In the bustling heart of Atlanta, Georgia, Dekalb, Marietta, College Park, Douglasville, Stone Mountain and surrounding communities, small businesses thrive as the backbone of the local economy. Amidst the dynamic landscape of commerce, these enterprises often find themselves navigating complex financial challenges. That’s where Metro Accounting and Tax Services comes into play, offering a dedicated and expert hand to guide small business owners toward financial success.
A Pillar of Support for Small Businesses:
Metro Accounting and Tax Services is more than just an accounting firm. It is a partner in the journey of local small businesses, providing a wide array of essential services designed to alleviate financial burdens and drive growth. From accounting and part-time CFO services to tackling the most daunting IRS tax problems, Metro Accounting is a trusted ally.
Small Business Accounting Services:
Accurate financial records are the cornerstone of any successful business. Metro Accounting understands the unique needs of small businesses and offers comprehensive accounting services. Whether you’re a startup looking to establish a solid financial foundation or an established business seeking to streamline your financial processes, their expert team has you covered.
Part-Time CFO Services:
Many small businesses may not require a full-time Chief Financial Officer (CFO), but they can certainly benefit from their expertise. Metro Accounting provides part-time CFO services, offering strategic financial guidance that can be a game-changer for your business. Their CFOs help you make informed decisions, manage cash flow, and plan for sustainable growth.
IRS Tax Problem Representation:
Facing IRS tax problems can be incredibly daunting for any business owner. Metro Accounting and Tax Services specializes in IRS tax problem representation. They’re your advocate when dealing with IRS audits, levies, liens, and back taxes owed. Their experienced team knows the intricacies of tax law, ensuring that your rights are protected while working to resolve your tax issues efficiently.
Payroll Tax Problems:
Payroll tax problems can disrupt the smooth operation of your business and lead to serious consequences. Metro Accounting can step in to address payroll tax issues, helping you rectify discrepancies, meet tax obligations, and avoid penalties.
Why Choose Metro Accounting and Tax Services:
Join the Metro Accounting Family:
For small businesses in Atlanta and the surrounding communities, Metro Accounting and Tax Services isn’t just a financial service provider; it’s a trusted companion on the path to financial success. With their expertise, dedication, and personalized approach, they empower small businesses to overcome financial challenges, achieve stability, and set their sights on new heights of growth.
So, if you’re a small business owner in Atlanta, Georgia, seeking expert accounting, tax representation, or financial guidance, Metro Accounting and Tax Services is ready to be your partner in success. Together, you can unlock the full potential of your business, ensuring a prosperous and secure future.
Introduction:
Owing the IRS back taxes may not be the most exciting topic, but it’s one that millions of Americans have had to confront at some point. Don’t worry; we’re here to make this journey a little less taxing (pun intended). In this witty and informative guide, we’ll explore what it means to owe the IRS, why it happens, and what you can do to remedy the situation and regain your financial peace of mind.
How Did We Get Here?
Picture this: You’re living your life, going about your daily business, and suddenly you receive a letter from the IRS. It’s not a love letter, and it certainly doesn’t contain good news. You owe back taxes. How did this happen? Life’s twists and turns, changes in income, or simply honest mistakes on your tax returns can lead to this situation.
Facing the IRS: The Dreaded Letter
Getting a letter from the IRS can feel like a scene from a suspenseful thriller. But fear not! It’s not the end of the world. The first step is to open the letter, read it carefully, and understand what they want from you. Ignoring it won’t make it go away, but confronting it head-on can save you from sleepless nights.
Options for Resolving Your Tax Debt
So, you owe the IRS some money—what now? Here are some witty ways to tackle the issue:
a. Payment Plans: Think of it as paying for that fancy coffee machine in monthly installments. The IRS offers various payment plans to help you settle your debt gradually.
b. Offer in Compromise: This is like negotiating with your sibling for a bigger slice of the pie, only more complicated. You might be able to settle for less than you owe if you meet certain criteria.
c. Tax Relief Programs: These are the golden ticket for those who qualify. They can provide a break from penalties and interest, giving you a fresh start.
d. Professional Help: When all else fails, consider seeking the assistance of a tax resolution professional, like Metro Accounting And Tax Services, CPA. They’ll help you navigate the maze and ensure you’re making the right choices.
After you’ve sorted things out with the IRS, it’s time to think about the future. Here are some witty tips to help you avoid this predicament in the future:
a. Keep Accurate Records: Think of it as a diary for your finances. Accurate records will make tax time less stressful.
b. Adjust Withholding: Tweaking your withholding can prevent owing large sums at the end of the year. It’s like finding that sweet spot on the seesaw.
c. Seek Professional Advice: Don’t be a lone wolf; tax professionals are there to guide you. Consult with them regularly to ensure you’re on the right track.
Owing the IRS back taxes isn’t an ideal situation, but it’s also not the end of the world. With a bit of wit, some knowledge, and a proactive approach, you can navigate this financial maze successfully. Remember, the IRS isn’t the enemy; they’re just here to ensure everyone pays their fair share. So, roll up your sleeves, face it with a dash of humor, and regain your financial footing. In the end, you’ll come out wiser and with your wallet intact.
Tax debt can feel like an insurmountable burden, causing stress and anxiety for individuals and businesses alike. While there’s a common belief that you can settle your tax debt for pennies on the dollar, the reality is more nuanced. In this comprehensive guide, we’ll explore the steps involved in settling back taxes, including the Offer in Compromise (OIC) program, which allows some taxpayers to indeed settle for less than the full amount owed. However, it’s crucial to understand that not everyone qualifies for this program, and eligibility depends on individual circumstances.
Understanding Tax Debt
Tax debt accumulates when individuals or businesses owe the IRS more money than they’ve paid in taxes. This can result from unfiled tax returns, unpaid taxes, or discrepancies between reported income and actual earnings. Unresolved tax debt can lead to severe consequences, including IRS collection actions, tax liens on property, and wage garnishments. Therefore, addressing tax debt proactively is essential to avoid these issues.
Eligibility for an Offer in Compromise (OIC)
The OIC program is a lifeline for many struggling taxpayers, allowing them to settle their tax debt for less than the full amount owed. To be eligible for an OIC, you must meet specific criteria:
• Doubt as to Collectability: You must demonstrate that you can’t pay the full amount of your tax debt due to financial hardship.
• Doubt as to Liability: You believe the assessed tax liability is incorrect.
• Effective Tax Administration: Paying the full amount would create an undue hardship, even if you can technically afford it.
It’s essential to understand that approval for an OIC is not guaranteed, and the IRS will thoroughly evaluate your financial situation before accepting or rejecting your offer.
Preparing for an Offer in Compromise
Before applying for an OIC, gather the necessary financial documents, including tax returns, bank statements, pay stubs, and documentation of your monthly expenses. It’s crucial to have all your financial records organized and up-to-date to present a compelling case.
Calculating Your Offer Amount
The IRS calculates the acceptable offer amount based on your reasonable collection potential (RCP). RCP includes your ability to pay based on income, expenses, and asset equity. The IRS will consider factors like your monthly income, necessary living expenses, and the value of your assets when determining the offer amount. Negotiation with the IRS may also play a role in reaching an acceptable offer.
Submitting the Offer and Associated Costs
Once you’ve calculated your offer amount, it’s time to prepare and submit your OIC. There is a non-refundable application fee associated with this process, although low-income taxpayers may qualify for a fee waiver. You can choose between two payment options:
• Lump-Sum Cash Offer: Pay the offer amount in a lump sum within 5 months.
• Periodic Payment Offer: Pay the offer amount in fixed monthly installments over 6 to 24 months.
What Happens After Submitting an OIC
After submitting your OIC, the IRS will review and process your application. This process can take several months. The IRS will evaluate your offer to determine if it’s reasonable based on your financial circumstances. You may receive one of three possible outcomes:
• Acceptance: Your offer is approved, and you must adhere to the agreed-upon payment terms.
• Rejection: The IRS rejects your offer for reasons such as incomplete information or an unreasonably low offer amount.
• Negotiation: In some cases, the IRS may negotiate with you to reach a more acceptable offer amount.
Appeals and Disputes
If your OIC is rejected, you have the right to appeal the decision. The appeal process allows you to present additional information or arguments to support your case. It’s essential to follow the prescribed appeal procedures and provide a strong argument to improve your chances of success. Dispute resolution options are also available if you disagree with other IRS decisions during the OIC process.
Alternatives to an OIC
While an OIC can be an effective way to settle tax debt, it’s not the only option. Depending on your circumstances, you may consider alternative solutions, including:
• Installment Agreements: Arrange a payment plan with the IRS to pay your debt over time.
• Hardship Status: Prove financial hardship to temporarily delay collection actions.
• Bankruptcy: In certain situations, filing for bankruptcy may discharge or reduce tax debt.
Each alternative has its advantages and disadvantages, so it’s crucial to explore the best option for your specific case.
Avoiding Tax Debt in the Future
The best way to prevent tax debt is through proactive tax planning and responsible financial management:
• Tax Planning: Plan your finances to ensure you have sufficient funds to meet your tax obligations.
• Budgeting: Create a budget to manage your expenses and avoid overspending.
• Professional Guidance:
• Staying Informed: Stay updated on changes in tax laws and compliance requirements to ensure you remain in good standing with the IRS.
Settling back taxes for pennies on the dollar is possible through the Offer in Compromise program, but eligibility depends on your financial situation and other factors. While this guide provides a comprehensive overview of the process, it’s essential to consult with tax professionals or legal experts for personalized guidance. Remember that addressing tax debt promptly and responsibly is key to regaining financial stability and peace of mind.
The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2021; however, the tax-bracket thresholds increase for each filing status.
Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025.
Standard Deduction
The standard deduction increases to $12,950 for individuals (up from $12,550 in 2021) and to $25,900 for married couples (up from $25,100 in 2021).
Alternative Minimum Tax (AMT)
AMT exemption amounts saw an increase to $75,900 for individuals (up from $73,600 in 2021) and $118,100 for married couples filing jointly (up from $114,600 in 2021).
“Kiddie Tax”
The “kiddie tax” is $1,150.
Estate and Gift Taxes
The maximum tax rate remains at 40 percent. The annual exclusion for gifts increases to $16,000.
Adoption Credit
In 2022, a nonrefundable credit of up to $14,890 is available for qualified adoption expenses for each eligible child.
Earned Income Tax Credit
The maximum Earned Income Tax Credit (EITC) for low, and moderate-income workers and working families increases to $6,935 (up from $6,728 in 2021).
Child Tax Credit
For tax years 2018 through 2025, the child tax credit is $2,000 per child.
Child and Dependent Care Tax Credit
You may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2022
Don’t hesitate to call if you have any questions or want to get a head start on tax planning for the year ahead.
Tax preparation is simply the process of preparing and filing a tax return.
This is generally one time a year that culminates in signing your tax return and finding out whether you owe the IRS money or will be receiving a refund.
For most small business owner this process involves one or two trips to see their accountant (CPA), around tax time (i.e., between January and April).
At this time they would hand over any financial documents necessary to prepare the tax return.
At times an enrolled agent, attorney, or a tax preparer who doesn’t necessarily have a professional credential may be engaged by the small business owner or individual to prepare their taxes.
For simple returns, some individuals may even prepare and file their taxes with the IRS themselves.
It is important to note that no matter who prepares your tax return, they should be trustworthy as you will be entrusting them with your personal financial details, skilled in tax preparation, and accurately file your income tax return in a timely manner.
If you’re ready to learn how a tax and accounting professional (CPA), can help you save money on your tax bill this year, don’t hesitate to call the office today.
For the small business owner a S Corporation can provide several tax benefits compared to other form of business entities. However, the challenge face is how to form a S Corporation?
A Certified Public Accountant (CPA), can help you in this regard. Click the link below to secure your complimentary consultation.
Generally S corporations begin as C corporations and then they elect to be treated as S corporations for tax purposes.
They are required to:
• be a domestic corporation.
• have only allowable shareholders (individuals, certain trusts, and estates).
• have no more than 100 shareholders.
• have only one class of stock, although different voting rights are permitted.
• not be an intelligible corporation (certain financial institutions, insurance companies, or domestic international sales corporations).
Form 2553 will be filled to make the election. The election must be signed by all shareholders of the corporation.
Once approved, the corporation will be treated as an S corporation for tax purposes.
Although all shareholders must consent to the election initially, no consent is required for shareholders that join after the election is made.
Shareholders must be individuals, certain trusts, or estates.
They may not be partnerships, corporations, or nonresident aliens.
Qualified retirement plans, trusts, and 501(c)(3) organizations are allowable shareholders.
Grantor and voting trusts may be shareholders as well. The limit of 100 shareholders is firm but members of the same family may elect to be treated as one shareholder.
The election can be made at any time during the year prior to the election taking effect; or no later than “two months and 15 days” after the beginning of the tax year. However, businesses that intended to be treated as S corporations and otherwise meet all the requirements of being an S corporation may file the election late if they have (and can show) reasonable cause. They must explain the reasonable cause for late filing on Line I of Form 2553.
Truckers, be reminded that if you have registered or is required to register a heavy highway motor vehicle with a taxable gross weight of 55,000 pounds or more at the time of first use on any public highway during the reporting period, you are required to file Form 2290, Heavy Highway Vehicle Use Tax Return.
Form 2290 should be filled for any taxable vehicles first used on a public highway during or after July 2021 by the last day of the month following the month of first use. This means that for vehicles first use on a public highway in July, Form 2290 must be filled between July 1 and August 31.
Taxes for the current filing season will be prorated for any vehicle that was first used on a public highway after July.
Every registrant must complete the first and second pages of Form 2290 along with both pages of Schedule 1.
You will only need to complete the “Consent to Disclosure of Tax Information” and “Form 2290-V, Payment Voucher” pages when applicable.
It is worthwhile to note that the filing deadline for truckers is not tied to the vehicle registration date.
Regardless of the vehicle’s registration renewal date, the taxpaying trucker must file Form 2290 by the last day of the month following the month in which the taxpayer first used the vehicle on a public highway during the taxable period.
Truckers, if you require any help with getting your accounting records in order, help is just a click away. Schedule your no cost appointment with our office today. Learn more below.
The gain realized from the sale of your main home may be fully or partially excluded from your income if you meet certain qualifications. Your main home is the one in which you live most of the time.
Two such qualifications that are required for this exclusion to take effect: the ownership and use tests.
This means that during the 5-year period ending on the date of the sale, you must have:
You will be allowed to exclude up to $250,000 of the gain from your income if you are single and $500,000 if you filled a joint return.
It is important to note that you will not be allowed to deduct any losses incurred from the sale of the main home.
Among other things, the tax payer will need to arrive at:
In order to report the sale or exchange of the home, Form 8949, Sale and Other Dispositions of Capital Assets, must be utilized if:
For persons who own more than one property gains can only be excluded to the extent that they are from the sale of the main home. Taxes must be paid on the gain from selling any other home. If you have two homes and live in both of them, your main home is the one you live in most of the time.
As a small business owner I’m sure you’ve heard of an S corporation but do you know what it really is?
A S corporation (or “S corp”) is a corporation that “elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes.”
The taxation of S corporations is similar to that of partnerships, while the operations are more similar to that of a C corporations, but there are some restrictions on the number and type of shareholders.
In fact, S corporations are formed as C corporations; they then elect to be treated as S corporations, assuming the requirements for such classification are met.
S corporations retain pass-through tax benefits while providing inherent liability protection to the shareholders.
Why is it called an S corporation? Although some people are of the view that the S stand for small (since S corporations cannot have more than 100 shareholders), the real reason for the name is that rules governing this entity type are contained under Subchapter S of the Internal Revenue Code.
This entity type is the first to combine the liability protection of a corporation structure with the tax benefits of a sole proprietorship or partnership.
According to the IRS, the number of S corporation returns (Forms 1120- S) surpassed the number of C corporation returns in 1997 and continued rising through 2015 (the last year for which tax statistics were reported in this area).
To learn more about S-Corps and the many benefits they offer, schedule your no cost consultation with a Certified Public Accountant (CPA), below.
In the United States the trucking industry is a nearly $800-billion industry that is responsible for moving just over 70 percent of the country’s freight.
The trucking industry is subject to a handful of unique income tax issues. In addition, changes under the Tax Cut and Jobs Act (TCJA) affect “nearly all carrier types and fleet sizes, from owner operators with a few power units all the way up to Fortune 500 transporters.”
The primary income tax issues discussed here today will be that of an employee versus a contractor.
• Employee/contractor distinction
The general rule is that someone is treated as a contractor if the payer “controls the result of the work, not what will be done or how it will be done.”
Trucking companies, especially the largest companies, often hire drivers as employees.
However, they also may engage owner-operators who act as independent contractors and own their own vehicles.
The general rule is amplified by examining:
• Behavioral control. The type and degree of instructions given, plus training and evaluation, speak to this category.
• Financial control. This category is informed by the party that bears the expenses associated with the work, the opportunity for profit or loss, and the type of compensation received.
• Type of relationship. The type of benefits associated with the relationship, whether it is permanent, and the type of services provided are all considered in this category.
A Certified Public Accountant can provide you with guidance as to the classification of persons you engage for services. Help is just a phone call away and you can schedule a no cost consultation today.
Let’s say Trans Company operates in the trucking industry transporting goods between major manufacturers and retail locations along the eastern sea belt of the United States. Trans Company employs 50 full-time truck drivers. However, as the company’s volume often increases during the holidays, Trans Company sometimes hires independent contractors to assist with local deliveries during the peak months of November and December.
In November, Trans Company contracted with John Brown, who is an independent driver from Mississippi who has his own truck. Mr. Brown is going to assist with several hauling jobs during the last two weeks of November and the first week of December. The amount paid to Mr. Brown for each job will be a function of a flat rate adjusted based on mileage and weight.
In this case:
• It is important to note that the 50 full-time drivers are treated as employees. Trans Company withholds income taxes from the employees’ paychecks and pays related payroll taxes including FICA and unemployment taxes. The employees are sent a W-2 reporting their wages at the end of the year.
John Brown on the other hand is not treated as an employee; he is treated as an independent contractor for tax purposes. The company will issue a check to pay him for his services and send him a Form 1099 at the end of the year to report the total payments made.
Mr. Brown will be responsible for paying his own self-employment taxes.
Companies are responsible for complying with employment and income tax withholding requirements for employees, but the same is not true for independent contractors unless such contractors are statutory employees.
As a small business owner it is important to note that a number of important factors contribute to profitability.
Factors such as the quality of the product, customer service, the ability of the product or service to meet a specific need of the consumer and many other factors.
In the small business environment a large gap exist between the operational and the financial functions.
Often the small business owner wear both hats and this prevent the focus and attention that’s needed on the business core operation.
The small business owner must apply a process of maximizing profitability, but more importantly, to make the effort more targeted by facilitating the conversion of profits into cash in the shortest possible time.
More than 50% of all business failures are due to them being undercapitalized and the inability to generate enough cash flow to keep operations going.
Many business failures could be avoided if the business owners had operated with a more profit centric mindset.
This involves the efficient and effective use of the capital at hand, and this starts with the planning process.
As a small business owner, have you given thought to developing a strategic plan to move your business forward?
If you need help in this regard or just need to get the conversation started call our office today and a Certified Public Accountant (CPA) will be happy to assist. You can also click the link below to learn more.
Setting the foundation for growth in your small business entails taking your small business to the next level. As a small business owner there is always a desire to take your business to the next level, but have you examine where you’re at today and why you want to take your small business to the next level? If you need help in navigation this process, call our office today for guidance.
In your quest to get to the next level, the small business owner should be asking themselves the following question:
Are they in a rut?
Are sales leveling off?
Are they having trouble finding quality employees?
Are they overwhelmed?
Do you find that your bottom line is not what you want you want it to be?
Or are you thinking about your exit strategy?
When the small business owner thinks that they are ready to make the big move, it is advisable that their starting point is with the implementation of a strategic plan.
