happy to introduce you to someone with the tax expertise you need.