What businesses need to know about the tax treatment of bitcoin and other virtual currencies

virtual currency

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic, or cryptocurrency.

While most small businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more large businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be purchased for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact

Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance.

The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.

When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date it was received by the employee.

When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. Generally, the self-employment tax rules apply, based on the fair market value of the virtual currency on the date received, and payers must issue 1099-MISC forms to recipients.

Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

Deciding whether to go virtual

Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.

To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors, or other service providers — contact us.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

IRS Audit Techniques Guides provide clues to what may come up if your business is audited

Audit Techniques Guides

IRS examiners use Audit Techniques Guides (ATGs) to prepare for audits — and so can small business owners. Many ATGs target specific industries, such as construction. Others address issues that frequently arise in audits, such as executive compensation and fringe benefits. These publications can provide valuable insights into issues that might surface if your business is audited.

What do ATGs cover?

The IRS compiles information obtained on past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain:

  • the nature of the industry or issue,
  • accounting methods commonly used in an industry,
  • relevant audit examination techniques,
  • common and industry-specific compliance issues,
  • business practices,
  • industry terminology, and
  • sample interview questions.

By using a specific ATG, an examiner may, for example, be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the taxpayer resides.

What do ATGs advise?

ATGs cover the types of documentation that IRS examiners should request from taxpayers and what relevant information might be uncovered during a tour of the business premises. These guides are intended in part to help examiners identify potential sources of income that could otherwise slip through the cracks.

Other issues that ATGs might instruct examiners to inquire about include:

  • internal controls (or lack of controls),
  • the sources of funds used to start the business,
  • a list of suppliers and vendors,
  • the availability of business records,
  • names of individual(s) responsible for maintaining business records,
  • nature of business operations (for example, hours and days open),
  • names and responsibilities of employees,
  • names of individual(s) with control over inventory, and
  • personal expenses paid with business funds.

For example, one ATG focuses specifically on cash-intensive businesses, such as auto repair shops, check-cashing operations, gas stations, liquor stores, restaurants and bars, and salons. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses.

Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records.

Likewise, for gas stations, examiners must check the methods of determining income, rebates, and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages, and tipping.

Avoiding red flags

Although ATGs were created to enhance IRS examiner proficiency, they also can help small businesses ensure they aren’t engaging in practices that could raise red flags with the IRS. To access the complete list of ATGs, visit the IRS website. And for more information on the IRS red flags that may be relevant to your business, contact us.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Should you file Form SS-8 to ask the IRS to determine a worker’s status?

independent contractorsClassifying workers as independent contractors — rather than employees — can save businesses money and provide other benefits. But the IRS is on the lookout for businesses that do this improperly to avoid taxes and employee benefit obligations.

To find out how the IRS will classify a particular worker, businesses can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, the IRS has a history of reflexively classifying workers as employees, and filing this form may alert the IRS that your business has classification issues — and even inadvertently trigger an employment tax audit.

Contractor vs. employee status

A business enjoys several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws.

On the downside, if the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties. That’s why filing IRS Form SS-8 for an up-front determination may sound appealing.

But because of the risks involved, instead of filing the form, it can be better to simply properly treat independent contractors so they meet the tax code rules. Among other things, this generally includes not controlling how the worker performs his or her duties, ensuring you’re not the worker’s only client, providing Form 1099 and, overall, not treating the worker like an employee.

Be prepared for workers filing the form

Workers seeking determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to health, retirement and other employee benefits and want to eliminate self-employment tax liabilities.

After a worker files Form SS-8, the IRS sends a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return it to the IRS, which will render a classification decision. But the Form SS-8 determination process doesn’t constitute an official IRS audit.

Passing IRS muster

If your business properly classifies workers as independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that can pass muster with the IRS.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Tax-Related Identity Theft: What You Need to Know

Identity theft continues to be a growing problem, with instances of tax-related identity theft increasing every year. This can be a frustrating, time-consuming issue for taxpayers. Here are some things you need to know about tax-related identity theft.

Tax-Related Identity Theft - Ramsay & Associates
What is Tax-Related Identity Theft?

Tax-related identify theft occurs when a social security number is stolen and used to file a tax return for a fraudulent refund. Many victims of tax-related identity theft are unaware that it has occurred until they file a return and discover that one has already been filed under their social security number. In other cases, taxpayers may receive a letter from the IRS stating that they have identified a suspicious return.

For 2017, the IRS, state agencies, and the tax industry enacted new safeguards and actions to combat tax-related identity theft.