A strategic plan is like a blue print that lays out the action for the future, it consist of a mission statement, a vision statement, a values statement which is the guiding principles, a gap analysis, an environmental scan, a SWOT analysis, the setting of strategic objectives and an implementation plan. Metro Accounting And Tax Services is always here to help the small business owner in getting through this process, don’t hesitate to call our office @ 404-9903365 if help is needed.
One of the major component of a strategic plan is the business mission statement.
The mission statement clearly defines why the small business exist and what its operations are intended to achieve.
It is important to note that the mission statement although changeable over time, doesn’t change every year and is something that resonate with the business for the long term.
Next, the small business must have a vision statement of the future. It is really defining the small business future, where you want to go and where do you want to grow. The vision statement is a short concise statement of the organization’s future and answers the question of what it intends to become.
Along with the mission and vision statements, the small business must define its guiding principles or values statement. This relates to the distinctive core beliefs of the organization. These beliefs are part of the organization’s strategic foundation and rarely change.
Conducting a “gap” analysis between the organization’s current state and vision state will amplify what actions are need to be taken in-order to close the gap. A gap analysis can take the form of an environmental scan or a SWOT analysis.
An environmental scan allows the small business to perform an analysis and evaluation of both internal and external forces that affect the organization.
The small business might want to evaluate their customer base, asking question such as who are their clients. Are we meeting the needs of our clients?
Technological changes should also be evaluated, what are the effects changes in technology is having on the business.
Regulatory compliance issues should also be examined. What regulation issues are affecting the company?
The economic climate should also be examined. What are the likely effects of a downturn in business?
Relationships with suppliers should be examined to see what makes the company most vulnerable to changes in the suppliers?
Quality of employees should be evaluate to see how do we retain top talent?
An eye must always be focus on the competition, always evaluation what differentiates us from our competition?
The other part of the “gap” analysis is the SWOT analysis. This analysis supports the gap analysis with additional information about what actions are needed to be taken in the organization to get it to the desired state.
This is where we look at the strengths, weaknesses, opportunities and threats face by the small business.
Typically the strengths and weaknesses or things that are internal to your organization. Opportunities and threats are things that are external to the organization.
It is important to note that these are not analysis that you do independent they’re really done across the firm and can include customers and clients.
The SWOT analysis coupled with the environmental scan allow the small business owner to look at the gaps that exist between where you are and where you want to be. This then allow the business owner to create the company’s strategic objectives by identifying the things to focus on for the next three to five years. They answer the question of what the organization must focus on to achieve the vision.
The strategic objectives must always be checked and calibrated for changes as it’s not something you create and put on the shelf and forget about. Performing a review and making the necessary changes every six months to a year is recommended.
The next stage in setting the foundation for growth is the implementation of the plan. You have completed the hard work, you know what to do now you have to figure out how you’re going to break that down into bite size pieces to achieve the strategic objectives. This can be broken down into short-term and long-term goals. The small business owner might consider what are they going to do this quarter, next quarter, next year and who does what and by when. Then there has to be a monitoring process to ensure performance and attainment of these goals.
The final step in setting the foundation is examining the value proposition of the small business. Setting the foundation is really looking at your firm’s value proposition. This is typically what your business can do for your clients, the tangible benefits that clients get from using your products, service or solution.
What is your product for your clients what is your product or service somebody wants to use your firm services and when you write
Your value proposition should be short, concise and defines what you do and explains how you’re going to solve the problem of your client or customer.
As a small business owner you are often told that in-order for your business to be successful it’s best to engage the services of a CPA.
You might be wondering who is a CPA and what does a CPA do and why you are being told to engage one in your business.
A CPA or a Certified Public Accountant is an accounting professional who has met the state requirements to earn the CPA designation in a chosen state through education, experience and sitting and passing the CPA Examination administered by The American Institute of Certified Public Accountants (AICPA).
Having a CPA engaged in your business is engaging a professional accountant that has met the profession’s highest standard of achievement.
CPA’s are sought out for their industry knowledge, reliability and at times their independence to provide assurance services to the general public.
It should be noted that all Certified Public Accountants are accountants but not all accountants are CPAs.
Accountants are persons who keep and interprets financial records, while a CPA does the same they are not limited to one industry or job function. In-addition, a CPA can provide a higher level of services than an accountant.
IRS Problems Have a Way of Ruining All Aspects Of Your Life. They Take A Toll On You Financially, Physically, and Emotionally.
You Can Never Really Forget About Them. They creep out of that mental compartment to keep you awake late at night.
They Distract Your Days with IRS Notices, Letters, And Threats. In General, IRS Problems Make Life Miserable.
Your IRS Problems are unlike many other problems in life, which may go away by themselves.
Unfortunately, IRS Problems just continue to get worse and more costly with more penalties and interest being added daily.
I don’t know what the IRS thinks, but I do know that they ruin people’s lives every day with these ridiculous penalties.
Your IRS problem will not go away by itself. You only have three choices to end your IRS Nightmare. You can do one of the following:
1. Pay the IRS 100% of What They Think You Owe Today.
2. Set up a Monthly Payment Which Never Goes Away Due to the Additional Penalties and Interest That Continue to Add Up.
3. Reduce the Total amount Owed to an Affordable Number and Get on with Your Life!
Metro Accounting And Tax Services can help you explore all the options, but you must take the first step.
Don’t make the mistake of dealing with someone who is not qualified to represent you before the IRS.
Schedule a Free Consultation to discuss your options in confidence. You have nothing to lose.
Call my office today at 404-990-3365
The backbone of small business accounting lies in proper record keeping.
This basically entails the orderly and disciplined practice of storing business records. Business success depends on creating and maintaining an effective accounting system via keeping good records.
An effective accounting system is one of the most important responsibilities of any small business owner.
This is applicable regardless of the number of persons employed, type of services provided, period of operations, financial status or the entity type, be it a sole proprietorship, partnership, limited liability company, C corporation or a S Corporation.
Recordkeeping not only facilitates regulatory compliance but also provides owners with relevant and timely information to help in making good business decisions.
The importance of small business accounting is amplified in that it allows the business owner to monitor business performance and prepare timely financials.
Three fundamental financial statements are:
1. The income Statement
2. The Balance Sheet
3. The Cash Flow Statement
Having a proper accounting system allows for:
1) Identify sources of income
2) Track deductible expenses
3) Track basis in property
4) Prepare and support items on tax returns
Just like how having a good accounting system in your small business supports positive management functions and decisions, poor recordkeeping practices can lead to the small business failure.
What is small business recordkeeping?Recordkeeping is the orderly and disciplined practice of storing business records. Business success depends on creating and maintaining an effective record system.
Effective recordkeeping is one of the most important responsibilities of any small business owner and is applicable regardless of the following:
Recordkeeping assists owners with key business functions:
Records provide important financial and nonfinancial information, including sales trends, changes in costs, and customer complaints. Owners and managers can use records to evaluate business progress and determine any changes that should be made.
Records allow for the preparation of accurate financial statements, which are important documents to help a small business owner work with a bank or creditors.
Please note that small business recordkeeping not only facilitates regulatory compliance but also provides owners with relevant and timely information to help in making good business decisions.
There are three fundamental financial statements that small business owners need to be mindful of. These are:
This shows the income and expenses of the business for a given period of time.
Provides a listing of the small business assets, liabilities, and equity on a given date.
This shows cash generated from day-to-day operations, cash used for investing in assets, proceeds received from asset sales, and cash paid or received from issuing or borrowing funds.
Good record keeping helps the small business owner identify the source of income. It allows the business owner to track the receipt of cash and other assets in-order to appropriately classify the receipts and determine the tax consequences.
Also, the business owner can track deductible expenses. Good recording keeping by the small business owner allows for the identification and support tax deductible expenses using invoices, cash payments or other purchasing records.
Good record keeping is very important when tracking the basis of assets. Records help the small business owner in the determination of basis to figure the gain nor loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses.
Just to clarify, basis is the amount of the investment in property for tax purposes.
In the preparation of tax returns, proper record keeping is crucial. Records provide owners with the information needed to appropriately prepare tax returns and related filings.
Proper record keeping also supports items reported on tax returns. In the unfortunate event of an audit or examination by the Internal Revenue Service (IRS), proper record keeping allows for accurate and reliable information to be provided.
To learn more, schedule your no cost consultation below to ensure you’re keeping good records.
For the small business owner it is important to note that just like how good record keeping practices support a positive management function and decision making process, poor record keeping practices can lead to negative consequences, including the making of poor business decisions.
Therefore, in-order to get an accurate measure of an entity’s performance and financial position, adequate records are necessary.
Poor record keeping may result in missed sale opportunity or profitability targets, cash-flow issues, mismanaged funds or exhausted budgets.
Records provide a basis for sound business decisions. If the small business owner is relying on missing or inaccurate records, they risk making ill-advised strategic decisions.
As a small business owner, you may have to produce records at the request of investors, customers, vendors, employees and even the IRS.
Without records in place, the information retrieval process can be long and daunting and may even halt the business growth and forward progress. The IRS may also assess up to a 20 % negligence penalty.
Among other things records are important for resource tracing, control and protection. It’s a well-known fact that without records in place, assets can be easily stolen.
It is imperative that small business owners keep adequate records from the beginning.
In some cases, small business owners may be forced to file for bankruptcy or shut their doors.
Every small business owner knows that dealing with complex tax preparations for their small business can be a daunting task.
Without the right support, it can be challenging to sift through paperwork, determine the right forms to fill out, and properly document cash flow.
Moreover, rushing to meet filing deadlines increases the likelihood of making mistakes that will attract IRS scrutiny.
Therefore, seeking the expertise of a professional tax service team is one of the best investments to make as a small business owner.
It will take the stress off your shoulders, help you save time and money, and ensure your compliance with the IRS.
A tax professionals, preferably a Certified Public Accountant (CPA), can save you time you would otherwise spend on tax planning and preparation.
A Certified Public Accountant (CPA), can tailor the services offered throughout the year to target your long-term financial growth objectives.
This frees you up to prioritize the aspects of your business that need your attention.
A tax and accounting firm can also advise you on strategies to efficiently managing your accounts and cash flow in a way that minimizes your tax liability.
By enlisting the help of small business tax professionals, you can achieve long-term savings and gains that outweigh your initial investment.
Tax problems come in many different forms; IRS tax problems, State tax problems, and Sales tax problems.
The IRS for example has ramped up its’ staff to increase their tax enforcement efforts through tax collection and tax audit.
When a taxpayer or a small business owner receive the dreaded tax notice that their tax return or their business is going to be audited and examined, the first thing they should do is seek professional tax advice.
Contact a Certified Public Accountant (CPA), who can represent you before the IRS or other taxing authority.
The same goes when the taxpayer receives collection letters threatening levying or garnishing of wages, paychecks or bank accounts. The taxpayers should seek out a Certified Public Accountant (CPA) for help.
The most common options to resolve your tax problems are:
• Full Payment – paying the amount on the tax notice.
• Pay The Correct Tax Only – paying the actual amount of taxes if you can afford to.
• Installment Agreement – paying the taxes owed through an installment agreement.
• Offer In Compromise – an offer in compromise, OIC, is an agreed amount less than what is owed.
So, if you have a tax problem do yourself a favor and contact us today to assist you in resolving your tax problem.
Notification of an IRS Tax Lien can be intimidating to process. But dealing with it doesn’t have to be. This is important to know: if you have a Federal Tax Lien filed against you, it’s important that you handle it quickly and effectively or you may lose your assets. These can include money in your bank account, an IRS bank levy, your car, and other property, your paycheck, wage garnishment, your retirement funds, and even your home.
The best way to avoid a lien is to file and pay taxes, on time and in full. If something prevents you from doing so, you need to communicate with the IRS to make some type of payment arrangement.
There are payment options and ways to settle your tax debt for pennies on the dollar. This of course is dependent on your individual situation.
Ignoring the correspondence from the IRS only compounds the matter. You would best be served by retaining a tax professional, like a Certified Public Accountant (CPA), to determine your best path forward in solving your tax debt.
A lien is a legal claim against your property to secure payment of your tax debt.
A federal tax lien comes into being when the IRS assesses a tax against you and sends you a bill that you neglect or refuse to pay it. The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property.
You have the right to appeal if the IRS advises you of the intent to file a Notice of Federal Tax Lien.
Credit reporting agencies may find the Notice of Federal Tax Lien and include it in your credit report.
Getting Rid of an IRS Tax Lien
The best way to get rid of a federal tax lien is to pay your tax debt – in full if you can.
The next best way of getting rid of the IRS Tax Lien is employ a tax resolution expert, preferably a Certified Public Accountant, (CPA) who will be able to help you by negotiating a suitable payment program (if you have the financial means to pay your back taxes) or to assist you in filing for an Offer in Compromise (OIC).
Don’t fight the IRS alone, it’s like going to court without a lawyer, your chance of winning is very slim. Employ a tax resolution specialist who understands how to deal with the IRS.
Similar to how an odometer provides insight as to the proper running of your motor vehicle, the gas level, the temperature etc., financial statements highlight the status of your business at any given time. Monitoring the financial health of your company can make the difference between success and failure.
By properly scrutinizing your financial statements, you can avoid spending money that you don’t have and know when to deploy funds to drive your business to the next level.
Creditor and investors will want to look at your financial statements, including balance sheet, income statement, cash flow statement, and statement of owner’s equity, to what health your business is in and see if you are on track to reach your financing goals.
As a small business owner and tax payer, it’s very important to understand the three basic types of financial statements and the wealth of information they reveal to you and the extent to which they can provide insights as to your success or failure.
The income statement provides the business owner and other users with a picture of your business’s financial performance over a specified period, usually a year.
Sometimes this statement is also known as a profit and loss statement (P&L) or statement of revenue and expense, it shows the operating and non-operating income and expenses of a business entity.
Among other things, the information contained in an income statement can be used to calculate financial ratios that provide insights into your business’s performance.
A professional accountant preferably a Certified Public Accountant (CPA), can be of assistance to help you extract and use this information to setup your business for success.
Commonly referred to as a statement of net worth or a statement of financial position, the balance sheet is one of the essential financial statements. It is based on the basic accounting equation that states (Assets = Liabilities + Equity), providing the small business owner with a snapshot of the business’s equity, assets, and liabilities.
The balance sheet also highlights your business’s financial position at any specific point in time.
Financial statement analysts can use the information contained in the balance sheet to calculate several critical financial ratios. This will allow the business owner to make informed decisions.
The owner’s equity or retained earnings portion on the balance sheet details your business’ included earnings at the end of a financial period.
It shows the profit maintained within the company rather than distributed to owner at the beginning and the end of a specified operating period.
Retained earnings are used to either reinvest in the business or to pay off debt obligations. It provides insight as to the financial health of your business.
This is so because it indicates whether your business can meet ongoing financial and operating obligations without requiring the business owner to contribute additional capital.
The cash flow statement (or a statement of changes in financial position) gives the business owner an understanding of how well the business manages its cash flow.
Financial analysts can use the information in a cash flow statement to evaluate whether your business is generating sufficient cash to meet its debt obligations as well as operating expenses.
A typical cash flow statement provides information about your business’s cash from operating activities, revenue from financing activities, and investing.
Preparing for Business Success with Financial Statements
By preparing these three financial statements, you will be able to have a clear vision and provide prospective lenders, investors or creditors with the critical information they need to assess your business success. It will also afford the business owner that ability to make informed decision.
The business owner will also be able to identify trends in the company’s performance so as to help position the business for continued success.
Always work with an experienced Certified Public Accountant (CPA), to help ensure that your company is compliant with financial reporting and obligations throughout the year.
Many small business owners do not fully understand their cash flow statement. This is surprising, given that all businesses essentially run on cash, and cash flow is really the lifeblood of any business.
Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! That’s hard to swallow, but consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business!
What Is Cash Flow?
Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.
Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.
An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain how the numbers were derived and what they really mean. 
Cash Flow Versus Profit
Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.
Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.
Theoretically, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.
If your retail business bought a $10,000 item and turned around to sell it for $20,000, then you have made a $10,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.
Analyzing Your Cash Flow
The sooner you learn how to manage your cash flow, the better your chances of survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.
The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.
Some of the more important components to examine are:
• Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
• Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
• Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
• Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
• Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable sometime in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.
Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.
For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.
Monitoring and managing your cash flow is important for the vitality of your small business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.
The decision as to which type of business organization to use when starting a business is a major one. And, it’s a decision to be revisited periodically as your business develops. While professional advice is critical in making this decision, it’s also important to have a general understanding of the options available.
Businesses fall under one of two federal tax systems:
1. Taxation of both the entity itself (on the income it earns) and the owners (on dividends or other profit participation the owners receive from the business). This system applies to the business called the “C-corporation” (C-corp) for reasons we’ll see shortly and the system of taxing first the corporation and then its owners is called the “corporate double tax.”
2. Pass-through taxation. This type of entity is in itself not taxed; however, each owner is each taxed on their proportionate shares of the entity’s income. The leading forms of pass-through entity (further explained below) are:
A Partnerships, of various types.
B S-corporations (S-corps), as distinguished from C-corps.
C Limited liability companies (LLCs).
A sole proprietorship such as John Wayne Plumbing or Marcus Garvey, M.D. is also considered a pass-through entity even though no “organization” may be involved.
The first major consideration (in this case, a tax consideration) in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass-through entity that has only one level (directly on the owners).
Co-owners and investors in pass through entities may need to have their operating agreements require a certain level of cash distributions in profit years, so they will have funds from which to pay taxes.
Losses are directly deductible by pass-through owners while C-corp losses are deducted only against profits (past or future) and don’t pass through to owners.
Business and tax planners therefore typically advise new businesses-those expected to have startup losses-to begin as pass through entities, so the owners can deduct losses currently against their other income, from investments or another business.
The major business consideration (as opposed to tax consideration) in choosing the form of business is limitation of liability, that is, to protect your assets from the claims of business creditors. State law grants limitation of liability to corporations (C and S-corps), LLCs, and partners in certain forms of partnership. Liability for corporations and LLCs is generally limited to your actual or promised investment in the business.
With vaccination being ramped up all over the country to address the Covid-19 pandemic, there is a semblance of society getting back to a new “normal”.
With that being said, how would you like to legally deduct every dime you spend on a well-deserved vacation this year? This financial guide offers strategies that help you do just that.
If a Small Business Owner decides to take a two-week trip around the US, you can and you can also legally deduct every dime on that “vacation.” Here’s how.
1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible. Wrong.
You must have at least one business appointment before you leave in order to establish the “prior set business purpose” required by the IRS. Small Business Owners, Keep this in mind before you leave for your trip.
Set up appointments with business colleagues in the various cities that you plan to visit.
Let’s say you are a manufacturer looking to expand your business and distribute more of your product. One possible way to establish business contacts–if you don’t already have them–is to place advertisements looking for distributors in newspapers in each location you plan to visit. You can then interview those who respond when you get to the business destination.
2. Make Sure your Trip is All “Business Travel.”
In order to deduct all of your on-the-road business expenses, you must be traveling on business.
The IRS states that travel expenses are 100 percent deductible as long as your trip is business related and you are traveling away from your regular place of business longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home.
It the small business owner wanted to go to a regional meeting in Atlanta, Georgia which is only a one-hour drive from his home all that would be needed is for him to sleep in the hotel where the meeting was being held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.
Remember that you don’t need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.
3. Make sure that you deduct all of your on-the-road -expenses for each day you’re away.
For every day you are on business travel, you can deduct 100 percent of lodging, tips, car rentals, and 50 percent of your food.
The IRS doesn’t require receipts for travel expense under $75 per expense–except for lodging.
So if the business owner pays $6 for drinks on the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.
However, the small business owner would need to document these items in a diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, and place along with the business reason for the expense.
You’ll need receipts for all paid lodging.
Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip.
Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.
4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.
If the small business owner have business appointments in Atlanta, Georgia on Friday and one on the following Monday, even though there’s no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.
5. Make the majority of your trip days business days.
The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days of the trip must be for business activities, otherwise, you cannot make any transportation deductions.
Let’s say the small business owner travelled to and spend six days in Atlanta, Georgia. He arrives early in Atlanta on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight out of Atlanta after playing a complete round of golf. The entire trip can be classified as a business trip.
