Tax News By Mike McVay, Tax Accountant 
Mike@MikeMcVay.com 
850-725-5696
www.PensacolaFLTax.com
Volume 7, Issue 6
 
Failure to File and Failure to Pay: Are You Headed for T-R-O-U-B-L-E?


The old saying goes, “There are only two certainties in life: death and taxes.” Have you ever wondered what would happen if you filed your tax return late or worse, did not file at all? Well, you are looking for trouble if you do not file your tax return.
If you do not file an income tax return, the IRS will gather all the transmitted tax documents and create a “substitute return” for you. If they show you are due a refund, nothing further will be done. Surprised? If they show you owe money, they will begin sending you collection letters.
And, if that is not bad enough, there will be a penalty for not filing your return equaling five percent per month up to 25 percent of the tax due. Then, there is another penalty of .5 percent per month up to 25 percent of the tax due for failure to pay the tax. An example is if you owe $1000, it will cost you $250 penalty for not filing, but only a $5 penalty for not paying. And then, don’t forget they tack on interest to that number!
If you qualify for a refund and wait more than three years to file your return, the IRS will take that refund away, because the statute of limitations expires. Don’t expect them to send you a reminder letter!
In addition to the penalties you are charged for not filing your return, you also increase your chances of being audited. For example, if you file on time, you have a 3 percent chance of an audit. If you don’t file on time, your chance of being audited increases to 50 percent...Yikes!
There have been many high profile cases about celebrities not filing or paying their taxes. Here is a short list of people that owe or have owed the IRS:

• Toni Braxton = $400,000
• Val Kilmer = $500,000 and has a lien on his New Mexico property
• Pamela Anderson = $700,000
• Wesley Snipes = $2.7 million and jail time
• Marc Anthony = $3.4 million
• Nicholas Cage = $14 million

Here is an example of how the IRS will handle situations.  David Pushman was a limo driver.  He failed to file two tax returns.  He said he had reasonable cause which was that he had a heart condition, ADD, decreased earnings, no money to pay the taxes and his friend discarded his records.  The court determined that he demonstrated willful neglect and denied his “reasonable cause.” 
The general rule is to file on time (it’s okay to file up to the extension deadline) since the consequences are harsher for not filing than not paying the tax due. However, be proactive to pay any tax due by the deadline, not the extension deadline. 
Be aware of the new filing deadlines:

• For individuals, file by April 15th or October 15th with the approved extension.
• For C corporations, file by April 15th or September 15th with the approved extension
• For S corporations, file by March 15th or September 15th with the approved extension
• For partnerships, file by March 15th or September 15th with the approved extension

Don’t put yourself in a position of grief. Even if you are not ready to file, file something and you can amend the return later. As always, reach out if we can help.

Mike McVay, Tax and Small Business Accountant 
850-725-5696
5336 N Blue Angel Pkwy
Pensacola, FL 32526
Mike@MikeMcVay.com

​Everyone will be benefiting from the new Tax Cuts. However 2018 could be the year of audits. Within the bill they have doubled the budget for audits. If you want to find out how to avoid or pass an I.R.S. audit. Look me up. I am a S-Corp, LLC and Personal Tax Expert. I teach my clients how to avoid or pass these audits. Mike@MikeMcVay.com. www.PensacolaFLTax.com

​The completed version of the GOP tax bill will have seven tax brackets, sources told FOX Business on Friday.
As Republicans in the House and Senate prepared to release the details of the joint bill agreed upon by lawmakers across both chambers, sources said the GOP decided to stick with a seven-tier bracket system. The rates fall at 10%, 12%, 22%, 24%, 32%, 35% and 37%. The House had initially proposed collapsing the number of brackets into just three or four, an initiative the administration supported in an effort to simplify the tax code.
While the number of federal-income brackets remains the same, the thresholds and percentages are different. Here’s a look at the new tax brackets.
10%

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This rate applies to:
Single individuals with income up to $9,525
Married couples filing jointly with income levels up to $19,050
12%
This rate applies to:
Single individuals with incomes between $9,525 and $38,700
Married couples filing jointly with incomes between $19,050 and $77,400
22%
Single individuals: $38,700 to $70,000
Married couples filing jointly: $77,400 to $165,000
24%
Single individuals: $70,000 to $160,000
Married couples filing jointly: $165,000 to $315,000
More on this...

