The Right Way to File Your Business and Personal Taxes

woman planning budget for her business and working on taxes

woman planning budget for her business and working on taxes

Filing your business and personal taxes can be daunting, but it’s an important part of being a responsible business owner and citizen. By following the right steps and keeping organized records, you can ensure you’re paying the correct amount of taxes and avoid any potential penalties or issues with the IRS.

By ensuring you take the right steps in filing your taxes, you can count on the smooth operation of your business and compliance with IRS rules. This post guides you through some key steps to follow when filing your business and personal taxes.

Learn the process and best practices you can use to make the tax filing process as smooth and stress-free as possible.

Determine Your Tax Filing Status

One of the most important things you can do to file your business and personal taxes the right way is to determine your tax filing status. Your tax filing status will determine the tax rate and deductions you’re eligible for.

The five main tax filing statuses are:

  1. Single
  2. Married filing jointly
  3. Married filing separately
  4. Head of household
  5. Qualifying widow(er) with dependent child

Depending on the type of business you have and your location, you may be required to pay federal, state, and local taxes. Some common taxes that businesses may be required to pay include:

  • Income tax: This is a tax on the profits your business generates. Your income tax rate will depend on the size of your business and the tax bracket you fall into.
  • Sales tax: If your business sells goods and services, you may be required to collect and remit sales tax to the government. Your sales tax rate will depend on the location of your business and the type of goods or services you sell.
  • Payroll tax: If you have employees, you may be required to pay payroll taxes, which include Social Security, Medicare, and unemployment insurance taxes.
  • Property tax: If you own a business property, you may be required to pay property taxes to the local government.

In addition to these business taxes, you may also be required to pay personal taxes on any income you receive, including your salary or profits from your business.

Establish Diligent Record Keeping

looking for files in the folder

In order to file your taxes accurately, you’ll need to gather all necessary documents and information. Having necessary documents on hand means you have to keep on track with meticulous record keeping throughout the year.

Good recordkeeping includes keeping track of all income and expenses, as well as any deduction you are eligible for. Keeping good records makes it easier to file your taxes and will also help you claim all the deductions and credits you are entitled to.

If you aren’t diligent about record keeping, challenge yourself to keep the following documents organized next year:

  • W-2 form (if you’re an employee)
  • 1099 forms (if you’re an independent contractor)
  • Receipts for business expenses
  • Other important financial documents

Determine Your Business Structure

Your business structure will determine how you file your business taxes. If you’re a sole proprietor or single-member LLC, you’ll report your business income and expenses on your personal tax return.

On the other hand, if you have a partnership or multi-member LLC, you’ll need to file a separate business tax return (Form 1065) and issue K-1 forms to each of your partners.

If you have a corporation, you will need to file a corporate tax return through Form 1120 or Form 1120-S.

For more detailed information about filing business taxes, read our article here.

Choose the Right Tax Forms

wooden box with cross and check marks

There are many different tax forms you may need to file, depending on your business structure and the type of income you receive.

Some common forms for small businesses include:

  • Form 1040 – This is the main personal tax form most taxpayers use to report their income and claim deductions.
  • Schedule C (Form 1040) – This form is used by sole proprietors and single-member LLCs to report business income and expenses.
  • Schedule E (Form 1040) – This form is used to report income or loss from rental properties, partnerships, and S corporations.
  • Form 1120 or Form 1120-S – Corporations use these forms to report their income and expenses.
  • Form 1065 – This form is used by partnerships and multi-member LLCs to report their income and expenses.

Claim Deductions and Credits

As a business owner, you may be eligible for certain deductions and credits that can reduce your tax liability. Some common deductions include business expenses such as office supplies, travel and transportation costs, and employee benefits.

You may also be eligible for credits for things like hiring employees from certain disadvantaged groups or investing in renewable energy.

Click here for a list of lesser-known tax deductions.

File Your Taxes On Time

The deadline for filing your business and personal taxes is typically April 15th of each year. If you’re unable to file by the deadline, you can request an extension using Form 4868.

However, keep in mind that an extension only gives you more time to file your taxes – it does not give you more time to pay any taxes that you owe.

Pay Any Taxes Owed

If you owe any taxes, you’ll need to pay them by the deadline to avoid late fees and penalties. You can pay your taxes online, by mail, or in person at a local IRS office. By following these steps and working with Cook CPA Group, you can ensure that you’re filing your business and personal taxes correctly and avoiding any potential issues with the IRS.

Frequently Asked Questions About Filing Business Taxes For the First Time

business owner filing their first business tax

business owner filing their first business tax

Starting a business is an exciting time in any entrepreneur’s life. However, the elation you may feel in seeing your vision come to life can quickly dissipate once tax season comes around. Filing business taxes for the first time can be a daunting experience.

In my over 20 years of experience as a professional accountant, I have found that business owners ask the same accounting and tax questions when first getting started. In an effort to help our clients, my team has put together this guide answering the most frequently asked questions about filing business taxes for the first time, including:

  1. How much does my business have to make before I’m required to pay taxes?
  2. How much should I put away to pay my business taxes?
  3. Will my business get a tax refund?
  4. Do I have to file taxes for my business if it made no money this year?

How much does a business have to make before paying taxes?

This is one of the first questions new business owners have about filing business taxes for the first time. Fortunately, the answer is straightforward. According to IRS tax laws, you must pay the Self-Employment tax (SE tax) if you work for yourself. This tax funds social security and Medicare, providing you with retirement, disability, and hospital insurance benefits.

If you own your own business, you are required to pay the SE tax if one of the following applies:

  1. Your net earnings from the business were $400 or more.
  2. You work for a church or a qualified church-controlled organization that elects to be exempt from social security and Medicare taxes. In this case, you must pay SE tax if you receive $108.28 or more in wages.

If either of the above points applies to you, you should also confirm you do not fall under any special rule or exception. Generally, the IRS allows exemptions to this rule for public officials like notary public fees, state and local government employees, etc.

For more information on the Self-Employment Tax, visit the IRS website here.

