Mesa Money Minute

Last week we gave you the first four tips for audit proofing your small business. Here are four more valuable tips. (5) Use technology. The options are endless and your CPA can help you decide what's best for you. (6) Understand what is deductible. Of course you will need your CPA's help from time to time, but having a general understanding of how tax deductions work will help you stay organizer. (7) Remember, only your business can make business deductions. If your employees spend their own money on business expenses, they cannot deduct them. Try a reimbursement policy instead. (8) Track donations meticulously. Donation expenses are one area the IRS looks at thoroughly. Be sure to keep the thank you letters the organization sends you. 

Audits are an unfortunate fact of life for small business owners. While the chance of an audit in any given year is low, there's a decent chance that over the life of your business you'll be subject to at least one type of audit of your business records. Here are eight tips to ensure you're prepared in case of an audit: (1) choose a strategy and stick with it! Are you going to use technology, a professional, old fashion paper ledgers? Figure out what works for you and keep it up. (2) Know what to track: income, expenses, assets and liabilities. Make sure your strategy covers all items. (3) Store your information in one place. You need to keep information for at least seven years, so get organized with your documentation system, whether that's a filing cabinet or the cloud.  (4) Keep your business and personal accounts separate. If you do one thing for your small business recordkeeping, do this. Tune in next time for the rest of the tips.

Last week, Sen. Manchin agreed to a pared-down version of Biden's Build Back Better legislation. The bill is called the Inflation Reduction Act and leaves out most of the tax provisions of Biden's proposal. There are no increases in individual tax rates, however the child tax credit, which was expanded for 2021, will also not be expanded going forward. The most significant tax change is the 15% minimum tax on financial profits to large corporations. This refers to the financial income reported to shareholders rather than the taxable income reported to the IRS, which under current law is frequently vastly different. The bill also attempts to end the much maligned "carried interest" tax benefit. There is also $370 billion of energy and climate-change provisions, and roughly $80 billion of IRS funding, in the hopes of raising revenue through increased enforcement action. This bill is not yet law and it remains to be seen whether it will garner enough support to make it through Congress so stay tuned.

A lot of real estate investors are converting their long-term rentals to short-term rentals, and renting them on websites such as AirBNB and VRBO. Before making the switch, it's important to understand the tax implications. First off, localities (including the City of Grand  Junction) often charge lodging tax in addition to sales tax. They may also require a special permit be obtained. Check with the city your property is located in to learn about tax and licensing requirements. Additionally, if you provide significant personal services, such as daily cleaning, recreational, or information services to your tenants or guests, the income from the property might be considered self-employment income subject to the 15% self employment tax. Consult with your CPA before deciding to convert to a short-term rental to make sure you understand the costs and benefits of doing so.

With the boom in real estate values in the last couple of years, many casual and professional real estate investors are looking for ways to save in taxes on their real estate investments. One strategy is to complete a cost segregation study. Cost segregation studies, or "cost segs" for short, are prepared to allocate or reallocate building costs to tangible personal property. A cost seg identifies and reclassifies personal property from real property assets to shorten the depreciation time for tax purposes. This, in turn, reduces current income tax obligations. Personal property, or section 1245 property, includes assets that are non-structural elements. Other property such as land improvements can also be depreciated with shorter lives. The deduction created from the cost seg will directly reduce taxable income. Cost segs must be completed by a qualified cost segregation provider. Reach out to your CPA to ask if a cost seg is right for your situation.

Effective July 1, Colorado imposes a retail delivery fee on all deliveries by motor vehicle to a location within Colorado with at least one item of tangible personal property subject to state sales or use tax. The retailer that collects the sales tax on the sale sold and delivered, including delivery by a third party, is liable to collect and remit the retail delivery fee. Deliveries include when any taxable goods are mailed, shipped, or otherwise delivered by motor vehicle to a purchaser in Colorado. The retail delivery fee is due at the same time as your sales tax return. Returns are generally filed on a monthly basis and must be filed on or before the 20th day of the month following each reporting period. Retailers permitted to file state sales tax return on a quarterly, annual or other basis will file the retail delivery fee return on the same schedule. The retail deliver fee is calculated as $.27 per sale. If every item in a retail sale is exempt from sales tax, the delivery is also exempt from the retail delivery fee. 

On May 23, 2022, Governor Polis signed a new law to give Coloradans a tax rebate of $750 for single filers and $1,500 for joint filers this summer. If you filed your individual 2021 tax return by June 30, you will receive your check by September 30. If you extended your tax return and file it by October 17, you will receive your check by January 31, 2023. To prevent fraud, all rebates will be issued by check, not direct deposit. You must file either a Colorado tax return or a property tax/rent/heat credit rebate in order to receive the rebate. You must have been a full-year Colorado resident in 2021; you do not qualify if you moved into or out of Colorado in 2021, or if you moved into Colorado in 2022. Go to colorado.gov or ask your CPA for more information.

Federal and state departments of labor and other taxing authorities are cracking down on the misclassification of workers. Workers in your business can be classified as either independent contractors or employees. Properly classifying workers is important because misclassifying a worker as an independent contractor can open you up to back payroll taxes, penalties, and interest; whereas misclassifying a worker as an employee can cost you in payroll taxes and benefits. Determining whether a worker is an employee or a contractor is a facts and circumstances test, meaning there is not a hard line definition. Instead, the authorities look at a number of factors to try to understand the big picture. There are three general categories of factors: behavioral control, financial contraol, and relationship control. They will be looking at things like who sets the schedule, whether the worker performs the same type of work for other businesses or the public, and who buys supplies and equipment, among other things. The more control the business has over the work, the more likely the person will be classified as an employee. The state department of labor and employment puts particular weight on whether the worker publicly markets their services to other businesses.

Colorado voters approved Proposition 118 in November of 2020, creating a state-run Paid Family and Medical Leave Insurance (FAMLI) program. FAMLI will start providing benefits to employees beginning January 1, 2024. Eligible employees will receive up to 12 weeks of paid leave in order to take care of themselves or their family during life changes such as the birth or adoption of a child or taking care of a family member with a serious health condition. Both employers and employees will pay a premium for the program, equalling about a half a percent of wages each. Beginning January 1, 2023, employers will need to begin withholding these premiums from employees' checks and remitting the premiums to the state. Small businesses with fewer than 10 employees will not have to pay the employer's portion of the premiums, but will still need to withhold the employee portion and remit it to the state.

A conservatorship is a court-ordered guardianship over an individual's financial life. These are set up when an individual lacks the capacity to manage one or more areas of their own finances. An interested party such as the adult child of an elderly person will bring the case to the court, and a judge will determine whether a conservatorship is necessary, and will appoint a conservator. Conservatorships can be limited, which applies to only specific matters, or full, which grants a conservator the rights and responsibilities regarding all financial aspects of an individual's life. The conservator has an obligation to act in the best interest of the protected person also known as a conservatee. Any adult can be a conservator, and they are usually a family member, although professional conservators who perform the duties for a fee also exist. The conservatorship is monitored by the court, with periodic reporting required. Before obtaining a conservatorship, consider whether a less restrictive solution, such as a power of attorney, can accomplish the same goals.