Secretary of State Annual Report Letters

If you are the owner of an LLC or corporation, you’ve probably received a few letters that look like this.

The letters look very official and tell you that you need to file your annual periodic report for your entity with the Secretary of State. However if you read the fine print, you will see that these letters do NOT come from the Secretary of State; they come from a third-party that is offering to file your annual periodic report for you.

(The example in this post if for a Colorado entity; however there are similar letters sent out in other states that offer this unnecessary “service.”)

All of the information pre-filled on the report is from public records on the Secretary of State’s website. You typically do NOT need to use a third-party to file your annual report. In this example, the third-party service is charging a $75 fee, which includes the $10 Secretary of State fee. In Colorado, the annual report can easily be filed online through the Colorado Secretary of State website. So if you use these service, you are basically paying $65 for something that will probably take you more time and energy then just going to the Secretary of State website and filing the report yourself.

You can find instructions here on how to file your Colorado annual report yourself: https://www.sos.state.co.us/pubs/business/FAQs/reports.html

You can also sign up on the Colorado Secretary of State’s website to receive email notifications when your annual report is due.

If you receive this type of correspondence and need help determining if it is legitimate, you may want to consult with your attorney or tax professional.

I Set Up an LLC… Now What?

Maybe you are doing some side work in addition to your regular W-2 job.  Or maybe working from home during Covid made you realize you are over the 9 to 5 grind and you are going out on your own.  You heard that if you are working for yourself, you should set up an LLC so you got on the Secretary of State’s website and filed the articles of organization.  You don’t really know what it means but you set up an LLC!

What is an LLC?

LLC stands for limited liability company.  It is a type of business entity that is typically set up for legal purposes, to limit the liability of your business activities from your personal life and/or other businesses. 

To set up an LLC, You usually start  by filing articles of organization with your state’s Secretary of State.  For an LLC to truly serve the purpose it is designed for i.e. limited liability, you will want to do a few other things including:

-Set up a bank account for the LLC to run all of your business income and expenses through.

-Consider working with an attorney to draft an LLC operating agreement.  This is especially important if you have partners/co-owners in the business.

-Set up a bookkeeping/accounting system.  If there will be minimal income and expenses, you may be able to just keep track in a spreadsheet.  If there will be more financial activity, you may need to utilize a bookkeeping software or app such as QuickBooks or Wave.

-Provide an updated W-9 to any clients/customers who give you a 1099.  You will want to give them an updated W-9 showing your LLC name (and EIN if applicable).

Also, to clear up one common misconception…setting up an LLC does not magically convert otherwise personal expenses into business deductions.  Generally, the amounts you pay to run your business are deductible as business expenses, regardless of whether you have a separate legal entity set up for the business. 

Tax filing options as an LLC

Operating an LLC gives you several tax filing options.

If you are the sole member (owner) of the LLC, you can file your taxes in the following ways-

-You can have the LLC treated as what is known as a “disregarded entity” which means you report all of the LLC’s income and expenses on your personal tax return and do not have a separate LLC tax return filing.

-You can make what is known as an “S election” with the IRS and file a separate S corporation tax return.  The main reason LLC owners choose to do this is it can reduce the self employment taxes you pay on your LLC income in some cases.

-You can file an election to have your LLC taxed as a C corporation and file a separate C corporation tax return.  One reason you may choose to do this is if you have a large amount of medical expenses; C corporations can allow for generous medical expense deduction reimbursements.

If you own the LLC with one or more others, in addition to being able to file as an S corporation or C corporation, you can also file as a partnership.  Filing as a partnership is the default tax filing for an LLC with two or more members.  A reason you may choose to file as a partnership is it can provide more flexibility in allocating income and losses to the members than filing as a corporation.

Do you need a federal employer identification number from the IRS?

If your LLC is going to be taxed as a corporation or partnership, you will definitely need an EIN to use for your business tax return.  If you are going to treat your LLC as a disregarded entity for tax purposes and report on your personal tax return under your social security number, there are still some circumstances where you will need or want a separate EIN for the business including if you plan on hiring employees.  Also, when you open a business bank account the bank will ask for your EIN.  You may be able to get around having an EIN with the bank by using alternative identification depending on the bank and their account opening requirements.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Self-Employment Tax FAQs

Maybe you’re newly self-employed and trying to get a handle on all things self-employment…or maybe you’ve been on your own for awhile and want to understand your taxes better.  One thing is certain, being self-employed can complicate your tax situation.  Here are some frequently asked questions about taxes when you are self-employed.

