By: Pete Solov, CPA
Inform Advisors About Major Changes in Business and Life
While preparing for tax season may not top anyone’s list of fun things to do as the leaves are turning and pumpkin spice fills the air, investing the time now to assemble documents, communicate with your tax advisor and evaluate your tax position can save time and make the process go more smoothly when tax season arrives.
Fortunately, no major tax overhaul legislation was enacted that would significantly change the tax picture either for businesses or individuals in 2022, so most taxpayers with roughly the same income as the previous year will have a similar experience with their tax returns.
However, taxpayers who had major changes in 2022 – for instance, a significant change in income or the purchase or sale of a business – should communicate with their tax advisors now to discuss how their tax positions have changed. Your tax advisor will determine what kinds of documentation and information you can assemble ahead of time to make the tax preparation process go smoothly.
Large capital gains may be able to be deferred but should be discussed with your tax advisor to see what the best options may be. If your business is having a rough year, this too may be an opportunity to consider planning prior to year-end.
Business taxpayers with certain hot button issues are advised to contact their tax advisors as soon as possible. These issues include international financial transactions, for which reporting requirements have become very complex, and also include doing business in multiple U.S. states and cryptocurrency trading.
- If you have had any international financial transactions, or if you have opened a foreign bank account, you may be required to file either a Form 8938 with your tax return, or a Foreign Bank Account Report (FBAR). Form 8938 is a statement of foreign financial interests filed with the IRS; the FBAR is filed with the Treasury Department’s Financial Crimes and Enforcement Network (FinCEN). The requirements for filing these reports are different, so your tax advisor needs time to determine which, if either, you are required to file. Be proactive and inform your advisor now. Penalties for failure to file start at $14,489.
- On a related issue, your tax advisor needs detailed information on any international financial activities as soon as possible. Schedules K-2 and K-3 will be required for each flow-through entity that may have been involved in foreign transactions. The leniency that was shown during the pandemic about these schedules is over; for 2022, new exceptions apply for filing these forms.
- Inform your tax advisor about any estimated taxes you have already paid for 2022. If you paid the amounts you were advised to pay, but your tax situation changed significantly during the year, your estimated payments may not have been enough. Both you and your tax advisor need to be prepared. You may wish to adjust your fourth quarter estimate prior to year-end. Contact your advisor to discuss.
- If you do business in multiple states, let your advisor know which states have withheld taxes and which have not. Additionally, if you have started doing business in new states, inform your advisor. More than 20 states have enacted pass-through entity (PTE) laws that enable S corporations and partnerships to deduct most of the state and local taxes at the entity level for Federal purposes the owners can no longer deduct at the federal level due to the $10,000 limit for tax itemized deductions. If you are doing business in any of those states, your tax advisor can help you realize the benefits of these new laws.
- Did you have any non-business supplemental income or losses? For example, cryptocurrency trading necessitates the filing of several different tax forms and schedules, particularly if there are gains or losses to report. Failure to report virtual currency transactions is considered fraud and the statute of limitations does not end.
Tips that typically apply to all individual and business filers include:
- When you receive a tax organizer from your tax advisor, fill it out completely and attach all the requested documents. Include information about any new dependents and whether you want the advisor to prepare children’s tax returns. Note whether you will be claiming a college student as a dependent; in some cases, the student may benefit from filing and utilizing the 1098-T tuition statement to garner the American Opportunity Tax Credit or another college tuition credit. However, the determination of who is a dependent should be reviewed with your tax advisor.
- Inform your tax advisor about any changes in investments so they know which Form 1099s should be received, especially if you have closed an account or opened a new one.
- Let your advisor know if you made a Qualified Charitable Distribution from an IRA, or if you made enough other charitable donations to boost you over the standard deduction threshold.
- Are you considering retirement? Talk to your tax advisor before the end of this year so they can run projections and do some early tax planning for you.
- Let your tax advisor know ahead of time if you are likely to need a filing extension due to a delay in receiving your Schedule K-1 or other factors. Due to the K-2/K-3 filing requirements, many flow through entities file extensions.
- If you are a Schedule C filer, did you buy or sell a business or an interest in a business? Inform your tax advisor now, as it will significantly impact your return preparation.
- Did you sell goods or services online (Facebook marketplace, eBay, etc.)? If so, you are likely to receive a 1099 for 2022. You should discuss with your tax advisor how or if this income will be taxed.
Even if your tax situation has remained stable in 2022, it’s a good idea to communicate with your advisor before the end of this year to confirm that. Contact your KRD advisor as soon as possible and let us know if you have any questions.