Thursday is a business day since it includes traveling – even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.
Since the small business owner accrued six business days, he could spend another five days having fun and still deduct all his transportation to Atlanta, Georgia. The reason is that the majority of the days were business days (six out of eleven).
However, he would only be able to deduct six days’ worth of lodging, dry cleaning, shoe shines, and tips. The important point is that the small business owner would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.
With proper planning, you can deduct most of your vacations if you combine them with business. Bon Voyage!
Every year, it’s goes without saying that there will be changes to current tax law and this year is no different. From standard deductions to health savings accounts and tax rate schedules, here’s a checklist of tax changes to help you plan the year ahead.
In 2021, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion.
The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2020; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025.
Standard Deduction
There has been an increase in the standard deduction increases to $12,550 for individuals (up from $12,400 in 2020) and to $25,100 for married couples (up from $24,800 in 2020).
Alternative Minimum Tax (AMT)
The AMT exemption amounts also saw an increase. Moving to $73,600 for individuals (up from $72,900 in 2020) and $114,600 for married couples filing jointly (up from $113,400 in 2020).
The phase-out threshold also saw an increases to $523,600 ($1,047,200 for married filing jointly). Keep in mind that both the exemption and threshold amounts are indexed annually for inflation.
“Kiddie Tax”
For taxable years beginning in 2021, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,100.
This amount is also used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.
One of the requirements for the parental election is that a child’s gross income for 2021 must not be more than $11,000 with a floor of $1,100.
Health Savings Accounts (HSAs)
Current or future medical expenses can be paid for with the contributions made to a Health Savings Account (HSA).
This can be for the owner of such account, his or her spouse and any qualifying dependent. However, these medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
Medical Savings Accounts (MSAs)
Medical Savings Accounts (MSAs) are of two types: There is The Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA but is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder.
To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare but note that both MSAs require that you are enrolled in a high-deductible health plan (HDHP).
High Deductible Health Plan – for self only coverage.
A high deductible health plan for self-only coverage refers to a health plan that has an annual deductible that is not less than $2,400 ($2,350 in 2020)and not more than $3,600 (up $50 from 2020).
Under this plan the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot not exceed $4,800 (up $50 from 2020).
High Deductible Health Plan – family coverage. For taxable years beginning in 2021, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,800 and not more than $7,150, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,750.
AGI Limit for Deductible Medical Expenses
In 2021, the deduction threshold for deductible medical expenses is 7.5 percent of adjusted gross income (AGI), made permanent by the Consolidated Appropriations Act, 2021.
Eligible Long-Term Care Premiums
Long-term care premiums are treated the same as health care premiums and are deductible on your taxes subject to certain limitations.
For individuals who are age 40 or younger at the end of 2021, the limitation is $450. Persons more than 40 but not more than 50 can deduct $850. Those more than 50 but not more than 60 can deduct $1,690 while individuals more than 60 but not more than 70 can deduct $4,520. The maximum deduction is $5,640 and applies to anyone more than 70 years of age.
Medicare Taxes
The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2021, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax.
Foreign Earned Income Exclusion
The foreign earned income exclusion amount is $108,700 for 2021, up from $107,600 in 2020.
Long-Term Capital Gains and Dividends
Tax rates on capital gains and dividends for 2021, remain at the same rates as 2020 (0%, 15%, and a top rate of 20%); however, threshold amounts have increased: the maximum zero percent rate amounts are $40,400 for individuals and $80,800 for married filing jointly.
For an individual taxpayer whose income is at or above $445,850 ($501,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $40,400 and below $445,850 for single filers).
Estate and Gift Taxes
During calendar year 2021, for an estate of any decedent the basic exclusion amount is $11.70 million, indexed for inflation (up from $11.58 million in 2020). However, the maximum tax rate remains at 40 percent. The annual exclusion for gifts remains at $15,000.
Tax Credits
Adoption Credit
A non-refundable (only those individuals with tax liability will benefit) credit of up to $14,440 is available for qualified adoption expenses for each eligible child during calendar year 2021.
Earned Income Tax Credit
The maximum Earned Income Tax Credit (EITC) for low and moderate-income workers and working families rises to $6,728 up from $6,660 in 2020.
The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credit
The child tax credit is $2,000 per child for tax years 2020 through 2025. The refundable portion of the credit is $1,400 so this means that even if taxpayers do not owe any tax, they can still claim the credit.
A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older).
Child and Dependent Care Tax Credit
There is no change to the Child and Dependent Care Tax Credit. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2021.
If you have two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.
Education
American Opportunity Tax Credit and Lifetime Learning Credit
For the American Opportunity Tax Credit the maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return.
To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
Prior to the passage of the Consolidated Appropriations Act, 2021, taxpayers with MAGI of $139,000 (joint filers) or $69,500 (single filers) were not able to claim the Lifetime Learning Credit.
Taxpayers, please be aware that while the phase-out limits for Lifetime Learning Credit have been increased, the qualified tuition and expenses deduction has been repealed starting in 2021.
Interest on Educational Loans
The maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $70,000 ($140,000 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $85,000 ($170,000 joint filers).
Retirement
Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at $19,500.
Contribution limits for SIMPLE plans also remain at $13,500. The maximum compensation used to determine contributions increases to $290,000 (up from $285,000 in 2020).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $66,000 and $76,000.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $105,000 to $125,000.
For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $198,000 and $208,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000.
The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Saver’s Credit
The AGI limit for the Saver’s Credit (also known as the Retirement Savings Contribution Credit) for low and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000 in 2020; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500 in 2020.
A business plan is a valuable tool whether you’re seeking additional financing for an existing business, starting a new company, or analyzing a new market. Think of it as your blueprint for success. Not only will it clarify your business vision and goals, but it will also force you to gain a thorough understanding of how resources (financial and human) will be used to carry out that vision and goals.
Before you begin preparing your business plan, take the time to carefully evaluate your business and personal goals as this may give you valuable insight into your specific goals and what you want to accomplish. Think about the reasons why you need additional financing or want to start a new business. Whatever the reason it is important to determine the “why.”
Next, you need to figure out what type of business or new business direction you are interested in pursuing. Chances are you already have a specific business in mind but if not you might want to think about your business in terms of what technical skills and experience you have, whether you have any marketable hobbies or interests, what competition you might have, how you might market your products or services, and how much time you have to run a successful business (it may take more time than you think).
Finally, if you are starting new business, you’ll need to figure out how you want to get started. Most people choose one of three options: starting a business from scratch, purchasing an existing business, or operating a franchise. Each has pros and cons, and only you can decide which business fits.
The final step before developing your plan is developing a pre-business checklist which might include:
Based on your initial answers to the items listed above, your next step is to formulate a focused, well-researched business plan that outlines your business mission and goals, how you intend to achieve your mission and goals, products or services to be provided, and a detailed analysis of your market. Last, but not least, it should include a formal financial plan.
Now, let’s take a look at the components of an effective business plan. Keep in mind that this is a general guideline, and any plan you prepare should be adapted to your specific business with the help of a financial professional.
In the introductory section of your business plan, you should make sure you write a detailed description of your business and its goals, as well as ownership. You can also list skills and experience that you or your business partners bring to the business. And finally, include a discussion of what advantages you and your business have over your competition.
In this section, you will need to describe the location and size of your business, as well as your products and/or services. You should identify your target market and customer demand for your product or service and develop a marketing plan. You should also discuss why your product or service is unique and what type of pricing strategy you will be using.
This section is where you should discuss the financial aspects of your business–and where the advice of a financial professional is vital. The following financial aspects of your business should be discussed in detail:
The Business Operations section generally includes an explanation of how the business will be managed on a day-to-day basis and discusses hiring and personnel procedures (HR), insurance and lease or rent agreements, and any other pertinent issues that could affect your business operations. In this section, you should also specify any equipment necessary to produce your product or services as well as how the product or service will be produced and delivered.
The concluding statement should summarize your business goals and objectives and express your commitment to the success of your business.
Help is Just a Phone Call AwayPlease contact a financial professional if you need help or if you have any unanswered questions about creating a business plan or need any assistance. Remember help is just a phone call away.
If you engage a worker for a long-term, full-time project or a series of projects that are likely to last for an extended period, it is important that you pay special attention to the difference between the classification of an independent contractors and that of an employee.
Why It Matters
This is so because the Internal Revenue Service and state regulators scrutinize the distinction between both because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do so because independent contractors are not covered by unemployment and workers’ compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.
Please note that if a business owner incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.
What’s the Difference between Employees and an Independent Contractors? 
An Independent Contractor is an individual who contracts with a business to perform a specific project or set of projects. The business has the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
For example, John Tom, an electrician, submitted a bid of $8,400 to a housing complex for electrical work. Per the terms of his contract, every two weeks for the next 10 weeks, he is to receive a payment of $1,680. This is not considered payment by the hour. Even if he works more or less than 400 hours to complete the work, Sam will still receive $8,400. He also performs additional electrical installations under contracts with other companies that he obtained through advertisements. John Tom is considered as and should be categorize as an independent contractor.
Labor laws vary by state. Please call if you have specific questions.
An Employee on the other hand provides work in an ongoing, structured situation. Generally, anyone who performs services for you is your employee if you can control what will be done and how it will be done. Even if a worker is given freedom of action they are still considered an employee, what matters is that you have the right to control the details of how the services are performed.
Mary Jane is a salesperson employed on a full-time basis by City Auto, an auto dealer. She works 6 days a week and is on duty in City Auto’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by the company. City Auto also pays the cost of health insurance and group term life insurance for Mary. Mary is considered and should be classified as an employee of the company.
Independent Contractor Qualification Checklist
The IRS, workers’ compensation boards, unemployment compensation boards, federal agencies, and even courts all have slightly different definitions of what an independent contractor is though their means of categorizing workers as independent contractors are similar.
One of the most prevalent approaches used to categorize a worker as either an employee or independent contractor is the analysis created by the IRS, which considers the following:
Minimize the Risk of Misclassification
Misclassifying an employee as an independent contractor can cause the small business owner a huge headache and you may end up before a state taxing authority or the IRS.
Sometimes the issue comes up when a terminated worker files for unemployment benefits and it’s unclear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost many thousands of dollars to defend, even if you successfully fight the challenge.
There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:
Questions about how to classify workers? Don’t hesitate to call and speak to a tax professional who can assist you.
More than half of all businesses today are home-based and this trend has been magnified because of the Covid-19 pandemic. People are striking out and achieving economic and creative independence by turning their skills into a means of earnings.
Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs that is, the home based business people.
And, with technological advances in the virtual space, along with smartphones, tablets, and iPads as well as rising
the demand for “service-oriented” businesses, the opportunities seem to be endless.
Is a Home-Based Business Right for You?
Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for the products or services you intend to offer. Before you invest any time, effort, or money take a few moments to answer the following questions:
Before you dive headfirst into a home based business, you must know why you are doing it and how you will do it. To achieve success your business must be based on something greater than a desire to be your own boss and involve an honest assessment of your personality, an understanding of what’s involved, and a lot of hard work. You have to be willing to plan for the long-term and be willing to make improvements and adjustments along the way.
While there are no “best” or “right” reasons for starting a home based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has space for a business and whether you can successfully run the business from your home. If so, you may qualify for a tax break called the home office deduction. Please call if you’d like more information about this tax break or to find out if you qualify for the deduction.
Compliance with Laws and Regulations
A home based business is subject to many of the same laws and regulations affecting other businesses, and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Zoning
Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration and Accounting Requirements
You may need the following:
If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.
Planning Techniques
Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
Estimating Start-Up Costs
To estimate your start-up costs include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment, and promotional expenses. In addition, business experts say you should not expect a profit for the first eight to ten months, so be sure to give yourself enough of a cushion if you need it.
Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services, and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.
Projecting Income
One of the most important skills you will need is knowing how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate the initial sales volume.
Determining Cash Flow
Working capital – not profits – pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.
Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.
If a home based business is in your future, then a tax professional can help. Don’t hesitate to call if you need assistance setting-up your business or making sure you have the proper documentation in place to satisfy the IRS.
It’s now the 4th quarter and tax season is right around the corner. For many small business owners that means scrambling to collect receipts, mileage logs, and other tax related documents needed to prepare their tax returns. If this describes you, chances are, you’re wishing you’d kept on top of it during the year so you could avoid this scenario. With this in mind, here are seven suggestions to help the small business owner like you keep good records throughout the year:
The small business owner should develop a system that keeps all their important business information together. Small business owners are encouraged to use a software program for electronic recordkeeping. Also, paper documents can be stored in labeled folders.
Throughout the year tax records should be added to the files as they are received. Having records readily at hand makes preparing a tax return easier.
This approach will help the small business owner discover potentially overlooked deductions and credits. The IRS should be notified of any address changes, likewise the Social Security Administration of any legal name changes to avoid processing delays with their tax return.
Records that the small business owner should keep include receipts, canceled checks, and other documents that support income, deductions and credits taken on the tax return.
Taxpayers should also keep records relating to property they dispose of or sell. This information is important to help figuring the basis for computing gain or loss.
It is generally suggested by the IRS that taxpayers keep records for three years from the date they filed their tax returns.
For the small business owners, there’s no particular method of bookkeeping that must be use. However, a method that clearly and accurately reflects the business gross income and expenses. The records should confirm income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
Well-organized records make it easier for the business owner taxpayer to prepare their tax returns. Good recordkeeping also helps to provide answers in the event that a taxpayer’s return is selected for examination or if the business owner receives an IRS notice. If you need help setting up a recordkeeping system that works for you, don’t hesitate to call.
If you’re an individuals with significant assets and you want to transfer wealth to your heirs tax-free, as well as minimize estate taxes, you should take advantage of the proven tax strategies such as gifting and direct payments to educational institutions for your loved ones. The current low interest rate environment and the volatility of the stock market are creating additional opportunities. Let’s take a look at some of the strategies available:
Gifting
The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income to heirs. For example, in 2020, you can make annual gifts of up to $15,000 ($30,000 for a married couple) to as many donees as you desire. The $15,000 is excluded from the federal gift tax so that you will not incur gift tax liability. Furthermore, each $15,000 you give away during your lifetime reduces your estate for federal estate tax purposes. Any amounts above this limit, however, will reduce an individual’s federal lifetime exemption and require filing a gift tax return.
Direct Payments
Another way to shift income to your heirs is through direct payments. Direct payments for medical or educational purposes indirectly shift income to heirs; however, it only works if the payments are made directly to the qualifying educational institution or medical provider. This strategy allows you to give more than the annual gifting limit of $15,000 per donee. For example, if you’re a grandparent, you can pay tuition directly to your grandchild’s boarding school, college, or university. Room and board, books, supplies, or other nontuition expenses are not covered. Likewise, in the case of direct payments to a hospital or medical provider. Medical expenses reimbursed by insurance are not covered, however.
Loans to Family Members
This strategy works by loaning cash to family members at low interest rates, which is then invested with the goal of reaping significant profits down the road. With mid and long-term applicable federal rates (AFR) rates for June 2020, as low as 0.43 and 1.01 percent, respectively, heirs can lock in these rates for many years – three to nine years (mid-term) and nine to more than 20 years (long-term).
Roth IRA Conversions
Contributions to a traditional IRA are made pre-tax, which means distributions are considered taxable income; however, with a Roth IRA, the tax is paid up front, and distributions are completely exempt from income tax. It is this feature that makes converting a traditional IRA to Roth IRA and rolling it over to an heir an attractive option, especially during a financial crisis. The conversion is treated as a rollover, and typically would be accomplished via a trustee to trustee transfer where the trustee of the traditional IRA is directed to transfer an amount from the traditional IRA to the trustee of the Roth IRA. The account owner pays income tax on the amount rolled over in the year the account is converted, which allows the account to accumulate assets tax-free and future distributions are tax-free.
Grantor Retained Annuity Trust (GRAT)
Another relatively low-risk strategy is the grantor retained annuity trust (GRAT), where the donor transfers assets to an irrevocable trust and receives an annuity payment back from the trust each year. This strategy enables heirs to profit from their investments long-term – as long as returns are higher than the IRS interest rate. This is easier than ever now that IRS interest rates are so low. In June 2020, the interest rate used to value certain charitable interests in trusts such as the GRAT is 0.60 percent.
To learn more about these and other tax strategies related to wealth management, please call the office and speak to a tax professional who can assist you.
If you’ve lost your job during the Covid-19 pandemic, you may have questions about the effects this could have your tax situation.
One question asked frequently is, if I’ve lost my job how does this affect my tax situation?
The loss of a job may create new tax issues for the individual. For example, any severance pay you receive is considered taxable income as are any payments for accumulated vacation or sick time. While it isn’t always possible to do so, making sure that enough taxes are withheld from these payments will help you to avoid a big bill at tax time.
Another thing to keep in mind is that if you receive unemployment compensation, this money is taxable. However, SNAP payments formerly known as food stamps and public assistance are not taxable – nor are Economic Recovery Payments sent during the coronavirus pandemic.
Another question that is front and center of the minds of the unemployed is, am I eligible to receive unemployment compensation?
This is dependent on your individual situation, you may be eligible for one of the following types of unemployment compensation:
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, states are permitted to provide Pandemic Unemployment Assistance (PUA) to individuals who are self-employed, seeking part-time employment, or who otherwise would not qualify for regular unemployment compensation. To verify income, states are generally requiring applicants to provide current year tax forms.
It is important to note that voluntarily deciding to quit your job out of a general concern about exposure to COVID-19 does not make you eligible for PUA; however, there are circumstances where an individual may be eligible for PUA.
Recipients of unemployment compensation often wrestles with the question of, is unemployment compensation tax-free?
Unemployment compensation received under the unemployment compensation laws of the United States or of a state is considered taxable income and must be reported on your federal tax return.
Benefits from regular union dues paid to you as an unemployed member of a union must be included in your income as well. However, if you contribute to a special union fund and your contributions are not deductible, then other rules apply. If this applies to you, only include in income the amount you received from the fund that is more than your contributions.
You can choose to have federal income tax withheld from your unemployment benefits by filling out Form W-4V, Voluntary Withholding Request. If you complete the form and give it to the paying office (e.g., your state’s Department of Labor), 10 percent of your payment amount will be held as tax. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.
You will receive Form 1099-G, Certain Government Payments (Info Copy Only), showing the amount you were paid and any federal income tax you elected to have withheld if you received unemployment compensation. You may owe tax when you file your tax return next year if no taxes were withheld initially.
You might also have questions about expenses related to a job search? You are no longer allowed to deduct certain expenses such as travel, resume preparation, and outplacement agency fees incurred while looking for a new job. In prior years, job-seekers were able to deduct these expenses even if they did not get a new job. Under the tax reform, many miscellaneous deductions were eliminated for tax years 2018-2025.
Previously, to collect unemployment compensation you have to actively be searching for work. However, the CARES Act gives states flexibility in determining whether an individual is “actively seeking work” if he or she is unable to search for work because of COVID-19, including because of illness, quarantine, or movement restrictions.
If your employer went out of business or filed for bankruptcy, they should provide you with a Form W-2 showing your wages and withholding by January 31. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fail to provide you with a Form W-2, contact the IRS. They can help by providing you with a substitute Form W-2.
If you’ve experienced a job loss during this difficult time and have questions about how it could affect your tax situation, please don’t hesitate to call our office or visit us on the web.
As we enter the final month of the third quarter of 2020 and as everyone continues to deal with the Corona virus COVID-19 pandemic, it’s not too early to look ahead to the 2020 tax year filing season. In so doing, the small business owner has to consider the impact of existing and recently passed legislation on how they will file their taxes in 2021.
In addition to several changes brought on by the corona virus other legislative changes for tax year 2020 were set to happen anyway. These include the new standard deduction amounts, the income thresholds for tax brackets, certain tax credits, and an increase in retirement savings limits. Others, including deductions for medical and dental expenses, and state and local sales taxes have remained the same.
