Managing your merchandise effectively can mean the difference between a loss or a profitable year. There are certain methods of accounting for inventory set by the Internal Revenue Service that impact how your taxes are filed. Inventory includes a variety of items, such as raw materials and finished products.
FIFO and LIFO methods
Values of items in inventory are not always the same. If you can’t identify which item matches up to which particular invoice or cannot determine the cost of an item, then there are accounting methods to help you identify values. Here are two commonly used methods:
First-in first-Out (FIFO) – Under the FIFO method, the items first sold or used are assumed to be the first items purchased as inventory. At the end of the year, costs are assigned to the remaining inventory of what you produced or purchased at the most recently incurred price. FIFO is a pretty logical approach and most businesses operate this way.
Last-in first-out (LIFO) – A method that lies at the opposite end of the spectrum. LIFO assumes that the most recent items in the inventory are the first to go. It can be often used to adjust profits, such as during product price inflation, which may lead to a company lowering its applicable tax bracket.
Often because it requires specific permission from the IRS with IRS Form 970, LIFO is not as common. It is also not accepted in international financial accounting standards. So, most companies prefer to use FIFO.
Managing how your business records inventory can be a daunting task. Having a skilled accounting squad at your side presenting solution for the needs of your business is the best way to go. MiklosCPA, a California-based firm, has helped many businesses with their accounting and taxation needs through our “virtual office” services. Give us a call if you want to learn more about our services! Also check back for future tax tip articles like this one here on our website and on our socialmediapages.
Whether you are establishing a new business or your business is expanding, the time frame (or period) in which your business maintains its records is important. There are certain accounting periods you can choose from; such as calendar year or fiscal year. As a business owner, you must decide how to maintain your records and reporting income and expenses. Does your business optimally operate within a calendar year or through a fiscal year? What are the differences between the two?
At MiklosCPA, our California-based accounting and tax preparation firm is here to ease some of your concerns and guide you through some basic concepts which will assist you to make the right determination when you first file your tax return.
Is a Calendar Year Right For You?
A calendar year is the twelve month period from January 1st to December 31st. Most individuals file their taxes using this period, and many businesses file this way by default due to:
Not keeping books or records,
Currently not having an annual accounting period,
The present year does not qualify as a fiscal year
Specific businesses required by a provision in the Internal Revenue Code that must file taxes using a calendar year.
Let’s say that you are just starting a Glendale-based graphic design business as a sole proprietor (Schedule C). You would continue to file your taxes using that same calendar year method that you have filed your previous individual tax returns.
If an individual or company files taxes using a calendar year then the calendar year serves as an accounting period is usually set in stone unless you receive an approval from the IRS.
Is Fiscal Year Right For You?
A fiscal year is a different way to measure a year. Your accounting period of your business may end on any day of the month except for December 31st. An easy way to think of a fiscal year is a year that looks different than the calendar on your wall. While most individuals and small businesses operate using a calendar year there are instances where it is beneficial to use fiscal.
For example, you operate a boat rental business in Newport Beach which sees the majority of its traffic and revenues during the lovely summer months. The majority of storage and repair expenses occur in the winter of the next calendar year. So your fiscal year ends in September rather than December. It may be beneficial to make the fiscal year as your default accounting period. This is especially true when your business is in need of a loan. In this case you would want to apply for the loan after the lucrative months because it could qualify you for a larger loan.
Did you make an error and choose an improper tax year on your prior year tax return? Changing a tax year is possible, but requires you to file Form 1128“Application to Adopt, Change, or Retain a Tax Year” to request approval from the IRS.
Having an accounting practice like MiklosCPA at your side is invaluable in maneuvering the IRS tax code. At MiklosCPA, we would love to schedule an appointment with you to help you decide what is right for you and your business! Or if you enjoyed this article, follow usonsocialmedia for future updates!
In today’s interconnected global economy, it is not uncommon for individuals or businesses to maintain foreign financial interests such as bank accounts and other overseas assets. However, you may be required by US laws to report these interests through the Foreign Bank Account Report (FBAR) when filing taxes.
Who needs to file FBAR?
Any United States person that has a financial interest in at least one financial account outside the United States.
AND the total value of all foreign financial accounts exceeds $10,000.
“United States person” also includes any business entities, such as corporations, Limited Partnerships, and LLCs formed in the United States that have foreign financial accounts. It also entails any resident in the United states, whether a citizen of the US or resident alien.
Individuals that need to file FBAR must answer the FBAR related questions on Schedule B of the individual 1040 form. FBAR itself can be E-filed for individuals and businesses. The due date to file FBAR is April 15th, just like with the individual tax filing due date.
FBAR is one of many things an individual or business should be aware of when filing taxes. Businesses especially may need the additional info due to their specific circumstances. Having a knowledgeable support team like us at MiklosCPA to anticipate those needs and other future requirements can save a business time and money from incorrectly rushed tax filings. We are a California-based tax and accounting firm that supports businesses with their tax and accounting needs through a “virtual office” service. This allows businesses to charge ahead with what’s most important, growing the business. If you would like to learn more about us, please contact us.
Employees need incentives to stay with companies long term, and businesses offering an IRA plan is one way to encourage long-term workers. However, the process involved in preparing and managing an IRA may be costly and time-consuming. Payroll Deduction IRAs are a viable alternative to traditional IRAs. They require little cost to start and little to maintain. The tax advantages and simplicity involved in establishing and maintaining this kind of IRA also are attractive to employees.