• GOP finalizes tax reform, expands child tax credit
• White House looks for ways to pay for infrastructure plan
• Final GOP tax plan expands child tax credit to sway Rubio

32%
Single individuals: $160,000 to $200,000
Married couples filing jointly: $315,000 to $400,000
35%
Single individuals: $200,000 to $500,000
Married couples filing jointly: $400,000 to $600,000
37%
Single individuals: $500,000 and above
Married couples filing jointly: $600,000 and above
Current rates
These are the existing rates: 10%, 15%, 25%, 28%, 33%, and 39.6%. Currently, the top rate applies to those with incomes in excess of $470,700. Plans put forth by both chambers initially included people with household incomes between $600,000 and $1 million in a 35% bracket.
Other
State and local tax deductions, otherwise known as SALT, have been a big source of controversy for Republicans throughout the tax reform debate. FOX Business confirmed on Friday that the new plan will cap state and local income and property deductions at $10,000.

EXECUTIVE SUMMARY: One of the fundamental differences between corporations and partnership business entities is that the former faces “two tiers” of taxation – once at the corporation level, and again when profits are distributed as dividends to the shareholder – while the latter are only taxed once to their owners as “pass-through” entities. Of course, the reality is that there are a lot of factors that go into determining the right kind of business entity, beyond just the pass-through taxation treatment or not, though in practice it is often a material factor.
A hybrid mid-point between the two is an S corporation, which is recognized as a corporation for legal purposes – including for liability protection, and transferability of stock shares – but still taxed as a pass-through business, similar to a partnership.
However, in practice the pass-through tax treatment of an S corporation isn’t exactly identical to a partnership, because with a partnership all pass-through income is subject to self-employment FICA taxes (as high as 15.3%), while an S corporation only pays FICA taxes on salary compensation to its owners, and not the remaining profits paid out as nontaxable dividend distributions.
To prevent everyone from just converting partnerships into S corporations that all pay their owners $0 in salary – to completely avoid FICA taxes – the IRS still requires that S corporation owner-employees be paid “reasonable compensation” for the services they render to the business.
Nonetheless, the reality is that for highly profitable businesses, especially with multiple owners and/or multiple employees, there is clearly a portion of profits, over and above just reasonable salary compensation, that can be distributed as a dividend to the S corporation owners, saving FICA self-employment taxes in the process. For profitable businesses, the tax savings can be thousands or even a few tens of thousands of dollars in savings.
Ultimately, not all small businesses can take advantage of these rules. Some don’t meet the ownership requirements of an S corporation, and others are so small and dependent on their owners that realistically, “reasonable” compensation would be 100% of the business profits anyway. Nonetheless, there are many high-income partnerships (or LLCs taxed as such) that might benefit by switching to an S corporation (or making an election for the LLC to be taxed as an S corporation), specifically to split the business profits into FICA-taxable wages and FICA-exempt S corporation dividend distributions. At least, until or unless Congress shuts down this perceived “loophole” and reunifies the taxation of S corporation dividend distributions with the pass-through income of partnerships!
Pass-Through Tax Treatment Of S CorporationsThe traditional tax structure of a corporation entails two tiers of taxation. The business itself is a standalone entity that files a tax return and pays taxes on its income. And any of the corporation’s accumulated income that is subsequently distributed as a dividend to shareholders is taxed again (albeit at favorable “qualified dividend” tax rates).
However, the reality is that many small businesses don’t even have a separate entity; instead, they’re simply a sole proprietorship, where the business owner is taxed directly on his/her income. Similarly, many partnerships are really just a combination of individual sole proprietors, and applying this kind of two-tier corporate entity tax structure would be unduly complex, and not representative of the reality (which is simply two individuals coming together in a joint venture).
To accommodate this reality, the tax code recognizes that partnerships can be taxed as a “pass-through entity”, where even though there is legally a separate business entity, the income is not taxed to the partnership entity, and instead is simply passed through in relative shares to partners’ own individual tax returns. In the process, the two-tier double-taxation of corporate income is avoided.
The challenge for some businesses, though, is that they don’t want to structure the business as a partnership (or an LLC taxed as a partnership). In some cases, it’s because of the liability exposure that can still attach to at least the general partners of a partnership. In other cases it’s because there’s a desire to make the business more easily transferrable, especially in small pieces (e.g., for succession planning), and it’s much easier to transfer shares in a corporation than partial interests of a partnership or LLC.
Accordingly, the tax code allows for corporations to make an “S election”. By electing to be treated as an S corporation, the business is nominally a traditional corporation for legal purposes (with all the usual requirements to establish and maintain a corporation), but is taxed as a pass-through entity (similar to a partnership). This allows businesses to enjoy many of the transferability, limited liability, and other benefits of a corporation, but still get the pass-through treatment that avoids two tiers of taxation. (Under the “Check The Box” rules, an LLC can choose to be taxed as a partnership, or taxed as a corporation which subsequently can make an S election.)
However, to prevent potential abuse, the tax code limits the exact kinds of corporations that can make an S election, restricting both the number of shareholders (no more than 100), the types of shareholders (most types of trusts cannot own S corporations), and the classes of stock (S corps can only have one class of stock, albeit with voting and non-voting shares).
Notwithstanding the restrictions, though, for the typical small business owner who wants some of the structural benefits of a corporation, but the pass-through treatment similar to a partnership, the S corporation is an appealing midpoint.
S Corporation Dividends And FICA Self-Employment TaxesNotably, while S corporations are taxed as a pass-through entity similar to a partnership, the rules are not exactly the same.
When it comes to owners in particular, a key distinction is that with a partnership, any/all income allocable to an active partner in the business is automatically and fully treated as self-employment income, subject to FICA self-employment taxes (Social Security and Medicare employment taxes).
However, with an S corporation, the corporate roots – where payments to owners can occur either as salary compensation for employment, or as a dividend to ownership – is at least partially maintained.
Of course, it doesn’t make sense to pay a traditional “taxable” dividend from an S corporation, because the whole point is that it’s a pass-through entity, where the income of the S corporation is automatically and already taxed to the owners when the business earns it. As a result, taking money out of an S corporation is simply classified as a “distribution” – functionally it’s a dividend, but a nontaxable one because the taxes were already paid when the income was earned by the business to begin with. This ensures that an S corporation is only subject to a single tier of taxation.
Similarly, when an owner-employee of an S corporation receives a salary payment (i.e., for services rendered to the business), the payment is deductible to the business, and taxable to the owner-employee. The net result is substantively the same as an S corporation dividend – the income is only taxed once, to the owner-employee.
An important distinction, however, is that while both the pass-through income of an S corporation, and a salary payment from an S corporation, are ultimately taxable to the owner-employee, at ordinary income rates, their treatment is not identical. Because as “corporate” income, an S corporation’s pass-through income by default is not subject to employment taxes under Revenue Ruling 59-221, since it was not directly earned (even though it’s otherwise treated as ordinary income). By contrast, a salary payment is fully subject to FICA taxes.
In other words, S corporation owners actually have control over whether they will receive their business income as salary, or as a dividend distribution (of previously-taxed pass-through income), where only one is subject to FICA taxes but not the other!
Potential Self-Employment Tax Savings From S Corporations And Reasonable Compensation RequirementsThe fact that wages from an S corporation are subject to FICA taxes, but dividend distributions are not, can be a non-trivial impact. FICA taxes include a 12.4% Social Security tax up to the Social Security wage base (which will be $127,200 in 2017), plus another 2.9% of Medicare taxes (for an unlimited amount of income). In addition, there’s another 0.9% Medicare surtax on earned income above $200,000 for individuals (or $250,000 for married couples). In total, this leads to FICA tax rates of 15.3% initially, dropping to 2.9% beyond the Social Security wage base, and rising to 3.8% at higher levels of earned income.