Stimulus Payments
The $1,200 stimulus payment for a single person or the $2,400 for couples, officially known as a “Recovery Rebate,” is an advance refundable tax credit on your 2020 taxes. This means that no matter how much taxes you owe or don’t owe for that matter in 2020, you’ll get to keep all the money with no taxes due on it.
It is worth noting that your recovery rebate is not taxable. It will not add to your taxable income in 2020 (or any other year). All of this is based on the fact that the CARES Act contains no “claw back” mechanism by which the government can reclaim funds that were legitimately extended.
Since the stimulus payment was based on your adjusted gross income (AGI) for 2018 or 2019, but technically applies to your 2020 AGI, there may be some discrepancy and confusion, but not need to worry as the news here is good:
Tax Deductions
The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from 2019. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 for 2020, up $200 from 2019. For heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.
The alternative minimum tax (AMT) exemption amount for single filers for tax year 2020 is $72,900, up $1,200 from 2019, and begins phasing out at $518,400. For married couples filing jointly, the AMT exemption amount is $113,400, which begins phasing out at $1,036,800.
The CARES Act allows a $300 “above-the-line” deduction for cash contributions to charity if you take the standard deduction when you file in 2021. For those who itemize, the law lifts the 60% of adjusted gross income (AGI) limitation, on cash contributions. Note: Donations to donor advised funds and supporting organizations do not qualify.
Tax Credits
The tax year 2020 maximum earned income credit (EIC) is $6,660 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,557 for 2019.
For tax year 2020, the modified adjusted gross income (MAGI) amount used by married joint filers to determine the reduction in the lifetime learning credit is $118,000 and phases out at $138,000, up from $116,000–$136,000 for tax year 2019. For single filers and heads of households, the MAGI range is $59,000–$69,000 for 2020, up from $58,000–$68,000 in 2019. You can’t claim the credit if you are a married individual filing separately.
Tax Brackets and Rates
For tax year 2020, the top tax rate remains 37% for individual taxpayers filing as single and with income greater than $518,400, which is a modest bump up from $510,300 for 2019. The income threshold for this rate will be $622,050 for married couples filing jointly (MFJ) and $311,025 for married individuals filing separately (MFS).
Income ranges of other rates up to the next-highest threshold are as follows:
The lowest rate is 10% for single individuals and married couples filing separately, whose income is $9,875 or less. For married individuals filing jointly, the combined income may not exceed $19,750.
For those filing as head of household (HOH), the income thresholds are the same as rates for singles in the 37%, 35%, and 32% brackets.
In other HOH brackets, the income thresholds are now $85,501 to $163,300 in the 24% bracket; $53,701 to $85,500 in the 22% bracket; $14,101 to $53,700 in the 12% bracket; and up to $14,100 in the 10% bracket.
Retirement Plans
The contribution limit for employees who participate in employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan (TSP) has been increased to $19,500, up from $19,000 in 2019. The catch-up contribution limit for employees age 50 and older increased to $6,500, up from $6,000 in 2019. The contribution limit for SIMPLE retirement accounts for 2020 has been raised to $13,500, up from $13,000 for 2019.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. During the year, if either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced or phased out. If neither the taxpayer nor his or her spouse is covered by an employer-sponsored retirement plan, the phase-outs of the deduction do not apply. Phase-out ranges for 2020 are as follows:
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.7
The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up $2,000 from 2019. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up $3,000.7
The income limit for the saver’s credit (also referred to as the retirement savings contributions credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000 in 2019; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.
Most owners of small businesses know that it isn’t easy to maintain their company’s financial records, however, keeping such records help your business to run effectively and smoothly. But one might ask, is it a wise idea for the small business owner to do their own bookkeeping?
If you are an owner of a small business and have enough time to do your own bookkeeping that is excellent but doing so reduces the time you’ll have to do what you do best and that’s running your business.
Bookkeeping is the part of accounting used for collecting, classifying, and recording the commercial and financial operations carried out by the company. It is the record of financial transactions and information related to a business every day operation.
A bookkeeper is responsible for:
If you insist on doing your own bookkeeping here are some financial transactions to be mindful of while doing the books:
One of the most important aspect of bookkeeping is maintaining an accurate and up-to-date record of all information. Accuracy is an essential part of this entire process. It ensures that the record of individual financial transactions is correct, up-to-date, and comprehensive. For this reason, accuracy is vital to bookkeeping.
The process of bookkeeping focuses on providing preliminary information, which is necessary to create financial statements. Transactions are entered in the books, and all changes in the financial records are continuously updated. The building blocks of bookkeeping requires a knowledge of debits and credits and fundamental understanding of financial accounting, which includes the overall balance sheet, cash-flow statement and the income statement. The bookkeeping process involves the preparation of accounting records, which enhances an evaluation of the company’s present position and allows the business owner to forecast with relative certainty the future position.
One of the main principle of bookkeeping is that the transaction log records all transactions that occur within the organization on a daily basis. For each transaction, there must be documentation describing the business transaction. This may include a sales invoice, sales receipt, payments to a supplier, a bill from a supplier, and payments made to a bank. These accompanying documents provide the audit record (any item that gives the documented history of a transaction in a company) for each transaction. They are an essential part of maintaining adequate audit trail in the business.
Modern accounting consists of a cycle of seven stages. The first three refer to bookkeeping, that is, the systematic compilation and recording of financial transactions. Bookkeeping is vital to manage your business resources properly. Also, you will need these records for tax purposes. Whether you prepare them on your own or outsource the process, you must understand the importance and basic principles of bookkeeping.
Keeping accurate records of transactions will help you identify and spot any problems in the flow of money, that is, the inflows – receipts and the outflows – payments.
These are some basic principles that should become a standard practice of your books.
If you decide to do bookkeeping on your own, please consult an expert in the field of accounting, especially at the beginning, to make sure that you are doing the right thing because it can cost you more in the long run to fix a problem than to avoid a problem initially. And as your business grows, you may want to hire someone or implement a more sophisticated bookkeeping software.
Another primary benefit of bookkeeping is that it helps eliminate the need to hire a full-time accountant for your business. The business owner only has to pay when accounting work needs to be done, which is considerably cheaper than employing a full-time accountant.
This process is found useful mostly for small businesses in that, it helps in saving money that you would typically spend on training an accountant for your firm. The small business owner also save in other employee related costs, such as health insurance, employer portion of employment taxes, sick days, vacation pay, time off delays , unemployment taxes, workers compensation insurance and overtime pay.
Welcome to Metro Accounting and Tax Services information series, What You Need to Know about Federal Taxes and Your New Business. Today we’ll be examining the Employer Identification Number or EIN, Record Keeping Requirements and Bookkeeping System for the small business owner.
As a small business owner you might be experiencing a little difficulty keeping up with all of your business recordkeeping.
You might be asking yourself what is an EIN? And what does EIN stand for, anyway?
You know it’s an Entrepreneur Something Number?
That doesn’t sound right.
You have receipts, receipts, receipts! You don’t know what to keep and what you can get rid of. You might have a restaurant receipt, and you’re of the opinion that you might not need it so you’re contemplating whether or not to keep it. You’re not even sure if you have all the information needed.
You’re a sole proprietor, but you’re thinking that maybe you should be a Limited Liability Company or maybe you should just incorporate.
You have lots and lots of questions. But presently your first bone of contention is that maybe you should just get through this mess first and deal with the rest later.
And you’re thinking that you still need to make sure you’re using the right accounting method.
The cash method, you guess… or maybe accrual is better. You don’t know.
How long should you keep records for? Maybe you should just pay someone to do it for you. But who?
Let’s see if we can help bring some order to the chaos that most small business owners are experiencing.
Employer Identification Number, or EIN
The federal Employer Identification Number, or EIN identifies tax returns filed with the IRS, and, as a business owner, you may be required to get an EIN.
As a small business owner will need an EIN if you pay wages, have a self-employed retirement plan, operate your business as a partnership or corporation, or if you are required to file any of these tax returns: employment; excise; fiduciary; or alcohol, tobacco, and firearms.
It is important to note that even if you are a sole proprietor with no employees and don’t meet any of these requirements, you may still need an EIN for dealing with other businesses, including banks, they require an EIN to set up a business bank account.
Recordkeeping
It is imperative that small business owners keep receipts, sales slips, invoices, bank deposit slips, canceled checks, and other documents to substantiate items of income, deductions, and credits. Although it may sound like a lot of work, unless you have records showing the sources of your receipts and payments you may not be able to prove that some are non-business related or non-taxable. Remember, recording these items will help you pay only the tax you owe.
Please remember that records must support the claimed amount, the time and the place, the business purpose, and your business relationship to any other person involved.
As a small business owner if your records are incomplete, they may not support your deductions. To support items of income or deduction on your tax return, you must keep records until the statute of limitations for that tax return expires. Usually, the statute of limitations for an income tax return expires three years after the return is due or filed or two years from the date the tax is paid, whichever is later.
So the moral of the story is, as a business owner you must keep your records as long as their contents may be material in the administration of any Internal Revenue Service law.
You’ll be required to keep employment tax records too if you have employees. All employment tax records must be kept for at least four years after the date on which the tax return becomes due or the tax is paid, whichever is later.
However, if you change your method of accounting, records supporting the necessary adjustments may be material for an indefinite amount of time. In addition, records relating to the basis of property must be kept for as long as they are material in determining the basis of the original or replacement property. They might be important to figuring out depreciation, amortization or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.
In the unfortunate even that you’ve lost your records due to circumstances beyond your control, such as a flood or an earthquake, you may substantiate a deduction by a reasonable reconstruction of your accounting records.
Bookkeeping Systems
Surprisingly, many persons who operate their own one-person business never bother to set up a business bookkeeping system. Their personal checking account serves as both a personal and a business account. The IRS, however, recommends that you open a separate business bank account for your business.
It is also recommended that business adopt the double entry bookkeeping system for maintaining their accounting records. Although more complex: it has built-in checks and balances, it’s self-balancing, and is more accurate than the single entry system. Because all businesses consist of an exchange of one thing for another, double entry bookkeeping is used to show this two-fold effect.
Along with the selected a bookkeeping system, the small business owner will also need to select an accounting method. This basically is a set of rules that you use to decide when and how you report your income and expenses.
The two most commonly used accounting methods are the cash method and the accrual method. On your tax return, you must use the same accounting method you used to keep your accounting records.
Under the cash method, the business owner reports all income in the year received and expenses are deducted only in the tax year in which they are paid.
With the accrual method of accounting, income is reported in the year it is earned, regardless of when it’s received. Expenses are deducted in the tax year they are incurred, whether or not they are paid that year.
Generally businesses that have inventory for sale to customers must use an accrual method for sales and purchases. However, many small businesses with gross receipts averaging less than 10 million dollars a year may use a cash method for sales and purchases.
It goes without saying that the COVID-19 pandemic is affecting millions of businesses across the world, causing stress and strain on businesses like we have never seen before.
Although this is certainly a difficult storm for businesses to weather, this is not the first nor will it be the last crisis that will affect the small business owner.
The best way to navigate any crisis is to be fully prepared, but that’s almost impossible, so the best thing businesses can do to be prepared is to understand and forecast your cash flow on an ongoing and scheduled basis.
The review of financials by most businesses is done on a monthly basis. Although this is an important step, relying solely on monthly financial statements to drive or inform business decisions can result in missed opportunities and a delay the response times to any cash challenges.
To combat this, and particularly to help the small business owner weather the storm, we recommend implementing a weekly cash flow process or at a minimum, monthly.
The weekly process includes 3 components: (1) reviewing what happened (the past), (2) where we are today (the present) and (3) where we are going (the future). Whether you find yourself in crisis mode or not, this guide will help you get started with developing your Baseline Forecast and introduce scenario planning to make better decisions.
Having a system in place to focus on cash flow – both where you have been (monitoring) and where you are going (forecasting) will put your company in the best position to survive and thrive, regardless of the present circumstances.
Cash flow is like oxygen to a business, without it the small business will suffocate and die.
A business needs the right amount, at the right intervals, to maintain good business health. Too little and a business may survive, but it will be in a weakened state. This can make it difficult to survive an economic downturn or fend off competitors. Too much and a business may become “lightheaded”. This can cause poor decisions and swing the pendulum the other way, suddenly the business finds itself suffocating and gasping for the cash air needed.
“Do we have enough money? Can we afford it?” Is often times the questions asked by Entrepreneurs & small business owners. Why are these questions asked?
In today’s age, you can log into your bank account in seconds using your smartphone and know exactly how much cash you have available. Why isn’t that enough? The short answer may surprise you: your current cash balance is only one piece of the puzzle.
Just imagine driving your car without a windshield or a rearview mirror, just windows on the left and right. You could see where you are at that given moment by looking side-to-side, but not where you came from or where you are going. You wouldn’t know if you were inches away from an accident or if a broken bridge lies ahead. Pretty scary right? Sometimes, ignorance is bliss. But this does not apply to cash flow or in this instance driving your car.
In today’s world, monitoring and forecasting your small business cash flow is as critical as having a business bank account.
Without monitoring and continually projecting future cash balances, you’ll simply be using your bank balance as a marker at that given moment, that is, our side windows. When we monitor our historical cash flow, we have a clear view of what happened and where we came from, our rearview mirrors.
And the small business owner can go one step further, with cash flow forecasting, they have visibility into what is coming so they can make decisions and plan ahead, their windshield.
The COVID-19 pandemic is affecting millions of businesses across the world, causing stress and strain on individuals, companies, entire industries, and even national economies. Although this is proving to be a particularly difficult storm for businesses to weather, this is not the first nor will it be the last crisis that will affect your small business. Monitoring and forecasting cash flow is as critical to a business as having a bank account.
A crisis can take many forms. It can be company specific such as losing a large client or supplier relationship, industry specific in the form of shifts in technology or processes used or it can affect a whole economy in the form of a recession.
As businesses struggle to deal with the COVID-19 crisis, the common cash flow questions during normal times, “Do we have enough money? Can we afford it?” are followed by more difficult ones. These questions challenge the very survival of a business and the livelihood of its owners and employees.
“Do I need to lay people off? How long will the cash we have today last? Are we going to go out of business?”
Small business owners hate uncertainty and neither do they like surprises. This is especially true when it comes to cash balances, availability of cash, and certainly the ultimate survival of a business.
How do you know if you’re headed towards a potential cash flow crisis? Here are a few symptoms you may experience:
If there is a good process in place for monitoring and forecasting cash, you can immediately start weighing options and strategizing for how to navigate the crisis. You can outline different scenarios and what-ifs to map out your options and possibilities. Most importantly, you can start on the fly from a position of confidence.
If you do not have a process for monitoring and forecasting cash flow, this is often referred to as starting “behind the eight ball”. Meaning, the race has already begun, and you are not yet at the starting gate.
Critical time must be spent gathering information to figure out not only where we are today, but a reasonable expectation for the future, that is your ‘Baseline Forecast’.
If you start from scratch, it could take days to gather enough information from your accounting software, bank registers, sales forecasts, debt schedules and more to be ready to sit down and try to interpret the information.
And gathering all that data is just the first step, you will still need to analyze and assemble it in order to develop a plan and forecast in order to take actionable steps.
In a crisis, fast decisions can be the difference between survival and all kinds of unpleasant alternatives.
What about… When things return to ‘Normal’?
Even when there isn’t a crisis like the COVID-19 pandemic, small businesses have historically struggled with managing their cash flow position. According to Intuit’s ‘State of Small Business Cash Flow’ report, 61% of small businesses regularly struggle with cash flow and 69% of their owners have been kept up at night by cash flow concerns.
Without a doubt, cash is very critical to business survival and most business owners identify cash flow as a source of worry, its struggle that causes them stress, then why don’t they focus on managing it more often?
The simple answer is that the traditional financial statements, that is, the income statement, balance sheet and cash flow statement provided to the small business owners by their accountants can be difficult to interpret and don’t tell the whole cash flow story.
Surprisingly even the cash flow statement, which based solely by name you would think would help, does little more than tell us the major categories where cash was spent, but tells us nothing about the future.
This is amplified by the fact that financial statements are prepared and reviewed monthly.
Reviewing your numbers monthly works for measuring performance against budgets and benchmarks, but you can lose sight of important activity and miss out on opportunities if you rely solely on monthly financial statements.
Let’s look at a simple example of insights and opportunities that are lost on the collections, accounts receivable side by only looking at information on a monthly basis.
The invoice is now 30 days older and more difficult to collect. Worse, when the business owner calls, they learn the customer has cash flow problems and are now unable to pay. What now? A once thought-to-be profitable job just became a huge expense and cash flow headache. Had the missed payment been noted during the June 19 weekly cash flow meeting, the business may have been able take action to reduce the impact. But now, facing the full brunt of this situation at once, the business has fewer options.
It is important for the small business owner to note that a lack of focus on cash can actually create a cash flow crisis!
If the business had a weekly or bi-weekly process in place to review cash activity and update their cash flow forecast, the payment delay would have been caught much earlier and they would have been able to take action sooner.
Every business knows that cash is king, yet an alarming number of businesses (only 33%) don’t even use a tech platform, tool or app to manage their cash flow. Here are 7 practical tips that every business owner should use to help with their cash flow.
For those that do not use a tech platform, tool or app, it is probably a manual process done in Microsoft Excel which is a great tool but takes a considerable amount of work to get an effective cash flow forecast. Furthermore, 74% of businesses judge cash flow tasks as difficult according to a 2019 study.
This is precisely why we are here to help business owners get a handle on their cash flow forecasting. If you use Quick Books Online or Quick Books Desktop we can forecast your future cash flow up to 6-months, you’ll instantly see KPIs and future forecast that you simply don’t get in Quick Books.
Every small business owner will appreciate being able to unlock insights into their cash flow so that they can run and operate their businesses successfully.
Here are 7 important cash flow tips that you should consider when running your business and we’ll make it dramatically easier for you to manage and forecast your cash flow.
1) Your days cash on hand should be 45 days or better
Most business owners look at their current cash balance (cash on hand) in their check book and make quick decisions whether they can afford something or not. The reality is that there may be expenses coming in that will claim the cash balance at some point in the future, so you must know what the day’s cash on hand really are. Two great dashboard KPIs that you can keep your eye on:
Cash on hand shows you the sum of all the cash in your bank accounts plus any deposited funds that you have.
In this example, it looks like the amount is very strong, yet the business owner must look at all the other factors that will use the cash and once done, can judge if this is really good or not.
Days cash on hand.
This shows the number of days that cash is available factoring in expenses and assuming no new sales. Below is a chart that gives you guidance of where you should be.
2) Understanding your payment terms are
You might have some great contracts with your customers and yet many larger customers have longer payment terms (Net 120, Net 60, etc.).
There was a time when I landed a large contact with a large company that required me to ramp up people and resources. I was super excited, and we were making strong progress on the new contact. As things ramped up, so did the expenses and the fact that I had to pay the people that were doing the work. The problem however, was the large company had a Net 60 which meant the first check would not come in for 2 months and yet I had to pay the expenses and payroll out of my own pocket which put me in a significant cash crunch position.
The Average days to collect from customers gives the business owner an overall summary of how all of your customers combined on average pay you in number of days. Generally, this should be as low as possible.
3) Pay particular attention to your expenses
Be very careful as expenses can add up quickly. Some new expenses seem harmless to add to your overall bills like a license to zoom or new software as an example. Furthermore, most expenses these days are put on a company charge card with an annual billing that is done initially and not remembered until the following year. And the larger your company gets, the more expenses come in with possible duplication – maybe one employee thought it was great to use zoom, while another got a license for another conferencing tool.
It’s important to keep an eye on your expenses. Perform an annual audit to ensure you need all your expenses and decide if you should cut some. This is one of the strongest ways that you can increase your cash flow. We’ll make it easy to see your monthly expenses and trend:
At times you may have an unexpected or higher than normal bill that you didn’t even know about. An example might be a water bill where every month it is roughly the same and auto paid through your business checking account or credit card. You don’t see a bill come in and maybe it was dramatically higher due to a leak or higher than normal usage. How would you really know about this anomaly? The tools and built in features we provide in our cash management program will watch over your business expenses and alert you to anything out of the norm so you can take action.
