Part 3: Ten Tax Tips to Know When You Register a Business in New Mexico
In Part 3 of our 4-part series, REDW covers an additional 2 of the 10 items to be aware of when registering a business in New Mexico:
- Schedule C mismatch audits. What is this and why do I care?
- Cash basis vs. Accrual basis reporting for internal books, income taxation, and CRS reporting. Do they need to be the same?
Ugh! I received a notice from the New Mexico Taxation & Revenue Department telling me that I owe tax for my sole proprietorship. What?! Why?
This type of notice is likely a “Federal-State Schedule C Tape Match.” The Federal government shares reported income tax return information with the states. This information is used by the states to identify Taxpayers who may have underreported income or sales tax, or not reported income or sales tax at all, at the state level. Here’s an example:
- 2010 Federal Form 1040 shows $20,000 of revenue reported on Schedule C.
- There are two 1099-MISC forms issued in the Taxpayer’s EIN for $10,000 each.
- 2010 Federal Form 1040 indicates that the Taxpayer lives in New Mexico.
- The two 1099-MISC forms are issued to the Taxpayer at a New Mexico address.
- In 2010, monthly CRS-1 forms total to $10,000.
In this scenario, a $10,000 discrepancy exists between what was reported as receipts on the federal income tax return versus what was reported to the State of New Mexico for gross receipts tax reporting purposes. Several reasons may exist for this discrepancy, including: (1) The receipts are deductible from New Mexico gross receipts tax, but the Taxpayer thought that the receipts were exempt from New Mexico gross receipts tax and did not report the receipts at all, or (2) The Taxpayer reported the receipts in one year for federal income tax purposes and in another year for New Mexico CRS reporting purposes.
This brings us to the topic of accounting methods. Accounting methods dictate the policies a business utilizes for accounting related reporting. One such accounting method is the basis of reporting. Cash basis means that receipts and disbursements are recorded when actual cash comes in and goes out. Accrual basis means that receipts and disbursements are recorded when revenues are earned and liabilities or expenses are incurred. A business can report their financial statements on one basis but report their income taxes on a different basis of accounting. Moreover, New Mexico’s tax statutes permit the selection of an accounting basis for reporting New Mexico gross receipts. The basis of accounting used for NM CRS-1 reporting purposes does not need to be the same basis used for income tax reporting, nor does it need to be the same basis of accounting used for financial statement purposes.
Key points to consider:
- Always address tax notices received.
- Just because the tax notice says that you owe tax does not mean that the notice is correct.
- Make sure that you know which basis of accounting you’re using for reporting purposes.