Saving Money

What Has Changed For Small Business Owners?

As you get your affairs in order this tax season, it’s important to be aware of the new changes to tax law and how they could potentially benefit your small business. Today on the Atlanta Small Business Show, we’re pleased to welcome back Andrew Poulos, Principal of Poulos Accounting and Consulting. In this segment, Poulos walks us through his recommendations and tips for effective tax planning.

Transcription:

Jim Fitzpatrick:
Andrew, thanks so much for joining us once again on the show.

Andrew Poulos:
Jim, good to be here. Thanks for having me.

Jim Fitzpatrick:
Sure. So talk to us about some of the challenges businesses should expect due to IRS backlog. We keep hearing that they’re understaffed and that you can’t even get them on the phone. I tried myself recently and was on the phone for two hours. I just left it on hold and just nothing. I couldn’t get anybody. It’s very, very difficult to communicate with the IRS these days right?

Andrew Poulos:
It is, it is. Did you try because you had a need or you tried because you wanted to experiment to see if you can get them on the phone?

Jim Fitzpatrick:
Yeah. Yeah. It’s crazy.

Andrew Poulos:
It is. It is. Yeah. No, we’re probably seeing from the latest statistics we saw coming out of the National Society of Accountants which our firm is a member of. They’re probably having about 11% call through rate as far as phone calls.

Jim Fitzpatrick:
Wow.

Andrew Poulos:
So if you’re trying to get through, it’s challenging. Backlog is obviously enormous so they have, as of a couple weeks ago, the latest statistics were that they were about 24 million returns still unprocessed from last year during the pandemic.

Jim Fitzpatrick:
Oh my gosh. Wow.

Andrew Poulos:
Yeah.

Jim Fitzpatrick:
24 million.

Andrew Poulos:
24 million. We’re fortunate we only have a few clients from last year that still haven’t received their refunds. One of them texted me yesterday, small business owner, and his personal return told me that he was happy to tell me that he finally got his refund and we’re roughly at the 11 months since we had filed that return last year.

Jim Fitzpatrick:
Gosh.

Andrew Poulos:
There’s incredible challenges. While life is sort of getting back to normal for most of us from COVID, which is very much welcomed, we still are seeing extreme challenges with the IRS and the current economic environment.

Jim Fitzpatrick:
Sure. A friend mind said, “Well, isn’t this good news because doesn’t this mean that if they’re that backlogged, they’re probably not doing that many audits?” Is there any truth to that?

Andrew Poulos:
Here’s the thing to that. Statistically speaking, the amount of audits that the IRS has been conducted in the last 10, 12, 15 years has dropped tremendously.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
And at the end of the day, if you’re doing things right, whether you’re a small business owner, or even just the average taxpayer, if you’re doing things right, and you’re comfortable with what you’re preparing, you should never fear of being audited because-

Jim Fitzpatrick:
Sure.

Andrew Poulos:
Ultimately if you were to get audited for something, you should prevail at of the day, if you are on the right side.

Jim Fitzpatrick:
Right.

Andrew Poulos:
But overall we always say in our profession that while the average student taxpayer in the American public obviously who don’t like the IRS in that much say, “Hey, this is great. The IRS basically isn’t doing much,” but it actually at the end of the day impacts all of us, small business owners and otherwise.

Jim Fitzpatrick:
Sure. Sure.

Andrew Poulos:
Because the system isn’t operating like it should. When you have to wait 11 months or 12 months or 16 months-

Jim Fitzpatrick:
That’s right.

Andrew Poulos:
To get your refund, that’s real hard money you have given the government-

Jim Fitzpatrick:
That’s right.

Andrew Poulos:
That you’re waiting to get back, which could impact you or your business. The real truth is that no, we don’t want to see the IRS like this because it impacts all of us when we can’t get things done that impact our lives.

Jim Fitzpatrick:
That’s right. That’s right. There’s no question we’d rather, and what is the reason that the IRS is giving for this huge delay?

Andrew Poulos:
Just the pandemic.

Jim Fitzpatrick:
Just the pandemic.