How much should a business put away for taxes?

magnifying glass one hundred dollar bills and percentage sign

How much you pay in tax in your first year in business (and every year after) depends on your business entity type and where you live. If you live in any of the following states, you don’t have to worry about saving money to pay state income tax:

  • Alaska
  • Florida
  • Indiana
  • Montana
  • Nevada
  • New Hampshire
  • South Dakota
  • Wyoming

On the other hand, if you live in a state with a high-income tax rate, like California or New York, you want to consider putting away a few extra dollars to pay your state income tax.

Another consideration is your business entity structure. If you structured your business as an LLC, S corp, or sole proprietorship, expect to pay the same tax rate as your own personal income tax rate. If you have a C corporation, you will pay a flat rate of 21% in taxes.

To account for the differences in business structure and state-based income tax variations, we recommend saving around 30% of your business income after expenses and deductions. That should be plenty of savings to pay both federal taxes and any applicable state taxes.

Do I have to file taxes during my first year in business?

The short answer to this question is yes. If your business made more than $400 in income this year, you are required to pay taxes your first year in business. The main thing to consider when filing taxes in your first year in business is the business tax payment deadlines.

If you expect to owe more than $1,000 or more in tax, and you operate your business as a sole proprietor, partner, or S corporation shareholder, expect to make quarterly estimated payments rather than the annual payments made as a personal filer. If your business is a C corporation and you anticipate owing tax of $500 or more, you must also make quarterly estimated tax payments.

Check out the IRS guide on Estimated Taxes to learn more about their requirements.

Do businesses get a tax refund?

judge gavel calculator and gold scale on dark background

Many business owners wonder if they can expect to see a tax refund in their mailbox after filing their taxes. While not as common for businesses as for personal tax filers, your small business can receive a tax refund in a few cases.

Since most business tax entities are considered pass-through, the business owner pays their federal income taxes on their individual tax return. So, if you own an LLC, sole proprietorship, or S corp, and your tax payments exceed the tax due, you can expect a tax refund just as you would with a personal tax return.

A benefit of structuring your business as a C corporation is the expectation of receiving a business tax refund. Because C corporations pay income taxes directly as a business (instead of passing through to the owner(s) personal return), they are the only entities that receive a refund to the business itself. Corporations can expect to receive a tax return only if it has paid more in estimated taxes than the tax it owes.

Do I have to file taxes if my business made no money this year?

There are several instances where a business has formed under a business entity (LLC, sole proprietorship, S corp, or C corp) but has not generated any income for the year. Whether you set up your business entity before formally opening or have ceased business operations for the year, you may still be required to file taxes even if you made no money.

Here are the specific rules for each business entity structure:

  • Single-Member LLC – there is no need to file taxes if you have no income or qualifying expenses.
  • Multi-Member LLC (partnership) – there is no need to file taxes if you have no income or qualifying expenses.
  • Sole Proprietorship – there is no need to file taxes if you have no income or qualifying expenses.
  • C Corporation – you must file an income tax return on annual taxable income unless you are exempt under section 501.
  • S Corporation – you must file an income tax return on annual taxable income unless you are exempt under Section 501.

Still, have questions about filing taxes in your first year in business? Schedule a free consultation today to speak with an expert team member. Cook CPA Group offers an array of tax preparation and planning services to help you through the business tax filing process.

4 Question You Must Ask Yourself Before Doing Own Business Accounting

woman thinking about doing her own business accounting

woman thinking about doing her own business accounting

Ensuring your business operations run smoothly is an overwhelming responsibility as a business owner. While some processes can come more easily to you than others, accounting practices are often weak points in many businesses.

You may think doing your own business accounting will save you much-needed cash flow, but if you don’t have a clear understanding of accounting practices, you could waste precious time and energy doing your own accounting.

Business accounting is one of the most important aspects of running a successful business. Before deciding to do your own business accounting, you should ask yourself the following four questions. These questions may help shape your perspective on some more technical aspects of business accounting.

In the end, you may find hiring an expert CPA saves you time, money, and energy.

How many monthly transactions do you expect?

An essential question to ask yourself before doing your own business accounting is how many transactions you expect to make each month. Keeping track of monthly transactions may be easy if you’re in the early stages of establishing your business. However, as your business grows, it becomes more important to ensure you track every transaction accurately.

There are many options to consider in the world of accounting software, with QuickBooks being a common choice among small business owners. Before you begin researching all your accounting software options, keep the following considerations in mind:

  • Accounting software typically comes with a monthly or annual cost. Run the numbers to determine whether it may be more cost-effective to work with a CPA instead.
  • Setting up your accounting software profile takes time. Consider the amount of free time you have to set up your account and learn the ins and outs of an accounting software program.
  • Accounting software can have many features that go unused by your business. While offering shiny bells and whistles is a great way to attract new buyers, the truth is you may be paying for features you don’t need.

Can someone else validate your calculations?

businessman asking help to an outsource cfo about his business accounting

Ensuring your financials are accurate is vital to the health of your business. Before deciding to do your own business accounting, ask yourself whether you feel confident making all the calculations yourself.

While accounting software can help you, it’s critical to manually review your calculations before filing your taxes. Many Cook CPA Group clients use their own accounting software but send us their account reports to ensure everything is up to snuff before filing their taxes.

Everyone makes mistakes, and it’s essential to recognize that business accounting is complex. Having a second pair of eyes to validate your calculations and confirm your accounts are in order is a huge step in ensuring you file your taxes accurately and timely. Doing your own business accounting may not be a wise decision for you if you don’t have someone you trust to double-check your financials.

Do you have separate business and personal accounts?

Maintaining separate business and personal accounts can go a long way in ensuring your accounting process is seamless. And, if your goal is to make paying taxes as easy as possible, separating your business accounting function from your personal accounts is critical.

Before deciding to do your own business accounting, review your current process. If you currently mix your business accounting with your personal accounting, it may be wise to separate them. While an experienced CPA has the know-how to wade through mountains of transactions, the process may prove too time-consuming for you.

Opening a separate business account is the best piece of advice I can give any business owner interested in doing their own business accounting. Doing so can save you unnecessary headaches during tax season.