4) Try increasing your sales
This is an obvious, yet often times over looked by the small business owner. You can set goals for your sales team and then use our program to know how your monthly sales is doing and also how it is trending over the past few months. You can analyze the sales along with the expenses and you’ll start to see a better trend on how your cash flow is really doing. 
5) Don’t rely on too few customers, know your Customer Concentration
It’s a dangerous practice but many small businesses rely on sales from just a handful of customers and in some cases rely on sales from just one or two customers. Having a high customer concentration puts your business at risk. If you lose your top customer, your business is at risk. Don’t be too dependent on just one or two customers because losing one could potentially really hurt your business. Focus on getting more customers to broaden your revenue stream. We can help you to avoid this scenario and let you see the impact of losing your top customer.
You can see your top customers very easily today and projected out 6-months in the future.
Customer concentration is where you calculate the revenue coming in as a percentage of your total revenue and understanding the dependence your business has on your customers. You can see this in Excel when you export your forecast and total all of your customers revenue and simply calculate each customer as percent of total.
6) Don’t pay your vendors too quickly
Everyone in business wants to be paid. Just like you want your customers to pay you in a timely manner, your vendors want their payments quickly as well. However, if you are paying your vendors too early it can hurt your cash flow position. You can delay payment as long as possible while meeting the terms of your vendor contact. Among other things, we’ll show you the average days to pay your vendors and you should consider stretching this out as long as possible without being late on your payments. You’ll always want to have a good relationship with your vendors and avoid late payments as it can hurt the relationship and potentially impact your good credit rating.
7) Know your cash flow forecast
Knowing your future cash flow forecast gives your business a cash road map. You get a much clearer idea of where your business is headed versus using just your cash on hand as a means to make decisions.
We’ll makes it simple to know your future cash flow as we look at your historical Quick Books data and projects a 6-month future forecast. You’ll have interactive chart at your fingertips to make it simple for you to see how you are doing each month and this gives you an opportunity to do a few what-if scenarios. For example, you need to buy your employees new laptops and you are not sure what month is the best month to do it. We’ll let you easily add a manual Cash-Out transaction and immediately see the impact on your future 6-month cash flow. If you put the laptop expense on a specific day in a future month and you realize that might not be the best month due to other expenses, you can quickly change the date of the laptop expense and see if that will work for your situation.
Small business owners, we can help you to run your business more efficiently and help you to be more profitable. Call the office of Metro Accounting And Tax Services at 404-990-3365 and schedule at 15 mins no cost consultation to get a cash flow checkup for your business.
Most Business Owners know how to sell something or make something to be sold. Very few have any formal financial management experience.
The signs are there and they feel the pain
Connecting the dots are difficult
They cannot see what’s coming
This lead to improvised management strategies
Cognitive biases and mental shortcuts can lead management into making costly errors as people routinely employ heuristic rules of thumbs or mental shortcuts to simplify and oversimplify the decision making process under uncertainty.
These may stem from:
The business owner inappropriately anchoring to an easily available and sometimes arbitrary point of reference when forming estimates and then adjusting to fit the circumstance.
Poorly constructed framing or presentation of the situations when deciding a course of action.
Overconfidence or extreme optimism that, when carried to the excess, causes a business owner to make poor decisions.
Self-serving bias leads people to see data in the way they most want to see it.
Dangerous situational dynamics are created when business owners don’t have the objective systems in place to collect key factual information that can mitigate the use of convenient facts or the predisposition of being too certain of personal opinions.
Examples of these situations are:
This leads to a very dangerous situation
Are you ready to?
In other words, are you ready to have?
As a business owner, at times it can be lonely at the top, but it doesn’t have to be that way. If you need to define a strategy to move your business to the next level, the Operational and Financial Advisors at Metro Accounting are ready to help you chart the way forward. Don’t hesitate to email or call us at clientservice@metroaccountingandtaxes or 404-990-3365.
It goes without saying that the goal of every business owner is to operate a profitable business. Being able to pay the bills when they are due and having some residual income at the end of the period is a satisfying feeling. With that in mind, business owners wrestle with the question of, what’s more important Cash flow or profits.
What Is Cash Flow?
Cash flow is the inflow and outflow of money from a business. It is necessary for daily operations, taxes, purchasing inventory, and paying employees and operating costs.
Positive cash flow indicates that a company’s liquid assets are increasing. This enables it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Negative cash flow indicates that a company’s liquid assets are decreasing.
What Is Profit?
Profit is the surplus after all expenses are deducted from revenue. Profit is the overall picture of a business and the basis on which tax is calculated.
There are three major types of profit that small business owners should pay attention to : gross profit, operating profit, and net profit. The business owner is provided meaningful insight when each type of profit is understood and analyzed and thus can make informed decisions that will aid in the company’s profitability.
Each type of profit gives the owner information about the company’s performance, especially when compared against prior operating periods and other companies in the same industry. All three levels of profitability can be found on the income statement.
Which One Is of Greater Importance to a Business?
When determining which one is of more importance, one has to take each business individually and evaluate and analyze its operational and financial position to make such a determination.
For example, a business may see a profit every month, but its money is tied up in hard assets or accounts receivable, and there is no cash to pay the daily operational cost of the business, i.e. employee salaries, electricity etc.
Once the company collects on those accounts receivable the business sees an influx in revenue, it starts to see positive cash flow again. In this example, cash flow is more important because it keeps the business running while still maintaining a profit. Alternately, a business may see increased revenue and cash flow, but the company has a huge amount of debt, so the business does not make a profit.
In the long run the absence of a profit eventually has a debilitating effect on the cash flow. In this instance, profit is more important. Another thing to remember when determining whether to focus on cash flow or profit, is the fact that there can be an infusion of cash into a business from external sources. A business owner can put up his or her personal assets as capital into the business. A small business loan can be secured from a bank to keep the business running until it begins to cash flow again.
Cashflow and profits are both crucial aspects of any business. In the long run for a business to be successful it must be profitable while generating a positive cash flow.
Profit is more indicative of your business’s success, but cash flow is more important to keep the business operating on a day-to-day basis. They can be viewed as a coin with two sides, both are equally important.
Having More Time to Focus on Your Business
By outsourcing your accounting operations to a professional accounting firm, you’re effectively hiring a team of experts. As an outsourced CFO, I work with clients from varied fields and backgrounds, each having a different level of complexity and challenge with their financials.
However, there seem to be a common theme with all these businesses: With the growth of their companies they eventually realize that they lack the expertise needed to fulfill all their accounting and bookkeeping functions and they really need to spend the time doing what they all do best and that’s running their businesses.
It is often the case where these business owners find that accounting and bookkeeping can be stressful and time consuming if not done correctly in the first place. Going back to find and correct errors can consume a lot of their energy and time which should be devoted to two vital areas of their businesses: specifically, business development and strategic planning.
Partner with the right professional and both challenges will be addressed. When you outsource your accounting and bookkeeping services to a Certified Public Accountant, you’ll be working with a team that has extensive experience. You’ll be provided with real-time financial insight that will aid your decision making process, you’ll have at your fingertips monthly financial packages (e.g. balance sheets, income statements and statements of cash flow) to more advanced analysis (e.g. cash reporting, budget-vs.-actual analysis, make or buy decision), simply put, you’ll have up-to-date financial information needed to make critical business decisions.
Risk and Fraud Prevention
Having a Certified Public Accountant as a valued business partner help you not only to address the first challenge but also affords you the opportunity to receive invaluable support in addressing the second challenge as well.
As a business owner you’ll need to comply with and be current with many rules and regulations that change frequently. Having to worry about being in compliant with all these rules and regulations can be another source of stress and distraction. You can eliminate this added source of stress by outsourcing your accounting and bookkeeping to a professional company, you’ll gain the peace of mind you deserve.
Among other things, you’ll need to prepare and submit sales tax filings, collect W-9s and manage submission of 1099s to the IRS, a professional accountant knows all the rules and will ensure you remain in compliance.
Other ways in which a Certified Public Accountant can reduces your exposure to risk is through the strengthening your system of internal control and with the segregation of duties. We’ll help you to define your company’s policies and procedures, and be that extra set of eyes to help in the prevention of errors or intentional mistakes (fraud prevention).
According to Association of Certified Fraud Examiner’s in one of their released study, most common victims of fraud are privately owned small businesses with less than 100 employees with an astounding median fraud amount of $147,000. This is due the fact that most small companies don’t have access to a controller or CFO who could look at the KPI and metrics which show abnormal activity in the transactional and billing data.
Cost Reduction
Outsourced accounting operations save you money by eliminating costly benefit packages to a full-time or part-time employee. When you outsource accounting, you only pay for the actual accounting, nothing else. This saves in productivity costs as well as payroll costs. The cost benefit analysis of outsourced accounting vs. in-house bookkeeping can save up to 40% in monthly costs.
Prepare for Business Growth
Starting a business and just having a couple of clients makes it easy for the business owner to be act as the company’s accountant. Afterall, it’s easy to record few revenue and expense transactions in a simple excel spreadsheet. This initial ease and simplicity can set you up for big problems down the road once you start to grow. Things get complicated fast and very soon you realize that you’ve actually become the company’s bookkeeper while trying to run a business on the side, instead of the other way around.
When you start your business with a scalable system in place, you won’t need to scramble to find a new system or resources when you’re in the middle of rapid growth. Your clients and vendors will enjoy the seamless operation—and you’ll have a much smoother path to growth, especially at tax time.
A Certified Public Accountant as you valued business partner can also draw upon their wide knowledge base and provide you with additional services as needed. You might be able to benefit from class and project accounting or analysis and planning. You might not know the financial ramifications of opening a new location or starting a new product line — but your Certified Accountant will. And you can enjoy the benefit of this expertise without having to provide benefits or devote management time to overseeing an in-house hire.
Now that you see how beneficial outsourcing your accounting really is, the next step is finding the right CPA for your business. In the end its really about different companies facing different problems that have a common solution.
Having that grand opening for your business is a great achievement and every business owner should be commended for making that big step. However, maintaining the business has proven to be a big challenge for many owners, here are three of the biggest challenges unique to small business owners.
Not having a steady supply of customers is a problem face by all businesses and particularly the smaller ones. Companies big and small can’t just sit around waiting for leads to come in. One has to be engaged in marketing everyday to find new customers. For the small business owner who don’t have a household name this can be particularly challenging. There seem to be so many avenues you can choose to focus your marketing on, how do you know what to prioritize and where to allocate your scarce resources?
Figuring out who your ideal customer is should actually the starting point for small business owners and any businesses for that matter.
Hope and wishing that customers will show up at your business just doesn’t work. You need to make sure you’re spreading the word to a targeted set of people, the right people.
Develop an idea of what your ideal customers look like, what they do, where they spend time online by building your buyer personas. Once you’ve built your buyer personas, you can start creating content and getting in front of your target customers in the places they spend time online and with the messages that they care about.
Depending on a single client or groups of clients is a sure recipe for disaster. If a single client makes up more than half of your income, you are in trouble. At this point you would be considered more of an independent contractor than a business owner. Diversifying your client base is vital to growing a business, but it can be difficult, especially when the client in question pays well and on time.
Such dependence can actually result in the longer-term handicap of your business and it is generally better for a business to have a diversified client base to pick up the slack if and when any single client quits paying.
A small business owner’s life is not without trials and tests, in-fact it’s not an enviable life, at least in the beginning. It’s extremely easy to get discouraged when something goes wrong or when you’re not growing as fast as you’d like. Self-doubt creeps in, and you feel like giving up at times.
Having the conviction to believe in yourself, your dreams and aspirations and having the temerity to stick it out are necessary trait for entrepreneurs. It helps also to have a good support system of family and friends who know your goals and support your struggles, as well as like-minded entrepreneurs who can be objective as it relates to the direction of your business. There is a very motivational poem called, “Success is failure turned inside out”. This can help the entrepreneur to refocus when things aren’t going the way expected.
The bottom line is this, a competitive drive is often one of the reasons people start their own business, and every challenge represents another opportunity to compete. One of the worst things a small business owner can do is to go into business without being cognizant of the challenges that lie ahead. Remain focus and don’t give up in the face of challenges.
Most real estate professionals manage their finances themselves, finding the time and energy to organize business expenses can be a daunting task in and of itself. If this sounds like you get the needed help from an accounting professional and focus on running your business. Remember, it’s not recommended to be “penny wise and pound foolish”.
To help you get started on the right footing, we’ve outlined some overlooked tax deductions to help real estate professionals reduce their tax liability and keep more of their hard-earned money in their pockets.
Real Estate Rental Property Losses
Losses on rental properties owned – provided there was material participation as a landlord.
Real Estate Agent Business Expenses
Office-related expenses like photocopies, letterhead, and other products you need to keep your business going.
Other items such as furniture, a new copier, computers, fax machines, or phone systems can either be expensed in full the year they are purchased, or depreciated over a certain number of years.
A dedicated landline used for your business, that expense can also be fully deducted.
You can also deduct the business percentage use of your cell phone bill if you use it for work.
Meals while traveling on business
Are you constantly taking clients out for lunch or hosting dinners to generate referral business?
You’re able to deduct 50% of the total expense.
Note: entertainment expenses are no longer deductible.
Continuing education or other training courses.
You may be eligible to deduct expenses like materials costs, registration fees, and related travel expenses.
Digital and online advertising
Digital and online advertising similar to expenses related to ordinary advertising like marketing materials, signs, photography, and staging are all deductible.
Real Estate – Specific Tax-Deductible Business Expenses
Commissions you’ve paid to employees or other agents are fully deductible as business expenses.
Fees
Annual fees are an expected cost of doing business. Other deductible fees include: renewal fees for your state license, the cost of professional memberships, and MLS dues.
Note: Professional fees excluding the amount used for political advocacy & lobbying.
Business Insurance
General business insurance and Errors & Omissions (E&O) insurance are fully deductible.
Real Estate Taxes
Deduct real estate taxes that are necessary for your business.
Real Estate Closing Gifts
Real estate closing gifts are tax deductible, as are other gifts given to clients or other business associates, provided that: a) the gifts do not exceed $25 per person, b)incidental cost s do not count towards the $25, e.g. packaging & shipping, c)husband and wife is counted as one person for gift giving purposes.
Mileage
Each and every mile you drive for your real estate business can be deducted from your taxes.
It’s advisable for agents to get an automatic mileage tracker app.
If you drive over 10,000 miles annually for your real estate business, you’ll likely get the best deduction by using the standard mileage deduction.
However, if you drive less frequently for realty or have a car payment that’s quite high, you might benefit from using the actual cost method to calculate your mileage deduction.
Home Office Deduction
If you use part of your home, you may be able to take advantage of the home office deduction as a real estate tax deduction.
Note: Unless you’re already deducting desk fees you can deduct a portion of expenses like rent or mortgage interest payments, utility bills, insurance costs, internet bills, and costs associated with repairs and maintenance.
Your home office must be used exclusively for business in order to qualify for the deduction
If you exercise your license for an independent broker or a national franchise, your desk fees are fully deductible; just note that you won’t be able to take the home office deduction. Desk fees can constitute a sizable tax write off for realtors.
Software
Any software or app you use to run your business is fully tax deductible, including business and accounting software, lead generation subscription services, CRM software, your Spotify subscription, even your automated mileage tracker.
Keeping your business income and expenses organized doesn’t have to be this complicated. Let’s face it, you cannot do everything by yourself, focus on running your business and get the needed professional accounting help. It’s now tax time, free yourself of lots of stress and sleepless nights.
Running a small business can be a demanding endeavor. The small business owner wears many hats and the last thing you want to do is to pay too much of your earnings in taxes to the IRS. As a small business owner there are many ways to reduce your taxable liability and keep more of your hard earned money in your pockets.
If you need ways to reduce your tax burden this year, consider some of the following methods to do just that. However, always consult a tax professional before taking action on any of these suggestions.
One way you can reduce taxes for your small business is by hiring a family member. There are a variety of options available to the small business owner in the regard. These options allow the small business owner to basically shelter some of his income from taxes and this is allowed by the Internal Revenue Service (IRS).
Hiring of your children – with this strategy small business owners are able to pay a lower marginal tax rate, or eliminate the tax on the income paid to their children. Their salary can be put in a Roth IRA for future purposes thus allowing you the tax benefit plus a way to provide for their future needs.
Hiring your spouse – taking into consideration the benefits they have through another job; you may be able to put aside an amount in retirement savings for them thus reducing your tax liability.
As a small business owner, you don’t have a 401(k) match from an employer but there are several retirement account options that can maximize your retirement savings and reap valuable tax benefits. For example, your traditional IRA contribution may be tax deductible.
A small business owner can reduce his tax liability by establishing a Health Savings Account (HSA). With the continued rise in health care cost this is a proven method to plan for the future while getting a tax benefit for doing so.
There is a triple tax advantage of establishing a HSA
1) You can claim a tax deduction for contributions you make to a HSA,
2) The interest or other earnings on the assets in the account are tax free,
3) Distributions are tax free when withdrawn for qualified medical expenses.
You don’t have the luxury of an employer paying a portion of your taxes as a small business owner. You’re on the hook for the entire amount of Social Security and Medicare taxes. Those amounts only increase an already high tax bill. If your business is set up as a Limited Liability Company (LLC), you still have to pay those taxes.
In certain circumstances, just by changing your business structure you can eliminate the employer half of those two tax responsibilities. There are many things to consider in this change, such as paying yourself a reasonable salary and other associated risks, but it can be a good way to reduce your taxable responsibility.
If you travel a lot for both business and pleasure, you may be able to reduce your business taxes. Business travel is fully deductible, though personal travel does not enjoy the same benefit. There are several ways to manage travel to save on business taxes. You can combine personal travel with a justifiable business purpose. You can also use the frequent flier miles you earn for personal travel.
The Bottom Line
With wise planning, you can reduce your small business taxes and keep more of your money working for you. Just remember to consult a tax professional first to make sure you qualify for the potential savings discussed here.
An independent contractor is a person or entity employed to perform work for—or provide services to another entity as a non-employee. As a result, independent contractors must pay their own Social Security and Medicare taxes. The payer must correctly classify each payee as either an independent contractor or employee. Another term for an independent contractor is a freelancer.
Doctors, dentists, realtors, lawyers, and many other professionals who provide independent services are classified as independent contractors by the Internal Revenue Service (IRS). However, the category also includes contractors, subcontractors, freelance writers, software designers, auctioneers, actors, musicians and many others who provide independent services to the general public. Independent contractors have become increasingly prevalent in the rise of what has been dubbed “the gig economy.”
For tax purposes independent contractors are considered sole proprietors or single member limited liability companies (LLCs). They must report all their income and expenses on Schedule C of Form 1040 or Schedule E if they have profits or losses from rental properties. Further, they must submit self-employment taxes to the IRS, usually on a quarterly basis using Form 1040- ES.
However, as sole proprietors, independent contractors do not necessarily pay taxes on their gross earnings. Applicable business expenses can reduce their overall tax obligation. The difference between gross earnings and business expenses is the net income, the amount on which taxes are due. Independent contractors must keep track of their earnings and include every payment received from clients.
It goes without saying that for many business owners, collecting on accounts receivables can be challenging especially as more people switch from established collection procedures to online payment methods. The good news is that the small business owner can take positive actions to improve collection rates, shorten the aging days of your accounts receivable, improve the business cash flow and tighten up its credit and collections policies. While some of the tips discussed here may not be suitable for every business most can serve as general guidelines to the small business more financial stability.
Define and stick to a concrete credit policy
It is imperative that the small business define and stick to concrete credit guidelines. Your sales force should not sell to customers who are not credit-worthy, or who have become delinquent. You should also clearly delineate what leeway salespeople have to vary from these guidelines in attempting to attract customers.
It is of vital importance that you have a system of controls for checking out a potential customer’s credit, and it should be used before an order is shipped. Further, there should be clear communication between the accounting department and the sales department as to current customers who become delinquent.
Clearly Explain Your Payment Policy
Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.
Making sure that invoices (both paper and electronic) include a telephone number and website address so customers can contact you with any billing questions. If you send an invoice via the US mail, also include a pre-addressed envelope.