Andrew Poulos:
They have a lot of their personnel working from home.

Jim Fitzpatrick:
Okay.

Andrew Poulos:
A lot of people are questioning whether people are truly working or sitting at home and getting paid, right?

Jim Fitzpatrick:
Yeah, sure.

Andrew Poulos:
That’s the unknown. It’s not for us to judge, but at the end of the day it’s impacting small businesses and everyone in general. It’s very difficult when you have individuals such as myself in a profession who have to spend time having our phone lines tied up, hoping that we can get through and we get through once every couple weeks, those are extreme challenge and it gets difficult to have to tell our clients over and over, “Hey, we can’t get through. We can’t get through.”

Jim Fitzpatrick:
Right.

Andrew Poulos:
At some point, your client’s looking at you like, “Well, what are you doing? You must not be doing your job.” The reality is we are doing our job, we just can’t get through because the person on the other end of the line is not answering the phone.

Jim Fitzpatrick:
Right. I think everyone is under the impression too that CPAs and accountants have a separate line or line of communication with the IRS than the layperson or the small business person. Is that true?

Andrew Poulos:
Yes. We actually do have a specialty line. We call in as licensed professionals, not unenrolled tax preparers, but licensed professionals can actually call in on a certain line it’s designated for us. Those are the lines we’re calling to and we can’t get through either. So that tell you—

Jim Fitzpatrick:
Really, so you’re having the same problem. Yeah.

Andrew Poulos:
Yeah. Let me me just tell you, you’ll find this amusing but on January 28th, I sent an email because we have a system that we log in to transmit 1099s electronically instead of doing it the old fashioned way of mailing them off.

Jim Fitzpatrick:
Sure.

Andrew Poulos:
They had made changes for security reasons, unbeknownst to most of us, they didn’t tell us that they had made changes. On the 28th, I logged in to transmit 1099s and file some extensions through what’s called the fire system and I couldn’t get in. I called the IRS, they said due to the topic I was requesting and the heavy call volume to call back a different day. The 31st is the deadline to transmit 1099s.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
Or file extensions and so, while I was thinking to myself, “This is just a bizarre because I’ve never had a problem getting into the system before as a licensed professional with my account that I have set up.”

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
I sent an email to the IRS, specifically the team that handles that fire system, and I got a reply two days ago.

Jim Fitzpatrick:
Wow. Two days ago and that’s January 28th.

Andrew Poulos:
Yeah, exactly. Took almost 32 days for them to reply via an email and the email was a standard format of email basically. These are the challenges that we’re seeing. If they took me 32 days to reply to one of my clients I’d be fired from representing them, right?

Jim Fitzpatrick:
Sure.

Andrew Poulos:
It’s just extremely unfair to the American people and to small businesses out there when we can’t even get a email reply for 32 days.

Jim Fitzpatrick:
That’s crazy. Let me ask you this. On the flip side, are they more tolerant of people that are not right up to date on their taxes or they’re paying them slow or they still owe them? Are they a little bit more lenient, I should say, on a small business owner that does owe them some money in light of all of what’s going on?

Andrew Poulos:
Yeah. What I would say is as far as small business owners who owe money, you always have rights as an American tax payer and there’s ways to navigate the system if you do owe. Doing nothing and ignoring the letters from the IRS, whether it’s now, pre-COVID, or after COVID-

Jim Fitzpatrick:
Right. Right. Never a good idea.

Andrew Poulos:
Is really not your best solution, is never a good idea.

Jim Fitzpatrick:
Right.

Andrew Poulos:
What we’re starting to see now is that notices are starting to pick up, automated notices. We’re starting to come out in full force with heavy volume as of a couple months ago and the various accounting associations in our profession got together and effectively lobbied Congress and lobbied the IRS to stop putting out notices when they can’t reply to communications to taxpayer-

Jim Fitzpatrick:
Exactly.

Andrew Poulos:
Notices and to our notices that we’ve sent in letters that we’ve sent in a year or two ago that are sitting in storage trailers that and have yet to be answered.

Jim Fitzpatrick:
Oh my gosh.