Are you familiar with business-related tax deductions?

businessman computing business related tax deduction

One of the main arguments against doing your own business accounting is missing out on business-related tax deductions. With the potential to save hundreds if not thousands of dollars on your tax bill with business-related deductions, you must know the opportunities you can take to pay less in taxes.

Business deductions are an important component of any tax filing, and accurate accounting plays a major role in claiming the appropriate tax savings. No matter the size or years in business, every business can and should leverage deductions. But researching eligibility requirements and ensuring you can legally claim the deduction can become a complex process.

Many people who opt to do their own business accounting also prefer to file their own taxes. While this can streamline the tax filing process, you could potentially be leaving money on the table. We strongly recommend you consult with a trusted CPA for guidance.

Cook CPA Group has decades of business accounting experience. We encourage you to schedule a free consultation with us if you’re debating whether to do your own business accounting. We can guide you through the important steps you should consider and serve as a resource for any business accounting questions you may have.

5 Child and Dependent Expenses You Can Deduct From Your Taxes This Year

couple with their children consulting lawyer about tax deduction

couple with their children consulting lawyer about tax deduction

The rising cost of living is a significant burden for many U.S. families. While you can’t deduct grocery bills or utilities from your tax bill, other family-related expenses can reduce your overall tax bill this year. From child care and adoption fees to education-related expenses, there are several tax credits you should leverage.

This post outlines the five child and dependent expenses that may just earn you a deduction this tax season, including:

  • The Child Tax Credit
  • The Child and Dependent Care Tax Credit
  • The Adoption Tax Credit
  • The American Opportunity Tax Credit
  • The Lifetime Learning Tax Credit

Keep reading to see if you qualify for any or all of the five tax credits.

Child Tax Credit

You may have heard the buzz around the Child Tax Credit (CTC) in recent years. First introduced in 1997 by President Clinton, the Child Tax Credit is a fully refundable tax credit for children under 17. In 2021, the Biden-Harris Administration expanded the Child Tax Credit to $3,600 per child under the age of 6 and $3,000 for other qualifying children under 18.

However, that expansion ended in 2022, and the credit will return to the original $2,000 per qualifying child under the age of 18.

How to Qualify for the Child Tax Credit

There are two factors to qualify for the Child Tax Credit: qualifications for you as the filer and qualifications for the child or dependant.

To qualify for the full CTC for each child, you must ensure you have a qualifying child and that the child has a valid Social Security number. Additionally, your annual income cannot be more than:

  • $150,000 for married filing jointly, or if you are filing as a qualifying widower
  • $112,500 for head of household filers
  • $75,000 for single filers or married filing separately

Your child or dependent must meet the following criteria to be eligible to file for the CTC on your tax filing:

  • Be under 18 at the end of the year
  • Be your child, stepchild, eligible foster child, sibling, stepsibling, half-sibling, or descendant (e.g., grandchild, niece, or nephew)
  • Provide no more than 50% of their own financial support during the tax year
  • Live with you for more than half the year
  • Be claimed as a dependant on your return
  • Not file a joint return with a spouse
  • Be a U.S. citizen, national, or resident alien

If you and your child or dependent meet the eligibility criteria, you can claim the Child Tax Credit on your tax return by filling out Form 1040 and submitting your Individual Income Tax Return with Schedule 8812 attached.

Child and Dependent Care Tax Credit

single mother working on her application for tax deduction

Another potential money saver for your family is the Child and Dependent Care Tax Credit. This credit provides cost savings for families who paid for care for their child or dependent. Child care can include care provided at a center, daycare facility, camps, or relative. At this time, state-based care does not qualify for the credit.

How to Qualify for the Child and Dependent Care Tax Credit

To qualify for this cost-saving credit, you:

  • Paid for care for a qualifying child or dependent under the age of 13
  • Paid for care for a qualifying child or dependent to look for employment
  • Paid less for care than your total yearly income

If you meet the eligibility criteria, you can claim the Child and Dependent Care Tax Credit on your tax return by filling out Form 2441 with your Individual Income Tax Return.

Adoption Tax Credit

happy family after the approval of the adoption

If you adopted a child or are in the process of adopting a child, you may qualify for the Adoption Tax Credit. It’s well-known the adoption process is lengthy and expensive. Luckily, the Adoption Tax Credit can help you save up to $14,440 per eligible child. Though there are some income limits and other eligibility factors, it may be worth your time and effort to consider filing for this tax credit.

How to Qualify for the Adoption Tax Credit

To qualify for the Adoption Tax Credit, the child you are adopting must be under the age of 18 or, if over the age of 18, must be unable to care for themselves. Additionally, the adoption credit is based on your modified adjusted gross income (MAGI), and you should check the IRS website or reach out to us to confirm the MAGI amount for 2022.

Qualified expenses include adoption fees, legal fees, adoption-related travel expenses, and other directly related expenses. To research other related expenses such as home study or same-sex parent adoption credits, read this article published by the IRS.

If you meet the eligibility criteria, you can claim the Adoption Tax Credit on your tax return by filling out Form 8839 with your Individual Income Tax Return.

American Opportunity Credit

mother and her college student daughter doing application for aoc

If your child or dependent is a student at an eligible higher education institution, you may be eligible for an annual credit of $2,500 per student through the American Opportunity Tax Credit (AOTC).

AOTC provides tax credits for qualified education expenses paid for during the first four years of higher education, including tuition, fees, books, supplies, equipment, and other related student expenses.

How to Qualify for the American Opportunity Tax Credit

Similar to the Child Tax Credit, there are two categories of eligibility: one to determine student eligibility and the other to determine if you can claim the credit on your tax return.

To be eligible for AOTC, a student must:

  • Earning a degree or education credential
  • Be enrolled at least part-time for at least one academic period beginning in the current tax year
  • Not have claimed the credit for more than four tax years
  • Not have a felony drug conviction

To claim AOTC on your return, you must have a MAGI of $80,000 or less or $160,000 for married couples filing jointly. You may be eligible for partial credit if your MAGI is over $80,000 but less than $90,000 or over $160,000 but under $180,000 for married filing jointly.