Setting up Payroll Deduction IRA
The employer sets up a Payroll Deduction IRA similarly to how many businesses establish traditional IRAs, through financial institutions such as banks or insurance companies. They can decide if the IRA will be treated in a fashion like a traditional IRA (not taxed going in, taxed taking out) or as a Roth IRA (taxed going in, not taxed taking out). The employer withholds set amounts from employees and contributes to the IRAs.
Operating a Payroll Deduction IRA
Generally any employee can participate in a Payroll Deduction IRA. Employees set the amounts they wish to contribute to the IRA and can withdraw at anytime. However, withdrawing from the IRA may be subject to taxes and penalties (if they are below 59 ½ years of age). Employees are always 100% vested in their Payroll Deduction IRA funds. For 2017, the contribution limit for employees to Payroll Deduction IRAs is $5,500.
So long as the employer keeps involvement in the IRA to a minimum, the IRA will not be treated like a regular IRA program under Federal law. This includes annual filings and other fiduciary requirements. The employer may simply pay some fees to the IRA provider and some internal costs. This translates into a low-cost savings plan provided by employers.
Employers may terminate the Payroll Deduction IRA at any time should they decide it no longer serves their purposes. Employers simply inform their provider to end the IRA. No IRS filing is necessary. Employees can continue to provide funds to their IRA by discussing it with the IRA provider.
Deciding on an IRA for your business is one of many questions business owners consider on top of other operational and accounting needs. Having a supporting team knowledgeable in accounting can help answer those future-looking questions. We at MiklosCPA can be such a firm. We are based in California, but utilize contemporary “virtual office” services coupled with personalized, periodic communications to support you and your business needs. If you would like to learn more about our services, please contact us.
Business owners utilize a staff of employees and independent contractors for their regular operations and projects. Sometimes the lines may blur between who is an employee or an independent contractor. This can lead to improper classifications of employees. Businesses may end up withholding incorrect employee-related taxes. For more info on how to properly classify employees, check out our other article.
Missed Class on Classifying Employees?
In the best situations, businesses act proactively to correct mis-classifications of employees. In more dire and negligent circumstances, the IRS steps in and forces employers to explain and correct their classifications of employees and contractors.
A “Notice of Determination of Worker Classification” from the IRS provides employers a chance to rectify their employee classification per recommendations from an audit, or take their case to the US Tax Courts. It provides three determinations:
Worker Classification – IRS determined that one or more individuals who provide services to the firm should be classified as employees.
Section 530 treatment – Depending on the timeliness of filing your business tax returns and statuses of workers after 12/31/1977, you may be granted some tax relief. You may also get nothing at all on this.
Amount of Employment Tax – The IRS determines the amount of employment-related taxes that is owed.
To Court or Not to Court?
Upon receiving the notice, you can decide if you want to take this further and file a petition to the US Tax Court. The deadline to file a petition is before the 91st day after the mailing date of the original Notice of Determination. The US Tax Court website provides more detailed information that will be needed to properly file the petition and prepare interested parties for the court system.
On the other hand, if you wish to not petition the issue further in court, you can accept the findings in the determination. Simply sign the waiver form (Form 2504-WC) that comes attached with the notice and send back to the IRS. Keep in mind that interest accrues on any penalties, so send the waiver as soon as possible to avoid more unnecessary interest costs.
Properly classifying employees can be an additional unseen cost for businesses. Having a team of professionals assist your business to prevent such unnecessary costs will pay dividends for your business in the future. That is where we can come in with the assist. Miklos CPA is a California-based tax and accounting firm that helps businesses with their taxation questions and accounting needs. We post articles like this periodically for our clients and for those seeking information on a certain tax topic. If you would like to know more about our services, contact us!
Managing a nonprofit can sometimes become overwhelming. Regardless, don’t forget to file your annual returns with the IRS, otherwise not doing so will cause the IRS to automatically revoke your nonprofit status!
Stay (Filing) Woke to Avoid Revoke
Tax-exempt nonprofits must file annual informational returns. If not filed for 3 consecutive years, tax-exempt status becomes automatically revoked. The IRS publishes on their website a list of those automatically revoked organizations. It lists details like revocation date, Employer Identification Number (EIN), and other information. Definitely not a list you want your nonprofit to wind up on.
Lost and Rebound
If the worst happens and your organization loses its nonprofit status, all is not lost. Your organization’s status can be reinstated! However, you will have to re-apply and start from the beginning with form 1023 or form 1024. The IRS provides 4 ways of reinstatement:
Streamlined Retroactive Reinstatement – For tax-exempt nonprofits who file a 990-EZ or 990-N. The organization must not have previously lost its status. It must also be less than 15 months since automatic revocation. Complete form 1023 or 1024 and send to the IRS with appropriate fees.
Retroactive Reinstatement (Within 15 months) – Similar to the above process, but with some additional work. Organizations who cannot file a 990-EZ or 990-N, or have had their status previously revoked must use this route. They will need to file all form 990s for the missing tax years. Additionally, they must attach a statement establishing a reasonable cause why they could not file for one tax year.
Retroactive Reinstatement (After 15 months) – Similar to the previous two, but now reasonable cause must be established for ALL three years.
Post-Mark Date Reinstatement – organizations may apply for reinstatement after the post-mark date of their application by completing the form 1023 or 1024, attaching appropriate user fees, and send to the IRS.
We regularly post articles like these on our website and social media pages. Our clients and readers find these articles useful for their own business needs or to further their own “good to know” knowledge. We are not just interested in informing others, but also supporting them with their particular business needs. MiklosCPA is a California-based accounting firm that has helped many businesses with their tax and accounting needs using our cloud-based services united with regular and personalized communication. If you would like to learn more about our services, contact us!
MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