Andrew Poulos:
They’re firing more volumes of letters meanwhile, they’re not addressing the American public and the letters. You may have got a notice and replied to that notice, Jim, let’s just say.

Jim Fitzpatrick:
Right.

Andrew Poulos:
And then they’re firing off a second or third notice with an intent to levy or an intent to garnish or intent to do something.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
Meanwhile you’ve said a reply that they’ve never looked at. Where is the fairness in that system? They backed off now and said that they’re going to suspend all automated notices until they can catch up, which that should have been the approach to begin with.

Jim Fitzpatrick:
Yep.

Andrew Poulos:
These are the challenges that we’re experiencing right now.

Jim Fitzpatrick:
That exact scenario happened to one of the companies that we own is that I got a notice from there. I said, “Hey, you owe this much money.” We tried to get them on the phone, our accountant worked diligently, we sent the letter back, we answered it, the whole deal. Again, like you said, we just got another notice that said, “Hey, we’re taking this serious, you owe this much. It’s like, “You didn’t even read our response on the other one and you don’t take our phone call. What are we do?” I fear that one day we’re going to go to our bank account and see X number of dollars just taken out and meanwhile, they’re not even communicating with us.

Andrew Poulos:
Yep, exactly.

Jim Fitzpatrick:
I’ll have to see how that goes but I think so many other business owners have got similar stories out there.

Andrew Poulos:
We all have those frustrations, all the small business owners are experiencing frustrations.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
Sometimes it’s just a small compliance issue that really isn’t impacting you in a sense that you’re going to wake up one morning and your money’s going to be gone from your bank account. It’s just other matters that have to be taken care of. It’s, for example, a new small business and there’s been millions of small businesses that have started during the pandemic.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
A lot of home based businesses.

Jim Fitzpatrick:
Yep.

Andrew Poulos:
It may be something as simple as you start up a small business reaching out to me, for example, say, “Andrew, I’ve started a business,” and for various reasons, I may recommend that you should file to elect to be treated as an S corporation for best tax strategy.”

Andrew Poulos:
Then we submit the S corporation application in a timely manner to get your LLC, for example, your corporation to be treated as an S corporation-

Jim Fitzpatrick:
Right.

Andrew Poulos:
And you could be waiting 12 or 18 or 24 months to get that S corporation approval approved retroactive. In the meantime, you’re operating with the intent of being an S corporation, not knowing if you’re going to be one or when you’re going to get that approval. It’s crazy. It’s just extremely frustrating.

Jim Fitzpatrick:
You wonder because of the literally hundreds of millions of returns that they’re working on, how does the IRS ever catch up? It seems like this delay is going to be with us well, into the next three, four, five, six years. I don’t know how you ever catch up because it’s kind of like the I Love Lucy thing where she’s making the chocolates and they’re going through and all of a sudden it backs up. It’s got to be the same thing with the returns. These people try to get caught up and meanwhile tax season comes again and you got another 3, 400 million or 300 million returns coming your way, right?

Andrew Poulos:
You probably have more than that if you include business returns and individual returns.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
But you’re absolutely right. The other challenges that we’re seeing that the IRS is facing is just the amount of personnel they’re losing.

Jim Fitzpatrick:
Right.

Andrew Poulos:
Used to the old days, a lot of Baby Boomers for example, back in those days, worked in government jobs, it was secure. It was great.

Jim Fitzpatrick:
That’s right.

Andrew Poulos:
Good pay.

Jim Fitzpatrick:
Then they’d retire.

Jim Fitzpatrick:
Pay. They, they retire now,

Andrew Poulos:
Now not so much. If you’re starting that entry level, for example, at the IRS, I don’t know what they’re paying, but let’s say they’re paying 35 or 40,000, for example, as an entry level position that may require even a bachelor’s degree.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
Would you do that and work that job when you can go work at Amazon for 18 or 20 bucks an hour in their warehouse?

Jim Fitzpatrick:
That’s right. That’s right.