Mike McVay - Sub S Corporation Tax Specialist - 850-725-5696 

W-2 & 1099-MISC filing deadlines
Background In an effort to combat fraud, The Protecting Americans from Tax Hikes (PATH) Act of 2015 was passed by Congress and signed by President Obama in December 2015. One key provision revises the filing deadline for Form W-2 and certain types of Form 1099. Forms W-2 and 1099-Misc Filing Deadline When do you file Form W-2? The filing deadline for all federal W-2s is  January 31. This is true for both employee and agency copies, or whether filing paper or electronic returns. 

What about Form 1099-Misc? The new January 31 deadline applies to certain types of 1099s.  If you're filing Form 1099-Misc and reporting amounts in Box 7: Nonemployee Compensation, then you will need to observe the new filing deadline of January 31. 

If you don't have amounts in Box 7, then the deadline remains February 28 for paper filings or April 2 for electronic filings.Changes for EmployersWith this new deadline, it's important that employers be well prepared to complete year-end tasks. This means:

• Verifying accuracy of employee information
• Reporting/submitting any year-end adjustments as soon as possible
• Reviewing year-end totals for any discrepancies

If you need to make corrections after sending your file to the Social Security Administration, you can do so by filing Form W-2c, Corrected Wage and Tax Statement.

McVay Business Services file all W-2 and 1099's electronically. Call us at 850-725-5696 for full service year-end tax filings. Mike@MikeMcVay.com