If you meet the eligibility criteria, you can claim the American Opportunity Tax Credit on your tax return by filling out Form 8863 with your Individual Income Tax Return.

Lifetime Learning Tax Credit

graduating student doing documents for llc

In addition to the ATOC education tax credit, you may be eligible to save up to $2,000 on your tax bill by claiming the Lifetime Learning Credit (LLC). The LLC covers qualified tuition and related expenses. Unlike the AOTC, the LLC helps students pay for undergraduate, graduate, and professional degree courses and other related expenses.

Although the AOTC provides a slightly higher return, there is no limit on the number of years you can claim the tax return. To claim the LLC on your tax return this year you, your dependent, or a third party must have paid for qualified education expenses for higher education and paid the education expenses for an eligible student enrolled at an eligible education institution. Additionally, the eligible student must be yourself, your spouse, or the dependent listed on your tax return.

How to Qualify for the Lifetime Learning Tax Credit

To be considered an eligible student and claim the LLC, the student must be enrolled or taking courses for at least one academic period at an eligible education institution to get a degree or credential or improve job skills.

If you meet the eligibility criteria, you can claim the Lifetime Learning Tax Credit on your tax return by filling out Form 8863 with your Individual Income Tax Return.

There are many ways to save money on your tax return, especially if you have a child or dependent. While these five tax credits are a good place to start, the best way to get the lowest tax bill is by reaching out to a professional accountant to walk you through tailored solutions.

Schedule a free consultation with Cook CPA Group today to leverage these tax credits on this year’s tax return. Our team of expert and approachable accountants make sure you don’t pay more than you have to.

Your Checklist for Paying Taxes Your First Year In Business

business partners working on documents for their business tax

business partners working on documents for their business tax

Reaching the end of your first year in business is a significant milestone. Bringing your idea to life and achieving your business goals is no small feat. As tax season approaches, it’s just as essential to research and understand the tax-paying process for your small business as it is to hit your next big goal.

From organizing your business financial statements to understanding required tax forms, paying taxes during your first year in business takes careful planning. Luckily, Cook CPA Group is always in your corner, anticipating your accounting needs.

Use the information outlined below to create a checklist that will make paying taxes during your first year in business a complete breeze.

Business Taxes You Are Required To Pay Your First Year In Business

The first essential step in planning your tax filing for your first year in business is familiarizing yourself with the different business taxes you’re expected to pay. As a small business owner, there are several business taxes you are required to pay to the IRS that you may not be familiar with. Here are the five types of business taxes you should prepare to file in your first year in business:

Income Tax

Paying income taxes during your first year in business will be no different than paying individual income taxes. In most cases, you will pay both federal and state income taxes, depending on your business entity type.

Sole proprietorships and S corporations report business income on individual tax returns. Your tax bracket will determine the flat tax rate you will pay.

Conversely, C corporations pay taxes based on the business’s net income. At the federal level, the tax rate for C corporations is 21%. Currently, forty-four states impose a corporate income tax ranging from 2.5% to 11.5%. Visit the Tax Foundation’s website to find your state’s corporate income tax rate.

Self-Employment Tax

business owner doing paper works for self employment tax

It’s common for business owners to consider themselves an employee of their company for accounting purposes. You are required to pay self-employment taxes if you earned $400 or more from business activities. That money will be taxed at a flat rate of 15.3% and is used to fund Social Security and Medicare benefits.

Employment Tax

You will be responsible for paying employment taxes if your business employs other individuals. Employment taxes include Social Security and Medicare, federal and state income tax withholding, and federal unemployment tax.

Estimated Tax

Businesses must pay estimated taxes four times per year if they expect to owe more than $500 in taxes as a C corporation or more than $1,000 as another business entity. Estimated taxes are due January 15, April 15, June 15, and September 15.

Excise Tax

Not every business is subject to excise taxes, but it’s critical to understand the goods and services that may apply. You should expect to pay the excise tax if your business sells certain products such as gasoline, cigarettes, or alcohol. Reach out to us for a comprehensive list of what goods and services fall under the excise tax rules.

Know Your Business Tax Forms & Tax Deadlines

calculator calendar and alarm clock on green background

As you gear up to pay taxes for your first year in business, it’s critical to understand the business tax forms you’re required to file and when they’re due.

Schedule C or Schedule K-1

If you run your business as a sole proprietor, you should file a Schedule C with your Form 1040 by April 15 to report your income. If you own an S corporation or a multi-owner LLC, you will file a Schedule K-1 by March 15 to report income to the IRS.

Form 1120 or 1120-S

If you own a C corporation, you will file a Form 1120 by April 15 to report income. An S corporation should use the similar Form 1120-S to file income separately from their personal income tax return by March 15.


Form 1099-MISC is filed to report the self-employment income you’ve earned as a business owner or if you’ve hired independent contractors to perform business-related activities. The deadline to submit copies of this form to the IRS is January 31.

Form 1065

If you own a partnership, you will use Form 1065 to report information, including income, gains, losses, and deductions.

Form 720

If you determine your business is subject to excise taxes, you will use Form 720 to report it.

Sort Your Business-Related Paperwork

female accountant sorting business related paperwork

Paying taxes for your first year in business requires careful planning. But organizing all your paperwork and determining the documentation needed to support your tax filing can be overwhelming. That’s why we suggest you focus on three main areas: financial documentation, business-related expenses, and payroll and employee documentation.

Financial Documentation

  • Balance sheet
  • Income statement
  • Bank account statements
  • Credit card statements
  • Invoices received from outside vendors
  • Invoices paid for services

Business-Related Expenses

  • Auto expenses (including mileage and maintenance)
  • Office Supplies
  • Operational costs (including rent, utilities, and maintenance costs)
  • Marketing and advertising costs
  • Expenses for professional services (including accountants, attorneys, bookkeepers, and consultants)
  • Insurance fees (including property insurance, vehicle insurance, business insurance, etc.)
  • Documentation for all equipment and assets purchased (including the depreciation schedule for each item)

Employment Expenses

  • Employee forms, including:
    • W-9 and I-9 verification forms for each employee
    • W-2 Forms
    • 1099 Forms for contractors
    • 1099-MISC for fees for nonemployee payments
  • Payroll forms
  • Witheld deductions from payroll and other employee wages

Now that you know the necessary forms, due dates, and documentation needed to pay taxes for your first year in business, you’re ready to meet this tax season head-on. If you feel overwhelmed with the process, schedule a free consultation with us. We’ll help you navigate the tax filing process for your first year in business and beyond.