Andrew Poulos:
With no debris, for example. Those are the challenges that government and probably maybe even far beyond the IRS are starting to face is that a lot of people are starting to realize that there’s better benefits, there’s better opportunities out there, better opportunities to even advance up the ladder so to speak, in other jobs in private sector versus in the government.

Jim Fitzpatrick:
That’s right.

Andrew Poulos:
I believe that they’re losing, I don’t know the statistics, I don’t know all the facts, but I believe that they’re probably losing more personnel and maybe also due to the pandemic more personnel than they’re able to hire right now.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
Those are challenges. Those would be challenges for any of us as small business owners-

Jim Fitzpatrick:
Sure.

Andrew Poulos:
If we were losing more of our team than we could replenish and rehire-

Jim Fitzpatrick:
Right. That’s right.

Andrew Poulos:
In the same time, we would be at extreme challenges ourselves.

Jim Fitzpatrick:
That’s right. Maybe we just need to go to a use tax and fire the whole IRS and it would be nice and clean and simple, right?

Andrew Poulos:
Yeah. Yeah.

Jim Fitzpatrick:
You just pay taxes through everything that you purchased.

Andrew Poulos:
Congressmen and Congresswomen wouldn’t have a job at that point because a lot of what they do in DC has a function of tax implications in all these legislations that they pass at the end of the day. I always say that while that may be good for us, the American people, there’d be about 300 Congress people up in DC that may not have a job after that.

Jim Fitzpatrick:
I know. I know.

Andrew Poulos:
Maybe that will happen one day-

Jim Fitzpatrick:
I was just going to say, that’s got a nice ring to it actually, but …

Andrew Poulos:
It does. It does. Yeah.

Jim Fitzpatrick:
Speaking of changes, one of the changes that came down the pike, which sounds good to me in the law is that business meals are now 100% deductible for 2021 and 2022, which I think is fantastic. There’s a lot of small business owners that might have just heard that for the first time and said, “Wow, that’s great. I can take somebody, one of my clients or my employee or whatever, and write off the whole meal.” Am I getting that right? What if, Andrew, we had a whole bunch of drinks or beers and burgers and everything? Is the whole bill 100% tax deductible?

Andrew Poulos:
Yeah. Now there’s a couple things to that, Jim, is that you are correct. It’s 100% deductible for the two years and really the concept behind that, the premise, is that they would trying to create business for restaurants who were one of the industries that were highly impacted-

Jim Fitzpatrick:
Sure.

Andrew Poulos:
During the pandemic.

Jim Fitzpatrick:
Sure.

Andrew Poulos:
It’s effectively 100% deductible, but the meal has to be from a restaurant and it does not necessarily have to be that you’re eating in the restaurant because a lot of people still are not comfortable going to a restaurant so it catered by the restaurant or you could do takeout for example.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
But this has always been in the law, still is part of the law, it has to be a business purpose to that meal, whether it’s a discussion with a new client, an existing client, something, there has to be some business purpose, basically. As long as there’s no entertainment involved, it’s 100%. The law changed with the Tax Cuts and Jobs Act in 2018 where they made entertainment non deductible, that used to be 50% deductible along with meals, but entertainment’s no longer deductible. If you go to a Braves game and you purchase the tickets separately from the drinks and you conduct some business and discuss business at the game, for example, the drinks might be 100% or the hot dogs or the burgers, for example, but the tickets would be 0% deductible because it falls under entertainment. If you go to Longhorns with a couple of clients and you discuss a business, for example, as a business purpose and you spent 300 bucks having steaks and wine, basically that whole meal would be 100% deductible under current law.

Jim Fitzpatrick:
Small business owners are always challenged in keeping their records and such. If I go to dinner with somebody and we do talk about business, although it’s a friend of mine, but the whole conversation is all about his business or my business, or what have you and such, and it’s kind of gray. Was this a business dinner that we had? Was it a friendship? Two people catching up? In the event that I’m audited, what is it that I need to prove that that particular $300 dinner with a bottle of wine or what have you is 100% tax deductible? What are they going to ask me for?

Andrew Poulos:
Yeah. It gets into gray matters and everyone has their own interpretation of whether they conducted business or there was a business purpose or business intent-

Jim Fitzpatrick:
Sure.