Question: Do I get to claim more tax deductions now that I’m self-employed?

Answer: Probably.  The federal tax code allows you to deduct business expenses that are “ordinary” and “necessary” for the production of your income.  The specific expenses you can claim as tax deductions will vary based on your individual self-employment situation and industry.   Allowable deductions typically will reduce your self-employment income.  You will then be taxed on your “net” (income after deductions) self-employment income.

Question: I’m self-employed for the first time.  I should set up an LLC so I can take deductions, right?

Answer: You don’t need a separate business entity to claim business deductions against your business income.  Whether or not you should set up a business entity to run your self-employment activity through is as much a legal question as a tax question.  

Question: Do I need to file a separate self-employment tax return?

Answer:  It depends.  

-If you do not have a separate entity and are in business by yourself (no partners), you are considered a “sole proprietor” and your business revenue and expenses will be reported directly on your personal income tax return. 

 -If you have set up a LLC and:

–are in business by yourself, the default tax filing is for the business revenue and expense to be reported on your personal tax return.  

–have partners in your business, or make a separate tax election to have your entity taxed as a corporation, you will need to file a separate business tax return. 

-If you have set up a corporation or partnership with your state, you will also have a separate business tax return filing requirement.

Question: I report my self-employment income and expenses on my personal tax return.  How is self-employment tax calculated?

Answer:  Your net self-employment income will be taxed in several ways.  

-You will be subject to federal income tax on your net self-employment income.  Self-employment income is subject to ordinary income tax rates.

-If you live somewhere that has state and local income taxes, you typically will be subject to state and local income tax on your net self-employment income.

-You will also be subject to self-employment tax.  This is made up of two components: Social Security tax and Medicare tax.  

   -Social Security tax is 12.4%. (Social Security tax is imposed on wages/self-employment income up to $147,000 in 2022)

   -Medicare tax is 2.9%.

   -Total self-employment tax is 15.3%

This is on top of your regular income tax.  This is a shock to many people when they first become self-employed.

Question: How do I pay these taxes?  When I worked as an employee, my company withheld tax from my pay.  Now that I’m self-employed, I don’t have any tax withheld from my payments.  I’m not sure what to do.

Answer: Now that you are self-employed, you may need to send in quarterly estimated tax payments to the IRS.  Typically the IRS wants you to pay in the tax you owe evenly throughout the year.  If you wait until you file your tax return to pay all of your tax for the year, you may be subject to an underpayment penalty.  Making quarterly estimated tax payments can prevent you from paying this penalty.

To avoid the underpayment penalty, you need to pay in 100% of your prior year tax amount (110% if your prior year adjusted gross income was $150,000 or higher), or 90% of your current year tax amount.  

So for example, let’s say you worked a W-2 job in 2021 and your total tax for the year was $6,200.  You became self-employed in January 2022.  To avoid the underpayment penalty for 2022, you could pay in $6,200 via quarterly estimated tax payments, or $1,550 per quarter. Even if your tax liability for 2022 was much higher than $6,200, you would not owe an underpayment penalty if you paid in $6,200 evenly throughout 2022.

Federal quarterly estimated tax payments are due as follows:

1st Quarter – April 15th

2nd Quarter – June 15th

3rd Quarter – September 15th

4th Quarter – January 15th

Question:  I had a spike in income last year; I don’t think it makes sense to make estimated tax payments based on last year’s tax.  How do I estimate my current year tax so I know how much I should pay in quarterly estimated tax payments?

Answer:  In this situation, it may be a good time for you to work with a tax professional to help you estimate your tax for the year to determine how much you should pay in estimated tax payments.

Question: Okay I think I need to make quarterly estimated tax payments.  How do I actually make the payments?

Answer: There are a few different ways you could make payments to the IRS.

-You could send in quarterly payment vouchers with a check.  The instructions and payment vouchers for most individual taxpayers can be found here  https://www.irs.gov/pub/irs-pdf/f1040es.pdf

Anytime you send something to the IRS ,it is a good idea to send it via certified mail with return receipt.  You want to be able to prove when you sent it if any issues come up.