Timing is everything
The faster invoices are sent, the faster you receive payment. For most businesses, it’s best to send an invoice when you complete the service or with a shipment, rather than in a separate mailing or online invoice days or weeks later.
Follow Through on Your Stated Terms
If your policy stipulates that late payers will go into collection after 60 days, then you must stick to that policy. A member of your staff (but not a salesperson) should call or email a reminder invoice or notice of late payment to all late payers and politely request payment. Accounts of those who exceed your payment deadlines should be penalized and or sent into collection if that is your stated policy.
Train Staff Appropriately
The person you designate to make calls to delinquent customers must understand the seriousness of and the professionalism required for the task. When calling a delinquent payer, the caller should:
Switch to an Online Payment System
Studies show that customers and clients prefer to pay with debit and or credit cards or EFTs vs. checks and to have multiple payment options (including traditional paper invoicing) available to them. Furthermore, when you use the latest online payment technology clients are more likely to feel that you run a more efficient streamlined operation and are “up-to-date.”
If you are a business owner who is struggling to get paid on time or are ready to make the switch to an online invoicing and payment system, help is just a phone call away.
Less than one-third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.
The number of people who are financially unprepared for retirement is staggering. One study revealed that more than half of the adults in the U.S. were planning to depend solely on Social Security for retirement income. Another study indicated that the great majority of Americans do not save nearly enough money. This Financial Guide developed by Metro Accounting And Tax Services, CPAs provides you with the information you need to get started on this important task.
It is very simple, to enjoy your retirement years you’ll need to begin planning early. With longer life expectancies and the growing senior population, people need to begin planning and saving for retirement in their 30s or even sooner. Adequate planning can help to ensure that you will not outlive your savings and that you will not become financially dependent on others.
It is never too late to start or to improve a retirement plan. This Financial Guide shows you the basics of retirement planning, and will enable you to get started or to revamp an existing plan. Basically, there are three steps to retirement planning:
In-order to ensure that you don’t shortchange yourself, in making estimates of future income needs and sources of income, be sure to estimate conservatively.
Estimating Your Retirement Income
Most people have three possible sources of retirement income: (1) Social Security, (2) pension payments, and (3) savings and investments. The income that will have to be provided through savings and investments (which you can plan for) can be determined only after you have estimated the income you can expect from Social Security and from any pension plans (over which you have little control).
Social Security
Estimate how much you can expect in the way of Social Security retirement income. To do this, you should file a “Request for Earnings and Benefits Estimate” with the Social Security Administration. This form can be obtained from SSA by calling their toll-free number: 800-772-1213. You can also request a benefits statement online through the Social Security Administrations Web Site.
Many people are being sent estimates of their future Social Security benefits without having to make a request. You may have received such an estimate in the mail.
The amount of Social Security benefits you will receive depends on how long you worked, the age at which you begin receiving benefits, and your total earnings.
If you wait until your full retirement age (65 to 67, depending on your year of birth) to begin receiving benefits, your monthly retirement benefit will be larger than if you elect to receive benefits beginning at age 62. The full retirement age will increase gradually to age 67 by the year 2027.
It is important to note that Social Security benefits may be subject to income tax. The basic rule is that if your adjusted gross income plus tax-exempt interest plus half of your Social Security benefits are more than $25,000 for an individual or more than $32,000 for a couple, then some portion of your Social Security benefit will be subject to income tax. The amount that is subject to tax increases as the level of adjusted gross income goes up.
Also, if you earn income while you are receiving Social Security, your benefit may be decreased.
Pension Plans
Estimate how much you can expect to receive from a traditional pension plan or other retirement plan. If you are covered by a traditional pension plan and you are vested, ask your employer for a projection of what you can expect to receive if you continue working until retirement age or under other circumstances, for example, if you terminate before retirement age. You may already have received such an estimate.
If you are covered by a 401(k) plan, a profit-sharing plan, a Keogh plan, or a Simplified Employee Pension, make an estimate of the lump sum that will be available to you at retirement age. You may be able to get help with this estimate from your employer.
If you are in the military or formerly served in the military, contact the relevant branch of service to find out about retirement benefits.
Establishing Goals For Retirement
Determine how much income you will need (or want) after retirement. Once you have determined this amount, you can figure out how much you will need to put away to have a big enough nest egg to fund your desired income level.
Many people don’t realize that their retirement could last as long as their careers: 35 years or longer. Your nest egg may have to last much longer than you might think. Remember that the earlier you retire, the more you will have to save. If you want to retire at age 55, you’ll have to save a lot more than if you retire at age 65.
A general guideline is that you will want to have at least 70 percent of whatever income stream you have before retirement. If you have any special needs or desires, for example, a desire to travel extensively-the percentage should be adjusted upward. The 70 percent figure is not a substitute for a thorough analysis of your income needs after retirement, but is only a guideline.
Here are some suggestions for estimating how much of an income stream you will want to have coming in after retirement:
The first step in trying to figure out what your annual expenses will be after retirement is to figure what your expenses are now. Take a year’s worth of checkbook, credit card, and savings account records, and add up what you paid for insurance, mortgage, food, household expenses, and so on.
If you are not among the lucky few that will have post-retirement health insurance coverage from an ex-employer, you will probably pay more for health coverage after you retire you may have to take out so-called “Medigap” coverage.
Other Expenses To Consider includes:
If you are planning to retire to another state, take into account the different state taxes you will be paying.
The answers to these questions will help you determine your estimated annual expenses after retirement. Then subtract from this estimate the anticipated annual income from already-viable sources. (Do not subtract the lump-sum payments you expect to receive, for example, lump sum payments from 401(k) plans. The difference is the annual shortfall that will have to be financed by the nest egg you will need to accumulate.
Now you will have to determine how much you need to save each year to accumulate a nest egg of that size by your retirement age.
The table below will help in this determination which assumes an after-tax return of 5 percent per year. Just multiply the required nest egg by the Savings Multiplier for the number of years until retirement.
For example, if you are 40 years old and want to retire at age 65. You determine that you need a nest egg of $350,000 to fund your annual shortfall. To find out how much you must save each year to have that $350,000 nest egg by the time you are 65, multiply $350,000 by the 25-year savings multiplier (2.1 percent). You will need to save $7,350 (2.1 percent times $350,000) a year for 25 years.
Subtract from this nest egg any lump sums that you expect to receive at retirement. To project the value at retirement of a present asset (retirement account, savings, investments, etc.); multiply the current value of this asset by the Growth Multiplier for the number of years until retirement.
Let’s assume that you already have $75,000 in a 401(k) plan. To find out what that amount will grow to in 25 years, multiply it by the growth multiplier for 25 years. This $75,000 will grow to $254,250 (339 percent times $75,000) by the time you retire. Subtract this $254,250 from the $350,000 needed in the previous example. This amount ($95,750) is the amount you must accumulate by age 65 to meet the income shortfall. Multiply this $95,750 by the 25-year savings multiplier (2.1 percent). You now know that, after taking the projected lump sum into consideration, you will still need to save $2,010.75 per year to accumulate $95,750.
|
Years Until Retirement |
Savings Multiplier |
Growth Multiplier |
|
5 |
18.1% |
128% |
|
10 |
8.0% |
163% |
|
15 |
4.6% |
208% |
|
20 |
3.0% |
265% |
|
25 |
2.1% |
339% |
|
30 |
1.5% |
432% |
Deciding on Investments
It is a known fact that the longer you have until retirement, more of your savings should be invested in vehicles with a potential for growth. If you are very close to or at retirement, you may wish to put the bulk of your savings into low-risk investments. However, this formula is subject to your own financial profile: your tolerance for risk, your income level, your other sources of retirement income (e.g., pension payments), and your unique needs.
Pros And Cons of Various Retirement-Savings Vehicles.
Tax-Deferred Retirement Vehicles
Each year, maximize your deposits in a 401(k) plan, an IRA, a Keogh plan, or some other form of tax-deferred savings. Because this money grows tax-deferred, returns will be greater. Further, if the amount you put in is deductible, you are reducing your income tax base.
Lowest Risk Investments
Money market funds, CDs, and Treasury bills are the most conservative investments. However, of the three, only the Treasury bills offer a rate that will keep up with inflation. For the average individual saving for retirement, it is recommended that these vehicles make up only a portion of investments.
Bonds
Bonds provide a fixed rate of income for a certain period. The income from bonds is higher than income from Treasury bills.
Bonds fluctuate in value depending on interest rates, and are thus riskier than the lowest risk investments. If bonds are used as a conservative investment, it is a good idea to use those of a shorter term, to minimize the fluctuation in value that might occur.
Stocks
Although common stock is riskier than any other investment options, it offers greater return potential.
Mutual Funds
Mutual funds are an excellent retirement savings vehicle. By balancing a mutual fund portfolio to minimize risk and maximize growth, a higher return can be achieved than with safer investments.
Remember that it is never too late to start or to improve a retirement plan. Contact our office at 404-990-3365 for all your retirement and accounting needs.
“People don’t care how much you know until they know how much you care.”
It’s interesting to see how many small businesses try to emulate and follow in a mirror image pattern the example of some large corporations to build an impersonal “corporate image.”
People actually prefer to do business with people, not institutions. The last time you called an organization with a problem, weren’t you frustrated and didn’t you experience emotional pain while “going through voice mail hell” or being transferred until you got connected with a person who could solve your problem? Corporate leaders with good marketing sense understood this.
When we think of Hewlett Packard, we think of Bill and Dave. Lee Iacocca rebuilt Chrysler largely by being the corporate spokesperson in commercials. No advertising has been more successful for Wendy’s than Dave Thomas telling us about his latest fast food offering. It requires 16 times the investment for an existing customer to replace the profits of one who is lost, according to the former president of Apple Computer, John Sculley.
Therefore, keeping existing customers is a key to running a successful business.
Why we lose customers?
According to a study conducted by the Technical Assistance Research Project in Washington D.C., 3 percent leave for convenience, 9 percent because of a relationship, 15 percent because of product, price or delivery problems, and 5 percent for other miscellaneous reasons.
That leaves 68 percent for the most significant reason: perceived indifference. Customers want to feel important and appreciated. A key to building customer loyalty is to build a relationship with customers and potential clients to ensure that they feel important and appreciated!
In any business, but especially a business where there is contact with a customer and a representative of the company either in person or on the telephone, the best way to cement that relationship is through personal notes – thank you notes!
Personalize thank you notes by hand addressing the envelope and using a real postage stamp. A hand-written note is best. But if your handwriting is terrible, be sure to sign the letter in blue ink.
When should you write thank you notes?
When you are getting started in business or in sales, you should write a note after any contact, including meeting someone at a seminar or when you exchange business cards. Learn to be sincerely appreciative and express that appreciation. If you deal with a problem, apologize personally with a personal note and be sure the problem is resolved as quickly as possible; maybe even sending another note after it’s done.
You certainly will want to acknowledge major purchases and referrals with thank you notes. You can sometimes exploit or manipulate people and make a sale. But when you become an “assistant buyer,” a friend who helps the customer make transactions in his or her best interest, and express your interest in the customer as a person, you are building a business or a sales career that will provide for you and your family for years to come.
It is worth noting that according to the US Small Business Administration, small businesses employ half of all private-sector employees in the United States. However, a majority of small businesses do not offer their workers any form of retirement savings benefits.
If you’re like many other small business owners in the United States, you may be considering the various retirement plan options available for your company. Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees.
Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business’s assets. Such benefits include:
Types of Plans
Most private sector retirement plans are either defined benefit plans or defined contribution plans.
Defined benefit plans are designed to provide a desired retirement benefit for each participant. This type of plan can allow for a rapid accumulation of assets over a short period of time. The required contribution is actuarially determined each year, based on factors such as age, years of employment, the desired retirement benefit, and the value of plan assets. Contributions are generally required each year and can vary widely.
A defined contribution plan, on the other hand, does not promise a specific amount of benefit at retirement. In these plans, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). A 401(k) plan is one type of defined contribution plan. Other types of defined contribution plans include profit-sharing plans, money purchase plans, and employee stock ownership plans.
Small businesses may choose to offer a defined benefit plan or a defined contribution plans. Many financial institutions and pension practitioners make available both defined benefit and defined contribution “prototype” plans that have been pre-approved by the IRS. When such a plan meets the requirements of the tax code it is said to be qualified and will receive four significant tax benefits.
It is necessary to note that all retirement plans have important tax, business and other implications for employers and employees. Therefore, you should discuss any retirement savings plan that you consider implementing with your accountant or financial advisor.
Plans that can help you and your employees save money.
SIMPLE: Savings Incentive Match Plan
A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE IRA plans, employees can set aside up to $12,500 in 2017 (same as 2016) by payroll deduction. If the employee is 50 or older then they may contribute an additional $3,000 (same as 2016). Employers can either match employee contributions dollar for dollar – up to 3 percent of an employee’s wage – or make a fixed contribution of two percent of pay for all eligible employees instead of a matching contribution.
SIMPLE IRA plans are easy to set up by filling out a short form. Administrative costs are low and much of the paperwork is done by the financial institution that handles the SIMPLE IRA plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent or to send contributions for all employees to one financial institution. Employees are 100 percent vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.
SEP: Simplified Employee Pension Plan
A SEP plan allows employers to set up a type of individual retirement account – known as a SEP IRA – for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to whichever is less: 25 percent of an employee’s annual salary or $54,000 in 2017 (up from $53,000 in 2016). SEP plans can be started by most employers, including those that are self-employed.
SEP plans have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP IRA each year – offering you some flexibility when business conditions vary.
401(k) Plans
401(k) plans have become a widely accepted savings vehicle for small businesses and allow employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $18,000 in 2017 (same as 2016), reduce a participant’s pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $6,000 in 2017 (same as 2016). Employers may offer to match a certain percentage of the employee’s contribution, increasing participation in the plan.
While more complex, 401(k)plans offer higher contribution limits than SIMPLE IRA plans and IRAs, allowing employees to accumulate greater savings.
Profit-Sharing Plans
Employers also may make profit-sharing contributions to plans that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEP plans.
Contributions may range from 0 to 25 percent of eligible employees’ compensation, to a maximum of $54,000 in 2017 (up from $53,000 in 2016) per employee. The contribution in any one year cannot exceed 25 percent of the total compensation of the employees participating in the plan. Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25 percent while others may get as little as three percent. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).
Your Goals for a Retirement Plan
Business owners set up retirement plans for different reasons. Why are you considering one? Do you want to:
You might say “all of the above.” Small employers who want to set up retirement plans generally fall into one of two groups. The first group includes those who want to set up a retirement plan primarily because they want to create a tax-advantage savings vehicle for themselves and thus want to allocate the greatest possible part of the contribution to the owners. The second group includes those who just want a low-cost, simple retirement plan for employees.
If there were one plan that was most efficient in doing all these things, there wouldn’t be so many choices. That’s why it’s so important to know what your goal is. Each type of plan has different advantages and disadvantages, and you can’t really pick the best ones unless you know what your real purpose is in offering a plan. Once you have an idea of what your motives are, you’re in a better position to weigh the alternatives and make the right pension choice.
If you do decide that you want to offer a retirement plan, then you are definitely going to need some professional advice and guidance. Pension rules are complex and the tax aspects of retirement plans can also be confusing. You can consult with Metro Accounting And Tax Services, CPAs before deciding which plan is right for you and your employees.
When it comes to creating a budget, it’s essential to estimate your spending as realistically as possible. Here are five budget-related errors commonly made by small businesses and some tips for avoiding them.
Please call our office at 404-990-3365 if you need assistance setting up a budget to meet your business financial goals.
Whether you’re starting a new company, seeking additional financing for an existing one, or analyzing a new market, a business plan is a valuable tool. Think of it as your blueprint for success. Not only will it clarify your business vision and goals, but it will also force you to gain a thorough understanding of how resources (financial and human) will be used to carry out that vision and goals.
Before you begin preparing your business plan, take the time to carefully evaluate your business and personal goals as this may give you valuable insight into your specific goals and what you want to accomplish. Think about the reasons why you are starting a new business; maybe you’re ready to be your own boss, or you want financial independence. Whatever the reason it is important to determine the “why.”
Next, you need to figure out what business is “right for you.” Chances are you already have a specific business in mind but if not you might want to think about your business in terms of what technical skills and experience you have, whether you have any marketable hobbies or interests, what competition you might have, how you might market your products or services, and how much time you have to run a successful business (it may take more time than you think).
Finally, you’ll need to figure out how you want to get started. Most people choose one of three options: starting a business from scratch, purchasing an existing business, or operating a franchise. Each has pros and cons, and only you can decide which business fits.
Pre-Business Checklist
The final step before developing your plan is developing a pre-business checklist which might include:
Based on your initial answers to the items listed above, your next step is to formulate a focused, well-researched business plan that outlines your business mission and goals, how you intend to achieve your mission and goals, products or services to be provided, and a detailed analysis of your market. Last, but not least, it should include a formal financial plan.
Preparing an Effective Business Plan
Now, let’s take a look at the components of an effective business plan. Keep in mind that this is a general guideline, and any plan you prepare should be adapted to your specific business with the help of a financial professional.
Introduction and Mission Statement
In the introductory section of your business plan, you should make sure you write a detailed description of your business and its goals, as well as ownership. You can also list skills and experience that you or your business partners bring to the business. And finally, include a discussion of what advantages you and your business have over your competition.
Products, Services, and Markets
In this section, you will need to describe the location and size of your business, as well as your products and/or services. You should identify your target market and customer demand for your product or service and develop a marketing plan is. You should also discuss why your product or service is unique and what type of pricing strategy you will be using.
Financial Management
This section is where you should discuss the financial aspects of your business–and where the advice of a financial professional is vital. The following financial aspects of your business should be discussed in detail:
Business Operations
The Business Operations section generally includes an explanation of how the business will be managed on a day-to-day basis and discusses hiring and personnel procedures (HR), insurance and lease or rent agreements, and any other pertinent issues that could affect your business operations. In this section, you should also specify any equipment necessary to produce your product or services as well as how the product or service will be produced and delivered.
Concluding Statement
The concluding statement should summarize your business goals and objectives and express your commitment to the success of your business.
Many tax payers use a paid tax professional to prepare their taxes. All paid tax professionals are not viewed the same way in the eyes of the IRS and of such have different level of representation rights.
Anyone who prepares, or assists in preparing, all or substantially all of a federal tax return for compensation is required to have a valid Preparer Tax Identification Number (PTIN). This include enrolled agents and certified public accountants. When a tax payer chooses to have someone prepare their federal tax return, it is of paramount importance to know who can represent you before the IRS if there is a problem with your tax return.
Representation rights, also known as practice rights, fall into two categories:
Unlimited representation rights allow a credentialed tax practitioner to represent you before the IRS on any tax matter. This is true no matter who prepared your return. Credentialed tax professionals who have unlimited representation rights include:
Limited representation rights authorize the tax professional to represent you if, and only if, they prepared and signed the return. They can do this only before IRS revenue agents, customer service representatives and similar IRS employees. They cannot represent clients whose returns they did not prepare. They cannot represent clients regarding appeals or collection issues even if they did prepare the return in question.
For returns filed after December 31, 2015, the only tax return preparers with limited representation rights are Annual Filing Season Program Participants. The Annual Filing Season Program is a voluntary program. Non-credentialed tax return preparers who aim for a higher level of professionalism are encouraged to participate.
Other tax return preparers have limited representation rights, but only for returns filed before Jan. 1, 2016. Keep these changes in mind and choose wisely when you select a tax return preparer. If you need expert assistance and representation before the IRS, contact the office of Metro Accounting And Tax Services, CPAs at 404-990-3365. We’ll speak to the IRS on your behalf.
Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.
Many small business owners ignore tax planning and don’t even think about their taxes until it’s time to meet with their accountants once a year. But tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits, and deductions that are legally available to you.
Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:
Tax Planning Strategies
Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:
In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.
The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.
Maximizing Business Entertainment Expenses
Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.
In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.
The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business.