Andrew Poulos:
In the meals and things like that. A lot of people just push the fine line and push their luck. But at the end of the day, the auditor, if you were ever have an audit, they can ask you for proof payment which means the credit card or the bank statement that you paid it through.

Jim Fitzpatrick:
Okay.

Andrew Poulos:
Then most importantly the receipt that shows the date the transaction, the meals, what was purchased and who you met with and what you basically discussed.

Jim Fitzpatrick:
Okay.

Andrew Poulos:
They may not get into the discussion part, but they would ask, “Was this a business meeting? What did you discuss? Who is this? Is this a client?”

Jim Fitzpatrick:
Sure.

Andrew Poulos:
“Was this a prospect?” It depends really, Jim, audits at the IRS are so subjective. You could have the same deduction on two different returns with two different auditors and get different results and even different questions. Whether one auditor would pursue that deduction-

Jim Fitzpatrick:
Sure.

Andrew Poulos:
Or to disavow it in the other one.

Jim Fitzpatrick:
Sure.

Andrew Poulos:
It’s just a very subjective matter.

Jim Fitzpatrick:
Right. Right. All of these things really depend on how much you’re talking about and how maybe if in the event that I claim $100,000 in income for my business and $30,000 of it is written off in meals at 100% with clients and such, they might go, “Eh, that doesn’t sound right to me.”

Andrew Poulos:
Correct.

Jim Fitzpatrick:
“Let’s talk about this.”

Andrew Poulos:
That’s right.

Jim Fitzpatrick:
If it’s $8,000 or 5,000, or what have you, maybe it’s 100 bucks a week that I’m dropping on a lunch or a dinner with a client’s plausible but is it $700 every single week? Maybe that is. Maybe in your business that’s what you do, but I would suggest that you better have then means to defend that and say, “Yeah, here’s a list of clients.”

Andrew Poulos:
Absolutely. Yeah.

Jim Fitzpatrick:
Right.

Andrew Poulos:
Yeah. You’re on the right track.

Jim Fitzpatrick:
Right.

Andrew Poulos:
A small business who may earn gross revenues of $10 million and has $50,000 in meals that are even legitimate-

Jim Fitzpatrick:
Sure.

Andrew Poulos:
The amount of $50,000 is a big dollar amount for any of us.

Jim Fitzpatrick:
Right.

Andrew Poulos:
But if you compare it in comparison percentage wise to a $10 million gross revenue, it’s going to be a far smaller percentage overall.

Jim Fitzpatrick:
Right.

Andrew Poulos:
That’s not going to be a glaring number to an auditor or to the system in general, for it to be pulled for an examination as it would if you had $125 or $150,000 revenues with $50,000 or $30,000 in meals. But at the end of the day, you got to be able to support the position and the last thing you want to do is take deductions that you can’t support, you know aren’t correct, or they’re highly in a gray area where you’re going to get at the end of the day, they’re going to be disallowed and you never want to put yourself in an element to have substantial understatement penalties either which could start getting up to 25% or higher of the tax dollar due. It’s not worth putting yourself or your business at risk like that.

Jim Fitzpatrick:
Right.

Andrew Poulos:
But overall if it’s a very small amount, if you have $2,000 in meals and you have good revenues, you’re operating a legitimate business, and they’re real, then if I was a business owner, I would not be scared of that. But just pushing your luck and just deducting all your meals that you’re going out with your friends and your family, that’s probably not the wisest thing to be doing.

Jim Fitzpatrick:
Right. Exactly. Although I will say that we have two of our sons in our business and of course my wife is my partner in our businesses so every time we get together, inevitably it ends up a business discussion. I don’t care whether it be for breakfast, lunch, or dinner, if the four go for a meal, it’s all about business. It’s this much personal and this much business. That’s one of those things that we’re like, “Well, this is actually a business meal that we’re having here,” but an auditor might say, “Wait a minute, those are your two sons and your wife and how are you claiming that?” But we’re all in the business together, all on the payroll so …

Andrew Poulos:
Yeah. You’re right. Everyone’s going to have a, it’s a matter of opinion on a lot of things.