5 Ways You May Be Exposing Yourself to a Tax Audit

5 Ways You May Be Exposing Yourself

5 Ways You May Be Exposing Yourself

Tax season is an incredibly stressful time of year. Most of us try our best to keep accurate records of all our finances for smoother tax filing. However, there are still several ways you may unknowingly be exposing yourself to an IRS tax audit.

Each year, the IRS audits a small percentage of taxpayers, most of whom are high-earners or made audacious claims on their returns. But the chances of getting audited are still severe enough that you should be aware of the ways in which you are potentially risking an IRS tax audit.

Claiming work-related expenses on individual filings, recording losses instead of gains, and deducting unusual expenses from taxable income are all ways you may be exposing yourself to a tax audit this year. Keep reading to learn the five ways you are unknowingly exposing yourself to a tax audit and how to avoid getting in trouble with the IRS this year.

Audit Red Flag #1: Underreporting Your Income

One of the first audit risks you should be aware of is underreporting your taxable income. It may be tempting to fib your way through your tax filing by reporting a lower taxable income amount than what you actually earned, especially by including more dependents than you have or reducing the amount of taxes owed.

However, the IRS will cross-check your tax filing with your Form W-2 to ensure you are reporting the correct taxable income. For example, if you made $70,000 in taxable income this year but only reported making $45,000, you are likely to be audited by the IRS. The IRS ensures you are filing accurate income by using a computer algorithm to check your Form W-2 against your return. If your income appears too low or too high, you may be exposing yourself to an IRS audit this tax season.

Audit Red Flag #2: Unjustifiable Business Deductions

worried business woman checking her business deductions

Some taxpayers attempt to justify large tax deductions to lower their overall taxable income. For example, filing a $30,000 deduction for business travel expenses when you only made $100,000 is a huge red flag and can get you in serious trouble with the IRS.

Additionally, filing for unusual deductions can also tip off the IRS that something may not be right with your taxes. If you are self-employed and operate your business from home, you may deduct home-based business expenses, such as depreciation, utilities, rent, and repairs. While these are tax deductions you are eligible to make as a self-employed person, if you file too many or too high of deductions, you may be risking an IRS audit.

Audit Red Flag #3: Unreported Foreign Accounts

If you have any accounts in a country other than the United States, you must report those accounts on your tax filing to the IRS. These accounts can be retirement accounts, checking accounts, or investment accounts in any foreign country. If a foreign account has more than $50,000, it must be reported to the IRS to comply with federal regulations.

Failing to report a foreign account not only comes with an audit but you are also guaranteed to pay a high penalty. In recent years, the IRS has bolstered its investigation team to crack down on taxpayers with foreign accounts who have not accurately reported these accounts in past tax filings.

If you need help accounting for or filing these foreign accounts to the IRS on your next tax return, reach out to us today. Cook CPA Group can help you properly report your foreign accounts to the IRS to avoid unnecessary tax audits.

Audit Red Flag #4: Withdrawing or Depositing Large Cash Amounts

withdrawing large cash amount

Withdrawing or depositing large sums of cash into or from your accounts may put you at risk of an IRS audit. Withdrawing large sums to purchase assets or equipment, such as a vehicle, without reporting the expense on your tax return may raise a red flag for the IRS.

Conversely, depositing more than $10,000 in cash into your bank account will trigger your bank or credit union to report that transaction to the IRS. While depositing more than this amount does not mean you’ve done something illegal, it does raise red flags for the IRS, and you are more likely to be audited.

Audit Red Flag #5: Filing Math Errors

The IRS uncovers millions of math errors on tax returns every year. While many of these mathematical errors are honest mistakes, they can still trigger a tax audit in a small percentage of cases. Luckily, if your deductions are legitimate but are slightly off due to a calculation error, you can easily explain this to the IRS in the case of an audit.

It’s critical you maintain adequate recordkeeping throughout the year for all your expenses in case of an IRS tax audit. With proper documentation, you can easily prove your deductions are legitimate and quickly resolve any questions your auditor may ask you.

If you find maintaining your records and accurately reporting your information on your taxes too overwhelming to do alone, don’t hesitate to reach out to us today. Schedule a call with us to learn more about how we can help you accurately file your tax return to avoid IRS tax audits or aid you in the case you get audited. We’re always here to help!

Tax-Saving Tips for Your College-Bound Kids

Tax Saving Tips


Tax Saving Tips

With colleges across the country opening their campuses for a fresh new set of students, it’s the perfect time to consider the tax savings your family can take advantage of this tax season. While every family’s economic situation differs, several tax credits and deductions are available to most families with college-bound kids.

Continue reading to learn the tax-saving tips your family can use this year to save on college-related expenses come tax time.

Tax-Saving Credits For College-Bound Kids

As the parent or guardian to a first-time college student, you know how much paperwork and filing goes into assuring the child in your life is set up for success. Many families get so bogged down by the overwhelm of it all that they don’t take advantage of several tax-saving options.

One of the easiest ways to save money on your taxes this year is by carefully considering tax credit options for eligible students and their families. The two most common tax credits your family can leverage to save money this tax season are the American Opportunity Tax Credit and the Lifetime Learning Credit.

American Opportunity Credit (AOTC)

graduation cap with tassel and wrapped 100 dollar bills

The American Opportunity Credit helps college-bound families pay for education expenses in the first four years of post-high school schooling. Although subject to income limitations and strict requirements, your family could receive a maximum annual credit of $2,500 per eligible student. Additionally, your family could receive up to a 40% refund if you owe no tax at the end of the year.