-You can make a payment via the IRS website.  Here is a link  https://www.irs.gov/payments

Question:  I didn’t make any quarterly estimated tax payments all year, even though I should have.  Am I going to tax jail?

Answer:  Probably not.  The purpose of quarterly estimated tax payments is to reduce or eliminate any underpayment of estimated tax penalty when you file your taxes.  The underpayment penalty rate is currently 3%.  If your total tax for the year is $10,000 and you made no estimated tax payments, the worst that will happen is when you file your taxes you will have a  maximum $300 underpayment penalty ($10,000 x 3%).  (The actual penalty calculation is slightly more complicated and your maximum underpayment penalty would actually be a little less than $300).

Question:  It’s October and I accidentally missed the first three quarterly payments.  What should I do?

Answer:  If you are able to, you may want to make one payment now equal to what your first three quarterly payments should have been.  So if you were supposed to make quarterly payments of $1,000 per quarter, you could make a payment now of $3,000.  You may still end up with some underpayment penalty when you file your return but paying now rather than waiting until you file your tax return will reduce the penalty.

Question:  The current underpayment of estimated tax penalty is only 3%.  I think I can earn 10% putting my money in fill in the blank investment (stock market, iBonds, crypto, my cousin’s food truck, etc etc).  Can’t I just wait until April of next year to pay all of my tax due plus the underpayment penalty since I’m earning a higher return than the penalty rate?

Answer: Sure, that’s your choice.  However, if you have a hard time saving money it may work better for you to go ahead and make payments quarterly so you don’t end up with a large tax bill and no cash to pay it.

Information provided on this web site “Site” by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

2021 Year End Tax Planning

2021 Year End Tax Planning

Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money.  Here’s a look at some issues to consider as we approach year-end.

Key tax considerations from recent tax legislation

Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below is a summary of the highlights in recent tax law changes to help you plan.

Economic impact payments (EIPs)

The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return.  

If you received an EIP as an advance payment in 2021, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment at tax filing time. 

Child tax credit

As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:

  • Amount has increased for certain taxpayers

  • Is fully refundable (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS)

  • May be partially received in monthly payments

  • Is applicable to children age 17 and younger 

The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis.  The IRS will be sending out Letter 6419 in January 2022 that will provide a total amount of advance Child Tax Credit payments that were disbursed to you during 2021.  You will want to compare the amount in the letter to what you actually received; we will request a copy of this letter when we prepare your 2021 taxes. 

Charitable contribution deductions

Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers) in 2021. Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%). There are many tax planning strategies we can discuss with you in this area. 

Required minimum distributions (RMDs)

RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.

Unemployment compensation

Another thing to note that’s different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021

State tax obligations related to teleworking arrangements 

The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered by you and your employer. 

Other year-end individual planning opportunities

Bunching of itemized deductions

If the total of your itemized deductions in 2021 will be close to your standard deduction amount, we should evaluate whether alternating between bunching itemized deductions into 2021 and taking the standard deduction in 2022 (or vice versa) could provide a net-tax benefit over the two-year period. For example, you might consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses that exceed 7.5% of your adjusted gross income, and state income and property taxes (subject to the $10,000 deduction limitation on such taxes that applies to both single individuals and married couples filing jointly; and the $5,000 limitation on such expenses for married filing separately returns), exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be appropriate.

Health Savings Accounts and Flexible Savings Accounts

You may want to consider health saving accounts (HSAs) if you don’t already have one. These are tax-advantaged accounts which help individuals who have high-deductible health plans. If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. If you qualify to contribute to an HSA for 2021, you have until the tax filing deadline (April 18, 2022) to make contributions. 

If you have set aside funds in a Flexible Spending Account (FSA) during 2021, be sure you incur enough medical expenses by year end to use up all of your funds.  Some FSA plans may offer a grace period in which you have 2 ½ additional months after year end to incur expenses.  Check with your employer on the specifics of your FSA.

Capital losses

Although no one likes to lose money on investments, a silver lining is that portfolio losses may provide tax planning opportunities.  Selling investments at a loss in a taxable brokerage account (not a retirement account) typically generates a tax deduction.  Realized losses can offset realized gains.  Realized losses in excess of realized gains can be deducted against other income up to $3,000.