Important Business Automobile Deductions
If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses. The mileage reimbursement rate for 2017 is 53.5 cents per business mile.
If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.
Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact the office.
Increase Your Bottom Line When You Work At Home
The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.
Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.
Section 179 expensing for tax year 2017 allows you to immediately deduct, rather than depreciate over time, up to $510,000, with a cap of $2,030,000 worth of qualified business property that you purchase during the year. The key word is “purchase.” Equipment can be new or used and includes certain software. Generally, depreciable equipment for a home office meets the qualification.
Some deductions can be taken whether or not you qualify for the home office deduction itself. It’s never too early to meet with a tax professional to learn more about home office deductions. Call today to schedule a no cost consultation.
Earlier is better when it comes to working on your taxes but many people find preparing their tax return to be stressful and frustrating. Fortunately, it doesn’t have to be. Here are six tips for a stress-free tax season.
1. Don’t Procrastinate. Resist the temptation to put off your taxes until the very last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error. Getting a head start will not only keep the process calm but also mean you get your return faster by avoiding the last-minute rush.
2. Gather your records in advance. Make sure you have all the records you need, including W-2s and 1099s. Don’t forget to save a copy for your files.
3. Double-check your math and verify all Social Security numbers. These are among the most common errors found on tax returns. Taking care will reduce your chance of hearing from the IRS. Submitting an error-free return will also speed up your refund.
4. E-file for a faster refund. Taxpayers who e-file and choose direct deposit for their refunds, for example, will get their refunds in as few as 10 days. That compares to approximately six weeks for people who file a paper return and get a traditional paper check.
5. Don’t Panic if You Can’t Pay. If you can’t immediately pay the taxes you owe, consider some stress-reducing alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have various options for charging your balance on a credit card. There is no IRS fee for credit card payments, but the processing companies charge a convenience fee. Electronic filers with a balance due can file early and authorize the government’s financial agent to take the money directly from their checking or savings account on the April due date, with no fee.
6. Request an Extension of Time to File (But Pay on Time). If the clock runs out, you can get an automatic six-month extension bringing the filing date to October 15, 2018. However, the extension itself does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date.
If you run into any problems, have any questions, or need to file an extension, help is just a phone call away, Metro Accounting And Tax Services, CPAs, 404-990-3365.
Many of the income tax changes affecting individuals and businesses for 2017 were related to the Protecting Americans from Tax Hikes Act of 2015 (PATH) that modified or made permanent numerous tax breaks (the so-called “tax extenders”). To further complicate matters, some provisions were only extended through 2016 and are set to expire at the end of this year while others were extended through 2019. With that in mind, here’s what individuals and families need to know about tax provisions for 2017.
Personal Exemptions
The personal and dependent exemption for tax year 2017 is $4,050.
Standard Deductions
The standard deduction for married couples filing a joint return in 2017 is $12,700. For singles and married individuals filing separately, it is $6,350, and for heads of household the deduction is $9,350.
The additional standard deduction for blind people and senior citizens in 2017 is $1,250 for married individuals and $1,550 for singles and heads of household.
Income Tax Rates
In 2017 the top tax rate of 39.6 percent affects individuals whose income exceeds $418,400 ($470,700 for married taxpayers filing a joint return). Marginal tax rates for 2017–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.
Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $75,900 for a married couple filing a joint return.
Estate and Gift Taxes
In 2017 there is an exemption of $5.49 million per individual for estate, gift and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $14,000.
Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT.
For 2017, exemption amounts are $54,300 for single and head of household filers, $84,500 for married people filing jointly and for qualifying widows or widowers, and $42,250 for married people filing separately.
Marriage Penalty Relief
The basic standard deduction for a married couple filing jointly in 2017 is $12,700.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA (indexed for inflation) and affect taxpayers with income at or above $261,500 for single filers and $313,800 for married filing jointly in tax year 2017.
Flexible Spending Accounts (FSA)
Flexible Spending Accounts (FSAs) are limited to $2,600 per year in 2017 (up from $2,550 in 2016) and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,600 limit for the subsequent plan year.
Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren’t required to do so.
Long Term Capital Gains
In 2017 taxpayers in the lower tax brackets (10 and 15 percent) pay zero percent on long-term capital gains. For taxpayers in the middle four tax brackets the rate is 15 percent and for taxpayers whose income is at or above $418,400 ($470,700 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Individuals – Tax Credits
Adoption Credit
In 2017 a nonrefundable (i.e. only those with a lax liability will benefit) credit of up to $13,570 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years starting in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
For tax year 2017, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.
Earned Income Tax Credit (EITC)
For tax year 2017, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,318 (up from $6,269 in 2016). The maximum income limit for the EITC increased to $53,930 (up from $53,505 in 2016) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals – Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2017. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2017, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Employer-Provided Educational Assistance
In 2017, as an employee, you can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2017, the modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $112,000 for joint filers and $56,000 for singles and heads of household.
Student Loan Interest
In 2017 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels. In addition, the deduction is claimed as an adjustment to income, so you do not need to itemize your deductions.
Individuals – Retirement
Contribution Limits
For 2017, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,000 (same as 2016). For persons age 50 or older in 2017, the limit is $24,000 ($6,000 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,500 (same as 2016) for persons under age 50 and $15,500 for anyone age 50 or older in 2017. The maximum compensation used to determine contributions increased from $265,000 to $270,000.
Saver’s Credit
In 2017, the adjusted gross income limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and-moderate-income workers is $62,000 for married couples filing jointly, $46,500 for heads of household, and $31,000 for married individuals filing separately and for singles.
Please call Metro Accounting And Taxes, CPAs at 404-990-3365 if you need help understanding which deductions and tax credits you are entitled to.
By now you should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2017 earnings and withheld taxes no later than January 31, 2018 (allow several days for delivery if mailed).
If you do not receive your Form W-2, it is important that you contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.
If you received certain types of income, you may receive a Form 1099 in addition to or instead of a W-2. Payers also have until January 31 to mail these to you.
In some cases, you may obtain the information that would be on the Form 1099 from other sources. For example, your bank may put a summary of the interest paid during the year on the December or January statement for your savings or checking account. Or it may make the interest figure available through its customer service line or Web site. Some payers include cumulative figures for the year with their quarterly dividend statements.
You do not have to wait for Form 1099 to arrive provided you have the information (actual not estimated) you need to complete your tax return. You generally do not attach a 1099 series form to your return, except when you receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that shows income tax withheld. You should, however, keep all of the 1099 forms you receive for your records.
If, by mid-February, you still have not received your W-2 or Form 1099-R, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:
If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a “reissued statement.” Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.
You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.
If you receive a corrected W-2 or 1099 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.
Most taxpayers will receive one or more forms relating to health care coverage they had during the previous year. If you think you should have received a form but did not get one contact the issuer of the form (the Marketplace, your coverage provider or your employer). If you are expecting to receive a Form 1095-A, you should wait to file your 2017 income tax return until you receive that form. However, it is not necessary to wait for Forms 1095-B or 1095-C in order to file.
If you enrolled in 2017 coverage through the Health Insurance Marketplace, you should receive Form 1095-A, Health Insurance Marketplace Statement in early 2018.
If you were enrolled in other health coverage for 2017, you should receive a Form 1095-B, Health Coverage, or Form 1095-C, Employer-Provided Health Insurance Offer and Coverage by early March.
If you have questions about your Forms W-2 or 1099 or any other tax-related materials, don’t hesitate to contact the office, Metro Accounting And Tax Services, CPAs 404-990-3365.
In our practice, tax payers often have a slew of questions relating to the best possible ways to save money and ultimately pay the least amount of taxes legally possible. As of such, Metro Accounting And Tax Services, CPA has complied these question with the requisite answers in an attempt to help these tax payers. If you have any additional questions, feel free to contact our office at 404-990-3365 and we’ll be happy to provide you with the guidance needed.
What special deductions can I get if I’m self-employed?
As a self-employed tax payer, you may be able to take an immediate expense deduction of up to $510,000 for 2017 ($500,000 in 2016), for equipment purchased for use in your business, instead of writing it off over many years. There is a phaseout limit of $2,030,000 in 2017 ($2,010,000 in 2016). Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE IRA plan and deduct your contributions (investments).
Can I ever save tax by filing a separate return instead of jointly with my spouse?
A tax payer may sometimes benefit from filing separately instead of jointly with their spouse. Consider filing separately if you meet the following criteria:
Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately.
Why should I participate in my employer’s cafeteria plan or FSA?
In 2017 (as in 2016), medical and dental expenses are deductible to the extent they exceed 10 percent of your adjusted gross income (AGI). As such, many tax payers are not able to take advantage of them. There is, however, a way to get around this if your employer offers a Flexible Spending Account (FSA), Health Savings Account or cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.
What’s the best way to borrow to make consumer purchases?
For tax payers who are also homeowners, it’s the home equity loan. Other consumer-related interest expenses, such as from car loans or credit cards, is not deductible.
Interest on a home-equity loan can be deductible. It is important that the tax payer avoid other nondeductible borrowings and use a home-equity loan if there is a need to borrow for consumer purchases.
What’s the best way to give to charity?
It is often the care where tax payers are philanthropic in nature, if you’re planning to make a charitable gift it generally makes more sense to give appreciated long-term capital assets to the charity. This is the preferred method to make your donation instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and the tax payer can obtain a tax deduction for the full fair-market value of the property.
What tax-deferred investments are possible if I’m self-employed?
The tax payer should consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting businesses. Several types of plan are available: the Keogh plan, the SEP, and the SIMPLE IRA plan.
I have a large capital gain this year. What should I do?
If the tax payer also have investments with accumulated losses, it may be advantageous to sell those investments prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).
What other tax-favored investments should I consider?
The tax payer should also take into consideration growth stocks that is held for the long term. No tax is paid on the appreciation of such stocks until you sell them. No capital gains tax is imposed on appreciation at your death.
Interest on state or local bonds (“municipals”) is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher paying commercial bonds after reduction for taxes.
For high-income taxpayers living in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.
How can I make tax-deferred investments?
Through the use of tax-deferred retirement accounts the tax payer can invest some of the money that they would have otherwise paid in taxes to increase the amount of their retirement fund. Many employers offer plans where the tax payer can elect to defer a portion of their salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.
Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.
What can I do to defer income?
If the tax payer is due a bonus at year-end, a good strategy to employ would entail the deferring of the receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If the tax payer is a self-employed individual, defer sending invoices or bills to clients or customers until after the new year begins. Here too the tax payer can defer some of the taxes, subject to estimated tax requirements.
The tax payer can achieve the same effect of short-term income deferral by accelerating deductions, for example, paying a state estimated tax installment in December instead of at the following January due date.
Why should I defer income to a later year?
Most tax payers are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term if the tax payer expects to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.
As is the case each year, millions of taxpayers miss out on getting their money from Uncle Sam, yes, they do. And at times the amount missed out on by these tax payers can be in the thousands of dollars. This is so because for whatever reason, on an annual basis tax paying citizens and resident aliens refuse to file a federal tax refund.
If you are due a tax refund but you fail to file a tax return claiming that refund within three years of the due date, you lose that refund. That is three years from the original due date, usually April 15. So, if a tax payer allows the time to file to claim the refund to run out, the tax refund that would have been received now becomes the property of the US Treasury. In-order to get the money you are due, the tax payer has to file a tax return. It’s very simple, you file for it or you lose it!!!!!
The statistic of the amount of money lost by tax payers due to the non-filing of tax returns is mind boggling. According to the IRS, it has over $1 BILLION for persons who fail to file their tax return in the year 2011. In the year 2012 the amount of tax refunds transferred to the US Treasury due to the non-filing of tax returns by tax payerspayers amounted to over $950 MILLION. However, in 2013 the trend of tax payers not filing their tax return again increased and this resulted in the forfeiture of over $1 BILLION to the US Treasury.
“People across the nation haven’t filed tax returns to claim these refunds, and their window of opportunity is closing soon. Students and many others may not realize they’re due a tax refund. Remember, there’s no penalty for filing a late return if you’re due a refund.”
The IRS reminds taxpayers seeking a 2014 refund that their checks may be held if they have not filed tax returns for 2015 and 2016.
By failing to file a tax return, people stand to lose more than just their refund of taxes withheld or paid during the year. Many low and moderate-income workers may have been eligible for the Earned Income Tax Credit (EITC). For 2017, the credit is worth as much as $6,318. The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2017 are as follows:
Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for the years 2014, 2015 or 2016 should request copies from their employer, bank or other payer.
As a tax payer you must file a tax return if income earned was above a certain amount. This amount is dependent on the individual tax payer’s situation and takes into consideration the tax payer’s filing status, age and the type of income you received during the tax year. A taxpayer may choose not to file a tax return if not required to do so but you are encouraged to file a tax return even if you had a small amount of income. This is due to the fact that you may be due a refund if you had federal taxes withheld from your income. Also, when in this position, the tax payer may be eligible for tax benefits afforded to low income earners such as the Earned Income Tax Credit which could amount to thousands of dollars in tax refund.
The moral of this blog is simple, tax payers must file a federal tax refund to claim the thousands of dollars that belong to them. IF YOU DON’T CLAIM IT, YOU LOSE IT!!!!!!!!!
IT’S YOUR MONEY. . . BUT YOU HAVE TO FILE A TAX RETURN TO CLAIM IT……AND YOU ONLY HAVE THREE YEARS. SO, GET STARTED…….
The tax payer can start the process by contacting the office of Metro Accounting And Tax Services, CPAs. We’ll be happy to guide you through the income tax filing process, ensuring that you get every penny that belong to you.
The Earned Income Tax Credit, EITC or EIC, is a benefit afforded to working people with low to moderate income. In-order to qualify for this credit, a tax payer must meet certain requirements and file a tax return. A tax payer is encouraged to file a tax return even if they do not owe any taxes or are not required to file a return. By doing so the EITC reduces the amount of tax you owe and may even give the tax payer a refund.
To qualify for EITC the individual tax payer must have earned income from working for someone or from running or owing a business and meet some basic rules. If the tax payer does not have a qualifying child additional rules must be met.
Qualifying for EITC:
For a tax payer to qualify for the earned income tax credit:
1. you must have earned income and adjusted gross income within certain limits; AND
2. you must meet certain basic rules and
3. either meet the rules for tax payer without a qualifying child
4. or have a child that meets all the qualifying child rules
EITC Basic Rules:
Social Security Number
A social security number is required for all persons listed on a tax return, this includes, the tax payer, the tax payer’s spouse and any qualifying child listed on the tax return. Such social security number must be valid for employment and must have been issued before the due date of your return (including extensions).
Filing Status
The tax payer must file as either:
It is important to note that a tax payer cannot claim EITC if their filing status is married filing separately.
Income Earned During 2017 and AGI Limits
For income tax year 2017, if the tax payer filing status is single, head of house hold or widowed, the tax payer’s earned income and adjusted gross income (AGI) cannot be more than:
A) $15,010.00 If the tax payer has no qualifying child.
B) $39,617.00 If the tax payer has one qualifying child.
C) $45,007.00 If the tax payer has two qualifying children.
D) $48,340.00 If the tax payer has three or more qualifying children.
For income tax year 2017, if the tax payer filing status is married filing a joint return, the tax payer and spouse earned income and adjusted gross income (AGI) cannot be more than:
· $20,600.00 If the tax payer has no qualifying child.
· $45,207.00 If the tax payer has one qualifying child.
· $50,597.00 If the tax payer has two qualifying children.
· $53,930.00 If the tax payer has three or more qualifying children.
Also of importance to the tax payer is the fact that for 2017, any income from investment is limited to $3,450.
Maximum Credit Amounts
The maximum amount of earned income tax credit a tax payer can claim for Tax Year 2017 is:
To claim the earned income tax credit a tax payer must file a Federal tax return and claim the credit. If you have a qualifying child, you must file the Schedule EIC listing the children with either the Form 1040A or the Form 1040. If you do not have a qualifying child, you can use the Forms 1040EZ or the 1040A or 1040.
For all your accounting and tax needs, the office of Metro Accounting And Tax Services, CPA is ready to provide the tax payer with professional guidance.
It goes without saying and all legal and tax professionals agree that if a tax payer business is not incorporated you may be throwing away thousands of dollars in tax savings and deductions.
In addition, at tax payer’s personal assets such as your home, cars, boats, savings and investments are at risk and could be used to satisfy any law suits, debt or liability incurred by the business. Forming a Corporation can provide the protection and give the tax payer peace of mind and allow for the laser focus that is needed to make your business even more successful and profitable.
Benefits of incorporating include:
Liability Protection: Properly forming and maintaining a corporation will provide personal liability protection to the owners or shareholders of the corporation for any debt or liability incurred by the business. Personal liability of the shareholders is normally limited to the amount of money invested in the corporation.
Tax Advantages: Another important benefit is that a corporation can be structured many ways to provide substantial tax savings. You can minimize self-employment taxes and increase the number of allowable deductions lowering the taxes you pay on the income of the business. Many corporations structure retirement and tax deferred savings plans for their owners and employees which can provide even greater tax savings.
Raising Capital: Sale of stock for the purposes of raising capital is often more attractive to investors than other forms of equity sales. A corporation can also issue Corporate Bonds to raise capital for expenditures without compromising the ownership of the business.
What is a corporation?
A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid.
What is the difference between an “S” corporation and a “C” corporation?
All corporations start as “C” corporations and are required to pay income tax on taxable income generated by the corporation. A C-corporation becomes an S-corporation by completing and filing federal form 2553 with the IRS. An S-corporation’s net income or loss is “passed-through” to the shareholders and are included in their personal tax returns. Because income is not taxed at the corporate level, there is no double taxation as with C-corporations. Subchapter S-corporations, as they are also called, are restricted to having no more than 100 shareholders.
Do I need an attorney to incorporate?
An attorney is not a legal requirement for incorporating a business in any state except South Carolina, where a signature by a South Carolina attorney licensed to practice in the state is required on articles of incorporation. In every other state, you can prepare and file the articles of incorporation yourself. However, if you are unsure of what steps your business should take and you don’t have the time to research the matter yourself, a consultation with Metro Accounting And Tax Services, CPA is often well worth the money you spend.
Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That’s where we can help.
Employer Identification Number (EIN)
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012, you can only apply for one EIN per day. The previous limit was 5.
State Withholding, Unemployment, and Sales Tax
Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).
Payroll Record Keeping
Payroll reporting and record keeping can be very time-consuming and costly, especially if it isn’t handled correctly. Also, keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee’s employment application as well as the following:
Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.
Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.
Understanding Schedule C tax guide was developed by Metro Accounting And Tax Services, CPAs in an effort to help Small Business Owners stay on top of all their accounting and tax needs.
In this guide, we will address how to calculate gross profit and gross income, show you how to identify and deduct expenses, and how to calculate net profit or loss. If help is needed by the small business owner in relation to any accounting or tax needs, our office can be reached at 404-990-3365. Our goal is to help you to focus on running your business and pay the least amount of taxes legally possible.
Understanding Schedule C: Introduction.
To complete a Schedule C the tax payer is required firstly to fill in standard information about themselves and their business. Information required includes: name of proprietor, social security number, principal business or profession – this is basically a description of the type of business you are in, business name, business address and the business employer ID number or EIN. The tax payer will also notice that there’s a place to enter a Principal Business or Professional Activity Code. These codes are based on the North American Industry Classification System, and the Schedule C instructions contain a list of the six-digit codes relating to business trades or professions.
Next the tax payer will decide on the accounting method used by the business, cash – meaning that income and expenses are only recognized when received or paid, or the accrual method – this is where income and expenses are recognized when they are incurred by the tax payer rather than when they are received or paid. For example, let’s say your power bill for March is not paid until April. Under the cash method of accounting, the tax payer would recognize and account for the bill when paid in April, however under the accrual method of account the bill would be recognized and accounted for in March even though it was not paid until April. The other questions in this section would be answered accordingly by the tax payer.
Understanding Schedule C: Part I, Income.
The first term we’re going to talk about is Gross Receipts. Gross Receipts are the income that a business receives from the sale of its products or services.