Warning Signs

It is important to know the warning signs of possible tax-related identity theft. This is especially important if the IRS or your tax professional contact you regarding:

  • Use of your social security number for more than one return
  • Additional tax owed or a refund offset, as well as collection actions taken against you, for a year that you did not file a tax return
  • IRS records that indicate wages received or other income from an unknown employer

If You Become a Victim

The Federal Trade Commission recommends these steps if you become a victim of identity theft:

  • File a complaint with the FTC at www.identitytheft.gov
  • Contact one of the three major credit bureaus to place a “fraud alert” on your credit record
  • In addition, contact your financial institutions and close any financial or credit accounts opened without your permission or tampered with by identity thieves

If you know or suspect that you are a victim of tax-related identity theft, the IRS recommends that you:

  • Respond immediately to any IRS notices by calling the number provided
  • Complete IRS Form 14039, Identity Theft Affidavit
  • File your tax return and pay any taxes that you owe; you may also need to mail paper tax returns

Ways to Protect Yourself

  • Always use security software with firewall and anti-virus protections in addition to using strong passwords
  • Learn to recognize and avoid phishing or suspicious emails, threatening phone calls or text messages from thieves posing as legitimate organizations, such as credit card companies, financial institutions, and the IRS
  • Do not follow links or download attachments from suspicious or unknown email addresses
  • Protect your personal data by securing your tax records, social security number, and credit card and banking information
  • Do not carry your social security card with you
  • Finally, remember that the IRS does not initiate contact with taxpayers to obtain personal or financial information

Find more information from the IRS Taxpayer Guide to Identity Theft.

Minnesota Department of Revenue

With an increase in scams and stolen personal information, the Minnesota Department of Revenue has stated that it is taking the time necessary to ensure that the correct refund goes to the correct person. The department reviews every return to verify information provided, and therefore, the length of time to process that return may vary from year to year.

Learn more from the Minnesota Department of Revenue. For Wisconsin, visit the website of the State of Wisconsin Department of Revenue.

 

Tax-related identity theft may also occur when thieves use a stolen Employee Identification Number from a business to create fraudulent W-2s. The accounting and tax professionals at Ramsay & Associates can assist taxpayers with individual and business tax-related identity theft – both with taking preventive actions and correcting any issues after identity theft occurs. Contact us for more information or to schedule an appointment.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Prepare Now for 2017 Tax Returns

Prepare for 2017 Tax Returns

With the April 18 Tax Day deadline behind us, you may be of the mindset that the last thing you want to do is start preparing for your 2017 income taxes. But there’s really no better time than now, when your most recent tax experience is still fresh. Here are a few things you can do now to prepare for 2017 tax returns. You’ll be glad you did.

File, Don’t Pile

Come tax season, a pile of receipts and documents shoved into a drawer or folder can be completely overwhelming. If you don’t already have an organized filing system in place, create one now. Mobile filing folders, boxes, or totes work well if you don’t have a filing cabinet and are available at office supplies stores. If possible, keep this separate from your non-tax related filing, such as credit card statements or correspondence. Take a look at your documents and receipts from your 2016 return to determine which categories you’ll need for each file folder, and keep up with your filing on a weekly or monthly basis. Next January and February when you receive your W-2, 1099s, mortgage interest statements, and other important documents, you’ll be ready to file them, and they’ll be easily accessible when the time comes.

Identify Areas of Weakness

Were there any specific items that caused delays or other issues with your 2016 tax returns? For example, were your mileage records incomplete? Did you neglect to thoroughly document clothing or household goods donations with photographs and receipts? If you haven’t already logged your mileage or documented donations for 2017 – or any other items that you may have missed – start now.

Electronic Documentation

Spreadsheets provide another excellent method of tracking expenses, tax deductible donations, mileage, and other important information. The more detailed the information captured, the better. If you have online receipts, include the hyperlink for easy access. Scan and save paper receipts electronically. Be sure to back up all your files.

Review Taxable Income

Did you withhold too little in 2016? Too much? Now is the time to review your taxable income and make necessary adjustments to your current withholdings, 401(k) contributions, and other components that determine your taxable income – and subsequently, your tax bracket. If you’re unsure of the best course of action to most positively impact your 2017 income tax return, contact Ramsay & Associates. Our tax planning services – for both individuals and businesses – allow you to make the best financial decisions for your family or your business. Contact us for more information or to set up a tax planning appointment.

Take the stress out of tax season – a little preparation now will go a long way in early 2018.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.