To claim AOTC on your tax return, make sure you and the student in your family check these boxes:

  • The student is you, your spouse, or a dependent listed on the tax return.
  • Must be pursuing a degree or credential.
  • Have qualified education expenses, including tuition, books, and equipment from an eligible. institution. See this page for a list of the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP).
  • Be enrolled at least part-time for at least one academic period beginning in the tax year.
  • Not have finished the first four years of post-high school education at the beginning of the tax year.
  • Not have claimed the AOTC for more than four tax years.
  • Not have a felony drug conviction at the end of the tax year.
  • Modified adjusted gross income (MAGI) is $90,000 or less (or $180,000 for married filing jointly).

If your family meets these requirements and is qualified to apply for the AOTC, complete Form 8863 and attach it to your Form 1040 or Form 1040A to apply.

For more information, visit the IRS webpage for the American Opportunity Tax Credit or reach out to us today.

Lifetime Learning Credit (LLC)

parent and student applying for loan

The Lifetime Learning Credit is another great tax-saving opportunity for families wanting to offset the cost of tuition and education expenses for the student in their life. Although subject to income limitations and other requirements, your family could receive a maximum annual credit of $2,000 per tax return.

Unlike the AOTC, the LLC has no limit on the years you can claim the credit and has less stringent eligibility requirements. Be aware you cannot claim both the LLC and AOT in the same tax year.

To apply for the LLC, make sure the student in your life meets these requirements:

  • The student must be yourself, your spouse, or a dependent listed on your tax return.
  • Have qualified education expenses, including tuition, books, and equipment from an eligible institution. See this page for a list of the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP).
  • Be taking higher education course(s) to get a degree, credential, or improve job skills.
  • Be enrolled for at least one academic period beginning in the tax year.
  • Modified adjusted gross income (MAGI) is between $59,000 and $69,000 (or $118,000 and $138,000 for joint returns).

If your family meets these requirements, and are qualified to apply for the LLC, complete Form 8863 and attach it to your Form 1040 or Form 1040A to apply.

For more information, visit the IRS webpage for the Lifetime Learning Credit or reach out to us today.

Tax-Saving Deductions For College-Bound Kids

stack of coins calculator and miniature college school model

As college tuition and related education fees increase, more and more students and their families must take on student loans. According to recent census data, around 13.5% of Americans have some form of student loan debt. And while this debt is a financial burden, there are some ways to save money during tax season.

The two most common tax deductions your family can leverage to save money on tuition and related college expenses this tax season are the Student Loan Interest Deduction and the 529 Plan Contributions.

Student Loan Interest Deduction

Your family or the student in your life can take advantage of up to a $2,500 tax deduction. Including required and voluntary pre-paid interest payments, the deduction can either be up to $2,500 or the amount of interest you paid during the tax year, whichever is less.

To claim the student loan interest deduction, the following requirements must be met:

  • You paid student loan interest during the tax year.
  • The loan holder is legally obligated to pay interest on a qualified student loan.
  • Tax filing status is married filing jointly.
  • Modified adjusted gross income (MAGI) is less than the annual limit.
  • If filing jointly, neither spouse can be claimed as a dependent on someone else’s return.

If your family and the student in your life meet these requirements, and are qualified to apply for the student loan interest deduction, make the deductions directly on Form 1040.

For more information, visit the IRS webpage for the Student Loan Interest Deduction or reach out to us today.

529 Plan Contributions

graduation cap on calculator with pen and dollar bills

Operated by the state or an educational institution, 529 plans allow your family to save for college and other higher education. Any earnings in the 529 plan are exempt from federal taxes and are often exempt from state taxes when you use the funds for qualified education expenses.

Although 529 plans are not tax deductible at the federal level, many states offer deductions or special tax credits for these types of contributions. Check out this site for a list of states that offer deductions or tax credits and the corresponding deduction or credit.

Regardless of deductions or credits available in your state, investing in a 529 plan remains an advantageous way to grow education-related savings tax-free.

If you have any questions about 529 plans or how your family can leverage tax credits or deductions on your next tax filing, book a consultation call with us. We’ll walk you through all your tax-saving options and ensure you never pay more than you have to.

How to Account for Independent Contractors in Your Business Taxes (4 Questions You May Be Asking)

How to Account for Independent Contractors

How to Account for Independent Contractors

With nearly 60 million Americans identifying as independent contractors, it’s important to understand how your business should account for these types of workers come tax season. Your company may hire independent contractors for a wide variety of projects, many of which fall outside the scope of your existing team’s responsibilities.

With an increasing freelancer workforce, you may be considering how you can leverage independent contractors for your own business. This post guides you through four questions you may be asking about accounting for independent contractors in your business taxes this year, including:

  1. What is an independent contractor?
  2. Are independent contractors treated as a payroll expense?
  3. What independent contractor documents should my business retain for tax purposes?
  4. How do I deduct independent contractor expenses from my business taxes?

How Does the IRS Define an Independent Contractor?

american flag cheque and dollar bill

The IRS provides specific guidelines to determine whether a person is an employee or an independent contractor. There is a fine line between the two classifications so it’s important your business understand the difference.

Generally, your business can determine how to treat this difference by understanding the business relationship. You can do this by following the IRS’s Common Law Rules – three distinct questions to help you determine the degrees of control your business has in the relationship:

  1. Behavioral Control – Ask yourself this: “Does my company control what the worker does and how the worker does their job?” This question will help you determine the type of instruction you provide the individual, the degree of the instruction, and the evaluation system you use to measure the details of the job.
  2. Financial Control – Ask yourself this: “Are the business aspects of the worker’s job controlled by me, the payer?” The financial control question gauges how significant of an investment the relationship is, any unreimbursed expenses, and the payment method.
  3. Type of Relationship – As yourself this: “Are there written contracts or employee-type benefits, including insurance or paid vacation?” This question will help you determine how you and the worker perceive the working relationship. Employee benefits and the timeline of the worker-business relationship can help you determine if the worker is truly an independent contractor for tax reasons.

If you need more guidance on this issue, check out the IRS’s Independent Contractor or Employee guide.