You may be able to take advantage of tax-loss harvesting.  This is where you sell an investment that is down to generate a tax-loss, then replace it in your portfolio with a similar investment.  Beware of the wash sale rules, which disallow your tax loss deduction if you buy the same investment within 30 days before or after the date you sold it to incur a loss.


Roth conversions

If you have had a drop in income, you may be in a lower tax bracket for 2021 than in prior years.  It may make sense to convert some of your traditional retirement accounts to Roth accounts before year end.  Let us know if you are interested in discussing this strategy.   

Business tax matters to note 

  • Business meals –– There is a 100% deduction (rather than the prior 50%) for expenses paid for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022. 

  • Purchases of property and equipment –– With tax-favorable options available to businesses, many purchases can be completely written off in the year they are placed in service. Plus, there are tax-favorable rules that permit qualified improvement property to qualify for 15-year depreciation and, therefore, also be eligible for 100% first-year bonus depreciation. Let us help you receive the best tax treatment.

  • Net operating losses –– If you have significant losses from 2018 to 2020, you may be able to carry those losses back up to five years, which can significantly impact a prior year where there was a tax liability. 

  • Sales and use tax considerations –– States are continuing to make changes to their sales and use tax laws and filing requirements following the U.S. Supreme Court ruling in the case South Dakota v. Wayfair, Inc. Please reach out to us if you have concerns about sales tax for your business.

Fraudulent activity remains a significant threat

Our firm takes data security seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:  

  • Receive a notice or letter from the IRS regarding a tax return, tax bill or income that doesn’t apply to you

  • Get an unsolicited email or another form of communication asking for your bank account number, other financial details or personal information

  • Receive a robocall insisting you must call back and settle your tax bill

Make sure you’re taking steps to keep your personal financial information safe. Let us know if you have questions or concerns about how to go about this.  

Virtual currency/cryptocurrency

Virtual currency transactions are becoming more common; this is an area of increased scrutiny by the IRS. There are many different types of virtual currencies, such as Bitcoin, Ethereum and non-fungible tokens (NFTs). The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally has tax impacts. 

Looming potential tax legislation

With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, there remains uncertainty in how this will impact taxpayers. As legislation continues to evolve, and if it passes, we’ll contact you to discuss how changes impact your taxes.

Year-end planning equals fewer surprises

There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position.  Let us know if you would like to review these opportunities together before year end.

Advance Child Tax Credit Information

Recently, there were changes made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:

·   Amount has increased for certain taxpayers

·   Is fully refundable (meaning you can receive it even if you don’t owe the IRS)

·   May be partially received in monthly payments

The new law also raised the age of qualifying children to 17 from 16, meaning some families will be able to take advantage of the credit longer.

The IRS will pay half the credit in the form of advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

·   The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.

·   The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

·   Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool

·   A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year

·   A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number

·   Income less than certain limits

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

Although the 2021 advance child tax credit payments are being estimated based on your 2020 tax return, the actual child tax credit you are allowed will be based on your 2021 tax return.  This means if your 2021 tax situation is significantly different from 2020, you may receive advance child tax credit payments that will have to be paid back to the IRS!

What if you expect your 2021 tax situation to be different from 2020?

Your 2021 tax filing may end up different from 2020 for a variety of reasons…your income may be up or down, your marital status may have changed, you may not be entitled to claim some of your dependents, etc.  If you expect your 2021 tax situation to be significantly different from 2020, you may want to opt-out of the advance child tax credit payments.  The IRS has set up an online portal where you can notify them that you do not want to receive the payments from July – December 2021.  If that is the case, you will calculate and claim the full credit you are allowed with your 2021 tax filing and not run the risk of receiving payments you have to pay back next spring (when you file your taxes).

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.

  • So far, people using the opt-out portal have found it cumbersome.  You have to set up either an IRS account or an ID.me account, which is a process that takes some time.
  • If you file married filing jointly with a spouse and want to opt-out, both you and your spouse have to go through the opt-out process.
  • You can choose to receive some of the advance payments and then opt-out of the remaining payments.     Once you opt-out of the payments, you will not receive any of the remaining advance payments.  However, the IRS has said they will be offering the ability to “opt in” again later in the fall.  There is a deadline to opt-out of the next month’s payment, as follows-