Jim Fitzpatrick:
It is.

Andrew Poulos:
In the the tech business-

Jim Fitzpatrick:
It is.

Andrew Poulos:
And you just have to be able to feel confident that you can support your position, whatever that position is, whatever that deduction is, far beyond just meals.

Jim Fitzpatrick:
That’s right. That’s right. Hey, appreciate all the time you’ve given me. But I don’t want to let you get away without talking about the second round of PPP funds that many businesses received last year. What’s the update? Talk to us about that.

Andrew Poulos:
Yeah. The PPP is done. They finished the funds that were depleted and exhausted last year, that program ended.

Jim Fitzpatrick:
Okay.

Andrew Poulos:
Hopefully far less businesses are in need of some sort of financial support. But this year there’s just a new revenue procedure, basically just a slight modification in law that just requires small businesses to put a note with their tax return, their corporate tax return filing, their business tax return, filing that they received a PPP loan. I’m not sure what the purpose of that is, perhaps it’s an easier tracking mechanism for the IRS to be able to figure out which businesses receive PPP funding, maybe it’ll help with future audits. None of us really know what the goal is right now. The IRS require and request and changes things all the time.

Jim Fitzpatrick:
Yeah.

Andrew Poulos:
But just know of course, if you received it, you also have to report it on your books because up until the loan really, it was a loan initially, which is a forgivable loan, so until we get those loans forgiven you should be sitting on your books on your balance sheet as a loan payable back to the bank that you received the money from and once it’s forgiven, it would show as a non-taxable income on your corporate tax returns.

Jim Fitzpatrick:
Either way, yeah, it’s non-taxable because one’s a loan and the other one’s …

Andrew Poulos:
It’s just a reporting method that this slightly has changed for the current year for 2021 on corporate returns, on business returns, people, small business owners who receive PPP, and I say that because round two was still heavy and a lot of small businesses did receive it. They just need to be aware of the slight modifications that the reporting requirements on their current year return.

Jim Fitzpatrick:
Gotcha. Gotcha. Hey, just in a last question here, can you give us a general overview of where we are today compared to last year?

Andrew Poulos:
Yeah, I think far better for most businesses, far better than we were 12 months ago or even 18 months ago or towards the tail end of 2020. I’m far more optimistic of where we’re at economically right now. I think we still have a lot of challenges.

Andrew Poulos:
We have inflation that’s hitting all of us, small businesses and otherwise, tremendously. I think that we’re going to continue to see inflation. I don’t think that the Fed’s going to curb inflation or their attempt to curb inflation or thing’s going to be as far behind in the process. But overall, as far as the pandemic, look, Jim, I think if we can just get to the point where cases are very minimal and it’s not the front and center and headline news every day and the threat to us and the fear of COVID basically causing great illnesses to all of us, I think we’re all going to start feeling more comfortable being able to go out, conduct business and reengage in society, so to speak, go to events without having COVID be in front and center. I think that element of it should help majority of small businesses and from the way they’ve been impacted over the last 12 and 24 months.

Jim Fitzpatrick:
Yeah, and boy, we can’t wait for this thing to be completely beyond us, but I agree with you. Things are-

Andrew Poulos:
Absolutely.

Jim Fitzpatrick:
Seem to be coming back around.

Jim Fitzpatrick:
Andrew Poulos of Poulos Accounting and Consulting for businesses that are out there. Listening to Andrew, he is a wealth of knowledge in this field and has got so many great clients and phenomenal reviews and such. That’s why we love when he comes on the show, when he does, and shares his knowledge with all of our viewers, but you don’t have a great accountant, you can start with Andrew. He knows his stuff. That’s one thing you want to have on your side as a small business owner is a great attorney and a great accountant. Those two sometimes work hand in hand with each other, but you’re in good hands with Andrew.

Jim Fitzpatrick:
Andrew, thank you so much for joining us on the show. We very much appreciate it.

Andrew Poulos:
Jim, thanks for having me once again.

Jim Fitzpatrick:
Great.


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