Are Payments to Independent Contractors a Payroll Expense?

employee listing payments to independent contractors

As we’ve just determined, hiring an independent contractor shares many similarities with hiring an employee. However, just as there is a difference in the relationship, there is a difference in the way you pay your workers.

When you hire an employee for your business, you request that they fill out a Form W-4. You then pay for certain standard employee benefits and taxes.

You would not do the same for independent contractors. Because each independent contractor is responsible for paying his or her own payroll taxes, unemployment insurance, social security, and other payroll taxes, you would not treat independent contractors as a payroll expense.

Rather than a payroll expense, independent contractors should be treated like any contract work. Your business likely hires other service professionals like lawyers and accountants on a contract basis. Independent contractors fall under this same category. And, as such, the work they perform should be treated as a tax-deductible expense.

What Independent Contractor-Related Documents Do I Need to Retain For Tax Preparation?

female worker checking documents for tax preparation

Hiring an independent contractor for your business requires far less recordkeeping than hiring full-time employees. Because independent contractors handle most of their own important tax documents, you may only need to retain a few important documents for tax filing purposes.

Before hiring an independent contractor, ensure you have the following three documents in place:

  1. A Form W-9 with updated contact information for the independent contractor, including a taxpayer ID number (EIN or SSN). Note that your business is not required to send the completed W-9 form to the IRS. Ensure you keep the form for recordkeeping purposes in the case of an audit or other concerns.
  2. A written contract outlining the scope of work the independent contractor is being hired to complete, including deliverables, timeline, and ownership. Both parties should sign the contract and retain a copy for their records.
  3. Any payments made to the independent contractor, including deposits before work begins and invoices for expenses or materials your business is responsible for covering.

These are three important documents to retain for tax-paying purposes, but you may want to consider the need for other documents. Including sub-agreements like confidentiality, non-solicitation, or non-compete agreements are documents aimed at protecting your business trade secrets, your clients, and your unique business process.

How Do I Deduct Independent Contractor Expenses From My Business Taxes?

The first step in deducting independent contractor expenses from your business taxes is retaining compensation documents. If your business has paid an independent contractor more than $600 for the year, you must complete Form 1099-NEC. This form serves to report how much your business paid independent contractors and other nonemployees for the year. You should fill out this form and then submit a copy to the IRS and the freelancer by January 31st each year.

You can download a copy of Form 1099-NEC from the IRS here.

Once you have properly filled out Form 1099-NEC, reach out to an expert accounting firm like Cook CPA Group. We’ll help you file Form 1099-NEC and other eligible business deductions to save your business money this tax season.

9 Lesser Known Tax Write-Offs for LLCs and S-Corps

nine lesser known tax write offs

nine lesser known tax write offs

As the owner of an LLC or S-Corp, paying less money in taxes means you have more to spend on building your business to new highs. The more deductions your small business can take at tax time, the lower your tax bill will be.

While you may be aware of a few more common tax deductions your LLC or S-Corp can take this tax season, we’re sharing a list of lesser-known small business deductions you can use on your tax return to lower your taxable profit for the year.

  1. Self-Employment Tax
  2. First-Year Start-up Costs
  3. Training and Education Costs
  4. Professional Services Fees
  5. Pass-through Entity Deduction
  6. Independent Contractor Deduction
  7. Charitable Contributions and Gifts
  8. Association and Membership Dues
  9. Retirement Contributions

Self-Employment Tax

The first tax deduction you should take advantage of this tax season is the self-employment deduction tax. Every year, you can claim 50% of what you pay in self-employment tax as a federal income tax deduction. These are Social Security and Medicare taxes you pay as a self-employed citizen.

Deducting the employer-equivalent portion of this tax is done with your adjusted gross income and only affects your overall income tax.

To read more about eligibility requirements, check out this helpful IRS website.

First-Year Startup Costs

The first year in business is one of the toughest. Luckily, there are tax advantages for your start-up LLC or S-Corp you should know.

Start-up costs, as defined by the IRS, are expenses your LLC or S-Corp paid or incurred for creating your business or researching the creation or acquisition of your business. To be eligible for this deduction, your LLC or S-Corp must meet both of these requirements:

  1. You can deduct the expense if you paid or incurred the cost to operate an existing business if it is in the same field as the business entered into.
  2. The expense is something you paid for or incurred before your business began.

To see a list of eligible start-up costs, visit this page.

Training and Education Costs

woman completing her assignment

Building a successful small business requires constant learning and growth. Your LLC and S-Corp may save money this tax season by deducting the cost of business-related training and education.

Eligible training and education expenses must:

  1. Maintain or improve job-related skills
  2. Be required by law to keep your current salary, status, or job.

Note that the training you take cannot be part of a program that educates or trains you for a new business. All training, certifications, and education programs must enhance your current trade or business.

Visit the IRS guide on the topic for more information on filing requirements.

Professional Services Fees

Running a business often means hiring and engaging with professional service providers to help keep daily operations running smoothly.

Your LLC or S-Corp can deduct fees paid to accountants, lawyers, consultants, and other service professionals. However, the expenses must be directly related to your current business and not for work to acquire business assets.

Additionally, you can deduct the cost of hiring tax professionals like Cook CPA Group to prepare for and file your LLC and S-Corp business taxes. Save money on your small business taxes this year by contacting us today.

Pass-Through Entity Deduction

Pass-through entities, like your LLC or S-Corp, are uniquely qualified for up to a 20% deduction on net business income from federal income taxes. There are some limitations, including:

  1. Your taxable income
  2. The type of trade or business
  3. The amount of W-2 wages paid
  4. Unadjusted basis immediately after acquisition of any qualified property held by the business

If you are interested in reading more about what taxable income includes, please see this IRS article for a detailed breakdown.

Independent Contractor Deduction

business owner instructing an independent contractor to paint walls

With the upswing in workers taking to freelancing or independent contractor work, it’s only natural that your LLC or S-Corp hire a nonemployee to perform services for your business. If your business hired an independent contractor, the expense is deductible from your year-end taxes.

For more information on deducting independent contractor expenses, read our recent blog post, How to Account for Independent Contractors in Your Business Taxes.

Charitable Contributions and Gifts

Your LLC or S-Corp can deduct qualified charitable contributions if they are in the form of cash contributions. Otherwise, this deduction is more advantageous for an individual come tax time.

That being said, any expenses your LLC or S-Corp incurs for business gifts can and should be deducted. Exceptions to this deduction include:

  1. Business gifts of more than $25 for every direct or indirect gift
  2. Gifts expenses that include any incidental costs (like packaging and mailing)
  3. Gifts with a permanent  imprint of the company’s name
  4. Gifts meant for wide distribution, such as pens, bags, and cases

For more information on exceptions, read IRS Publication 535.

Association and Membership Dues

Many small businesses are not aware that the IRS allows tax deductions for membership or association dues that are required or directly related to your business.

For example, if you join your local Chamber of Commerce or pay dues for a similar business-related association, your LLC or S-Corp can claim the fee as a deduction.

These expenses can be claimed on your Schedule C form. Reach out to us today to ensure you never pay more than you have to.

Retirement Contributions

woman calculating her retirement contribution

Saving for future financial needs is more important than ever. Make sure your LLC or S-Corp takes advantage of the retirement contributions deduction.

The IRS outlines a special rule you should use to calculate retirement contributions for yourself as a self-employed individual. Essentially, your retirement plan contribution is calculated based on compensation. To calculate this plan compensation, you should:

  1. Deduct a portion of your self-employment tax, and
  2. The amount of your retirement plan contribution

Once you have that number, you’ll calculate your own contribution and deduction.

Head over to the IRS’s guide on Calculation Your Own Retirement-Plan Contribution and Deduction, for a detailed overview of how to calculate your retirement contribution deduction

If you are interested in paying fewer taxes this tax season for your LLC or S-Corp, book a call with us today. Our team of expert accountants has decades of experience filing taxes and saving money for LLCs and S-Corps, and we’d be happy to help you take advantage of these lesser-known deductions!


90 90 90 Rule

the 90 90 90 rule

This is the final series with Ed Cotney as he concludes with an in-depth discussion of the IRA rules to consider other approaches to address required minimum distributions.

If you have an IRA or 401k and live to be age 90, and if all you do is take the required minimum distributions out once you turn 72, chances are you’re still going to have 90% of your IRA intact. So if you have a million-dollar IRA today and you’re 72 years old, chances are when you die, about $900,000 will still be in your IRA.  Hence the 90 90 90 rule.

2020 Inherited IRA Distribution Rules and Risks of the 10-year rule

Giving It All At Once

2020 inherited ira distribution rules

Proceeds will be distributed all at once when you die. This will go on top of your children’s earned income resulting in a higher tax bracket.

10 Year Rule

The kids can let the money stay in the IRA for up to 10 years, and they just have to fully take out the inherited IRA after you die within ten years. There’s some risk exposure with this. The Kids have the right to take out their portion at any given time within the ten years after you die, and they will need to file a 1099r form.

If we do this ten-year rule, while the money is in the 10-year stretch rule; you need to ensure your kids don’t get enough bankruptcy or judgment. If one child does, they could lose the inherited IRA and could even pay a tax bill. You can check the Clark V. Ramaker Case as an example.

A Story Of How Converting IRA To CRUT Helps A Widowed Spouse

family smith scenario

Tim and Susan want to transfer their wealth when they’re dying, their children free from tax, safe from lawsuits, and safe from creditors and predators. Tim passed away, and Susan’s age now is 80.

They have four kids, Susan has a house worth four hundred thousand dollars, and they have cash of $400,000, and Susan and Tim’s combined IRAs are $800,000.

The 1st kid, Mike, is a successful doctor and has a wonderful job. The 2nd daughter, Mary, didn’t marry very well. In fact, after Tim dies, his husband says, “I can’t wait for your mom to croak. This way, we can go buy a new truck and a bass boat”.

The 3rd son, Ed, is in a rocky third marriage, but he’s good with money. He’s good-looking too. The last son, Dan, is not good with money, is divorced, and looking for work.

Susan’s concerned that Dan will just waste his inheritance money and have to borrow from his siblings.

Taxes Issues Upon Death Of Susan

  1. House – No tax, because of Step up in basis
  2. Cash – No tax, because of Step up in basis
  3. IRA/401K – Will have an Ordinary Income Tax

How The Charitable Trust Come In-Play

ira to charitable remainder unitrust tax benefits

Calculating the total value of the asset, we got $1,600,000. We know that the non-ira assets, the house, and the cash will go to the children with zero tax, and the estate plan says that when Tim and Susan die, the $800,000 IRA goes in four equal distributions to the kids.

When Susan dies, the $800,000 will go to a charitable trust. This trust is designed to be a 20-year income payout to the four children using a very conservative number of 5.3%. We’re going to distribute $42,000 divided by four, so each child will get about $10,000 to $11,000 for the next 20 years. In total, we’re going to distribute out $896,000 of taxable income to the kids.

Now, here’s what’s cool about this strategy. This $800,000 has a high degree of asset protection from judgment, creditors, and predators. So, for example, in year 4, after Susan dies, Brother Dan gets into a divorce. He is receiving an income stream from the charitable trust but can’t take any money from it—that way, protecting himself.

And for Mike, the doctor, this is a smart deal too. It’s not a question of will Mike be in a lawsuit as a doctor. It’s a question of how many lawsuits he will be in during the rest of his life. So the last thing he needs to get is something that doesn’t have some form of creditor protection.

The last benefit from this is at the end of 20 years, after this charitable trust has paid out nearly $900,000 to the kids, almost $900,000 will go to her designated church.


This is not a multi-million dollar Warren Buffett strategy. This strategy works for anybody with at least $500,000 in qualified money, like a traditional IRA or 401k. This is a strategy where using a charitable trust provides a beautiful income stream to the kids and a beautiful gift to your designated charity.

There’s nothing severely advanced or complex here. You may have to spend a little bit of money for the lawyers to draft this, but this blows the doors of leaving an inherited IRA to a child so that they can take the money out over ten years at some point. By using charitable trust, we are making money off the IRS.