The second term is Returns and Allowances. Returns and Allowances include cash or credit refunds the business makes to customers, this include rebates and other allowances off the actual sales price. Individuals who don’t make or buy products for resale as part of their business wouldn’t have returns or allowances to deduct from gross sales.
The third term is Cost of Goods Sold. Cost of Goods Sold is the cost to a business to buy or to make the product that is sold. It is easy to calculate the cost of goods sold if you sell all your merchandise during the same year when they were purchased. However, some of your sales will probably be from inventory that you carried over from earlier years and you will probably have inventory left unsold at the end of the year.
To calculate the cost of goods sold you will start with the cost of the inventory on hand at the beginning of the year. You will add the cost of additional goods purchased or manufactured during the year. The cost of any merchandise withdrawn for personal use such as food a grocer may take home or gasoline a garage owner may give to his relatives is then subtracted. This results in the cost of items available for sale during the year. The value of your inventory at the end of the year is then substracted. Your cost of goods sold is the remaining amount.
Some businesses may choose to keep a continuous or automated inventory record for reordering stock. But no matter what type of system you have in place, the tax payer must keep good beginning and year-end inventory records.
The fourth term is Gross Profit. To calculate Gross Profit, first subtract the returns and allowances from total gross receipts. Then, subtract the cost of goods sold from that difference.
The final term for this section is Gross Income. Gross Income is simply the sum of gross profit and other income received during the period.
Understanding Schedule C Part II, Expenses.
According to the IRS, a tax payer can only consider the day-to-day ordinary and necessary business expenses incurred in running his or her business. As of such, expenses must be considered ordinary and necessary in order to be deducted for tax purposes.
The first expense we are going to discuss is car and truck expense. If a taxpayer uses a car for business only the full cost of operating it may be deducted. If the taxpayer uses the car for both business and personal purposes, the expenses must be divided between both uses on the basis of mileage to compute a business percentage.
If the taxpayer claims any car or truck expenses, additional information pertaining to such use must be provided on Schedule C, Part IV, Information on Your Vehicle. Please note that the taxpayer is only required to complete this part if car or truck expenses are entered on line 9 of Schedule C and the taxpayer is not required to file Form 4562, Depreciation and Amortization.
It is important to note that the taxpayer should not include commuting miles to and from work as business mileage. You may take a deduction for your actual business expenses for the car or use a standard mileage rate. Standard mileage means multiplying your business mileage by the IRS standard rate. Actual business expenses include gas, oil, repairs, insurance, depreciation, tires, and license plates. Under either method, parking fees and tolls are deductible
The second expense is depreciation. Depreciation is the annual deduction allowed to recover the cost, or other basis of business, or investment property having a useful life substantially beyond the tax year. Depreciation starts when you first use the property in your business for the production of income, and it ends when you take the property out of service, deduct all your depreciable cost, or other basis, or no longer use the property in your business.
Of importance to the tax payer is the fact that land, inventory, or property placed in service and disposed of in the same year are not depreciated.
Depreciation Methods
There are two main methods to calculate depreciation: They are the Modified Accelerated Cost Recovery System and the Section 179 deduction.
For most tangible property, that is, properties you can see or touch, the acceptable depreciation method is the Modified Accelerated Cost Recovery System. It’s commonly referred to by its initials, MACRS, and pronounced “makers.”
For the other method, under Section 179 of the Internal Revenue Code, you can elect to recover all or parts of the costs of certain qualifying property, up to a limit, by deducting it in the year you place the property in service.
The third and fourth expenses up for discussion are those for legal, professional services and office expenses incurred by the taxpayer in running their business. Included in these expenses are fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to the operating of the business. Also included are fees for tax advice related to the business and for preparation of the income tax return and the various forms related the business. In addition, under the category of office expense, office supplies and postage are also included.
The fifth expense that is of importance to the small business owner is the supplies expense. In most cases, a taxpayer can deduct the cost of materials and supplies only to the extent they were actually consumed and used by the business during the tax year, unless they were deducted in a prior tax year. You can also deduct the cost of books, professional instruments, equipment, etc., if you normally use them within a year.
If their usefulness, however, extends substantially beyond a year, you must generally recover their costs through depreciation.
Next up is the travel, meals, and entertainment expenses. For the travel part of these expenses, the taxpayer is allowed to deduct expenses for lodging and transportation connected with overnight travel for business while away from your tax home. This is simply the main place of business, regardless of where you maintain your family home.
For the meals and entertainment expenses the taxpayer would enter the total deductible business meal and entertainment expenses. This includes expenses for meals while traveling away from home for business and any meals that are business-related entertainment. Business meal expenses are deductible only if they are directly related to or associated with the active conduct of your trade or business; not lavish or extravagant; and incurred while you or your employee is present at the meal.
After you’ve completed entering your individual expenses, add them up and enter them as your Total Expenses. If you run your business out of your home, don’t forget to enter those expenses, too. This is done a few lines down.
Next, you have to enter your Net Profit or Loss. Net Profit or Loss is the amount by which the gross profit and any other income for a period is more, or less in the case of a loss, than the business expenses and depreciation for the same period.
To calculate net profit or loss, the tax payer would subtract from the gross profit the total expenses incurred and any expenses for the business use of your home. The tax payer would then report this profit or loss on line 12 of Form 1040, U.S. Individual Income Tax Return.
Completing the Schedule C can be a bit challenging at times, but doing so accurately can have a big impact on your tax refund. The Certified Public Accountants at Metro Accounting and Tax Services are ready to take this weight off your shoulders. Don’t hesitate to contact the office for all your accounting and tax needs.
In today’s income tax environment, The Internal Revenue Service is strongly encouraging taxpayers who are seriously behind on their taxes to pay what they owe or if they can’t, to enter into a payment agreement with the Service in-order to avoid putting their passports in jeopardy.
Beginning immediately, the IRS is implementing new procedures that will adversely affect individuals with “seriously delinquent income tax debts.” These new procedures and provisions which are a part of the FAST Act, that is the Fixing America’s Surface Transportation (FAST) Act, signed into law in December 2015, requires the IRS to notify the State Department of taxpayers that it has certified as owing a seriously delinquent tax debt. The FAST Act also requires the State Department to deny a delinquent tax payer’s passport application and to deny such tax payer’s passport renewal. With this mandate, the State Department is empowered to even revoke a delinquent tax payer passport.
Therefore, if you are a taxpayer with a seriously delinquent tax debt, you are in the cross-hairs of the IRS and you need to take immediate action to prevent the non-issuance, non-renewal or revocation of your passport. If you need expert guidance in settling your IRS debt, the Tax Resolution Experts at Metro Accounting and Tax Services will be happy to be of assistance. At times we are able to get an IRS Offer In Compromise for taxpayers that amounts to far less than what is owed to the IRS. Taxpayers affected by this law are those with a seriously delinquent tax debt. A taxpayer with a seriously delinquent tax debt is defined by the IRS as generally being someone who owes the IRS more than $51,000 in back taxes, penalties and interest for which the IRS has filed a Notice of Federal Tax Lien and the period to challenge it has expired or the IRS has issued a levy.
There are several ways taxpayers can avoid having the IRS notify the State Department of their seriously delinquent tax debt. They include the following:
For taxpayers serving in a combat zone who owe a seriously delinquent tax debt, the IRS postpones notifying the State Department and the individual’s passport is not subject to denial during this time.
Let’s face it, the IRS is going to collect on the taxes owed by tax payers. Therefore, it is recommended that tax payers who are behind on their tax obligations should approach the IRS with a view to have a dialogue to pay the back taxes or enter into a payment plan with the IRS.
The reality is that most people are unable to pay the IRS the full amount owed. If you are a financially distressed taxpayer and you cannot pay what is owed, Metro Accounting And Tax Services, CPA can held. We are tax resolution experts. We can negotiate a lower tax bill on your behalf with the IRS. Just give us a call and we can get on working for you so, 404-990-3365.
One of the first steps to complete in relation to filing your income tax is to figure out which filing status to use. This is very important as it can significantly affect the amount of your tax refund.
It is important to note that what is of importance is your status as of December 31, 2017 and not at any other time during the year. If you have been married for the year and unfortunately got divorced on December 31, 2017, you are considered for tax purposes single for the entire year.
There are five filing statuses on can use when filing their income taxes. These include: single, married filing jointly, married filing separately, head of household and qualifying widow or widower with a dependent child.
For income tax purposes if you’re single, divorced or legally separated as of December 31, 2017, the status that you will most probably fall in is that of being a single person.
Married filing jointly as its name suggest, is where a married couple files their returns together as one return. Most couples tend to file a joint income tax return as it’s usually easier but couples do have a choice when it comes to filing their tax returns.
Couples can also file their income tax returns separately if they so desire, in this case their filing status would be married filing separately. This entails a little extra effort on the couple’s part but you might want to figure your taxes both ways and see which way results in the least amount of tax liability.
Next up is the head of household filing status that is available when filing your tax return.
Lots of single parents qualify as head of household filing status. If you’re not married but you pay more that half the cost of keeping up with a home for a qualifying person, then this status might be the best filing status for you. There are lots of special rules one has to meet to be able to qualify for this filing status but it is worth the extra work as the financial implication on your tax return can be great.
The final filing status for income tax purposes is that of a qualifying widow or widower with a dependent child. If your spouse died within the last two tax year and you have a dependent child, you might be able to use this filing status.
This income tax filing status has special rules that apply but the financial implication on your tax refund is worth the extra work. The best way to determine your filing status is to call our offices, Metro Accounting And Tax Services, CPA at 404-990-3365 and one of our accountants will be happy to guide you through the process.
As a tax payer you probably know that you must include income from all sources on your tax return. Income is derived from either of two sources: you work for someone who pays you or you operate your own business. Income includes things like salary, wages, overtime pay, tips, interest, net earnings from self-employment.
But did you know that you are required to report other types of miscellaneous income you receive on your tax return?
Other types of income received include the value of services of goods exchanged in a barter arrangement, awards, prizes or other contest winnings including gambling winnings.
As it relates to barter, tax is levied on the fare market value of the goods or services exchanged and both parties are required to report such barter exchange on their individual tax return.
The cash value of awards and prizes is also usually taxable and should therefore be include on the tax return of the tax payer.
Regardless of the amount of gambling winnings, the tax payer is required to report the winning on their tax return. Among other things, gambling income includes winnings from lotteries, raffles, horse racing, poker tournaments and even casino winnings.
From an income tax perspective, many low to moderate income earners may qualify for a tax credit that could boost their income tax refund by thousands of dollars. That’s right, we are referring to the earned income tax credit more frequently known as the E-I-T-C.
Taking advantage of this credit can be substantial for some tax payers but exactly how much of the credit you get depends on your individual situation. The E-I-T-C takes into consideration your income and family size. In addition, you must meet special rules to qualify for the E-I-T-C. These rules can be a bit complicated and challenging for the average tax payer but the tax professionals at Metro Accounting And Tax Services are ready to help you navigate this process.
It is important to note that since the earned income credit can add thousands of dollars to your tax refund, all returns claiming this credit are examined thoroughly by the IRS. The IRS takes the filing of a false claim for E-I-T-C very seriously. Among other things, the tax payer needs to ensure that any child claimed is indeed a qualifying child. Tax payers need to be very careful is this regard as errors on your return could delay your tax refund or your E-I-T-C may even be denied.
The Tax Cuts and Jobs Act, H.R. 1, agreed to by a congressional conference committee on Friday and expected to be voted on by both houses of Congress during this week, contains a large number of provisions that would affect individual taxpayers and in effect the amount of income taxes they would end up paying. It is important to note that all of the income tax changes affecting individuals would expire after 2025 if no future Congress acts to extend the bill’s provisions. The individual tax provisions would sunset, and the tax law would revert to the current laws that are on the books.
Standard deduction
The bill would increase the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of households, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers is not changed by the bill. The standard deduction change may have a profound impact on the individual tax payer and the amount of taxes paid depending on their individual situation.
Personal exemptions
In the present format of the tabled bill, personal exemptions would be repealed, this change might have far reaching impact on the individual tax payer and the amount of income taxes paid.
Passthrough income deduction
For income tax years after 2018 to 2025, individuals would be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. “Qualified business income” is interpreted as the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business that is undertaken by the taxpayer within the United States. These do not include specified investment-related income, deductions, or losses.
It is important to note that if W-2 wages are present and are above the threshold of the taxable income, a limitation on the deduction would phased in. Also, if income is above the threshold for specified service trades or businesses the deduction would be disallowed.
A specified service trade or business is defined as any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees. However, a taxpayer is excluded from taking this deduction if the taxpayer has taxable income in excess of $157,500 or $315,000 in the case of a joint return from such operation.
The taxpayer is allowed to deduct 20% of the qualified business income with respect to such trade or business. In general, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Capital-intensive businesses are allowed 25% of wages paid plus a portion of the business’s basis in its tangible assets. However, if the taxpayer’s income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income with respect to each respective trade or business.
An S corporation shareholder’s reasonable compensation, guaranteed payments, or payments to a partner who is acting outside of his capacity as a partner would not be included as “Qualified business income”.
Child tax credit
Individuals would see an increase in the amount of the child tax credit allowed on their income tax return if the proposed changes are enacted. The amount would increase to $2,000 per qualifying child. The maximum refundable amount of the credit would be $1,400. A new nonrefundable $500 credit for qualifying dependents who are not qualifying children is also created. The phase out threshold would increase to $400,000 for married taxpayers filing a joint tax return and $200,000 for other taxpayers.
Education provisions
The bill would modify Sec. 529 plans, this modification would allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. It is worth noting that this limitation applies on a per-student basis. Also, certain homeschool expenses would qualify as eligible expenses.
Certain student loan would discharge on account of death or disability. These proposed changes can have significant monetary effect on an individual’s income tax return.
Itemized deductions
The limitation on itemized deductions would not exist through 2025. This change could have significant monetary implications on the individual tax payer.
Mortgage interest
Home mortgage interest on acquisition indebtedness has been reduced to $750,000 down from the current amount of $1 million. This change can also be impactful of the individual tax payers.
The proposed changes will not affect a taxpayer who has entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017. As of such, they will be allowed the current-law $1 million limit.
Home equity loans.
The home equity loan interest deduction would be repealed through 2025. This can also affect a tax payer negatively in that it can result in them getting a smaller income tax refund when they file their taxes.
State and local taxes
Under the final bill, individuals would be allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes. This is another limitation that will adversely affect tax payers if they have in-excess of $10,000 in state and local taxes.
However, the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.
Casualty losses
Under the bill, taxpayers can only take a deduction for casualty losses if the loss is attributable to a presidentially declared disaster. Therefore, any losses not attributed to a presidentially declared disaster is not deductible. This change can also affect negatively affect the tax payers and the refund they receive from filing their income taxes.
Gambling losses
The term “losses from wagering transactions” is clarified to include not only to the actual costs of wagers, but also other expenses incurred by the taxpayer in connection with his or her gambling activity.
Charitable contributions
The bill would increase the income-based percentage limit for charitable contributions of cash to public charities to 60%. A charitable deduction for payments made for college athletic event seating rights would not be allowed.
Miscellaneous itemized deductions
All miscellaneous itemized deductions subject to the 2% floor under current law would be repealed through 2025 by the bill.
Medical expenses
The bill would reduce the threshold for deduction of medical expenses to 7.5% of adjusted gross income for 2017 and 2018.
Alimony
Alimony and separate maintenance payments are not deductible by the payor spouse for any divorce or separation agreement executed after Dec. 31, 2018. Neither would such payments are included in income by the payee spouse. This is another change that will affect the refund received by tax payers.
Moving expenses
Except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station, the moving expense deduction would be repealed. This an above the line deduction that will affect the tax return received by tax payer.
Exclusion for bicycle commuting reimbursements
The bill would repeal through 2025 the exclusion from gross income or wages of qualified bicycle commuting expenses.
Moving expense reimbursements
The bill would repeal through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.
IRA recharacterizations
The bill would exclude conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This would prevent taxpayers from using recharacterization to unwind a Roth conversion.
Estate, gift, and generation-skipping transfer taxes
There will be a doubling of the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. The basic exclusion amount provided would increase from $5 million to $10 million and would be indexed for inflation.
Alternative minimum tax
The ATM exemption has been increased for tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026. The AMT exemption amount would increase to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds would be increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts would be indexed for inflation.
Individual mandate
The amount of the penalty imposed on taxpayers who do not obtain insurance that provides at least minimum essential coverage, effective after 2018 would be eliminated.
All in all, the current bill with all the proposed changes will have far reaching financial implication on the individual tax payer. In some instances, the tax payer will have a larger tax refund, in other cases a smaller tax refund will be had by the tax payer.
Moving expenses are deducted as an adjustment to income on Form 1040, but only to the extent that they are unreimbursed by your employer. You cannot deduct any moving expenses covered by reimbursements from your employer that are excluded from income. However, you have to meet the requirements of the tax law in-order to be able to deduct these expenses. The following types of moving expenses are deductible as long as they are “reasonable”:
It is important to note that the rules applicable to moving within or to the United States are different from the rules that apply to moves outside the United States.
Qualifying for Moving Expenses
If your move was due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses; however, you may not deduct any expenses for meals.
You can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.
To qualify for the moving expense deduction, you must satisfy three requirements.
A) Your move must closely relate to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement. Please contact us if you need assistance understanding this requirement.
B) The “distance test;” must also be met for moving expense to be deductible. Your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. For example, if your old main job location was 15 miles from your former home, your new main job location must be at least 65 miles from that former home. However, if you had no previous workplace, your new job location must be at least 50 miles from your old home.
C) Time is of the essence, therefore the “time test” must also be met. If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full-time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location. There are exceptions to the time test in case of death, disability, and involuntary separation, among other things. And, if your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.
As a grateful nation, if you are a member of the armed forces and your move was due to a military order and permanent change of station, you do not have to satisfy the “distance or time tests.”
What Are “Reasonable” Expenses?
You can deduct only those expenses that are reasonable under the circumstances of your move. For example, the cost of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. If during your trip to your new home, you make side trips for sightseeing, the additional expenses for your side trips are not deductible as moving expenses.
The purchase price of your new home or any part thereof cannot be deducted as moving expenses. Neither the costs of buying or selling a home, or the cost of entering into or breaking a lease can be deducted as moving expenses. Don’t hesitate to call if you have any questions about which expenses are deductible.
Reimbursed moving expenses for which you took a deduction must be included in your total income figure on your tax return.
Travel by Car – How to Calculate the Deduction
If you use your car to take yourself, members of your household or your personal effects to your new home, you can figure your expenses by using either the actual expenses or the standard mileage rate allowance.
When you choose the standard mileage rate you can deduct parking fees and tolls you pay in moving. You cannot deduct any general repairs, general maintenance, insurance, or depreciation for your car.
Member of Your Household
You can deduct moving expenses you pay for yourself and members of your household. A member of your household is anyone who has both your former and new home as his or her home. It does not include a tenant or employee unless you can claim that person as a dependent.
Moves Within or to the United States
If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.
Household goods and personal effects. The cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home can be deducted as moving expenses. If you use your own car to move your things, compute the deduction under the rule discussed above under “Travel by Car.”
The cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home can also be deducted.
Like-wise you can deduct any costs of connecting or disconnecting utilities due to the moving your household goods, appliances, or personal effects.
Also, you can deduct the cost of shipping your car and your pets to your new home.
It is important to note that you can deduct the cost of moving your household goods and personal effects from a place other than your former home. Your deduction is limited to the amount it would have cost to move them from your former home.
Let’s say Paul Brown is a resident of North Carolina and has been working there for the last four years. Because of the small size of his apartment, he stored some of his furniture in Georgia with his parents. Paul got a job in Washington, DC. It cost him $300 to move his furniture from North Carolina to Washington and $1,100 to move his furniture from Georgia to Washington; however, if Paul had shipped his furniture in Georgia from North Carolina (his former home), it would have cost him $600. He can deduct only $600 of the $1,100 he paid. He can deduct $900 ($300 + $600).
The cost of moving furniture you buy on the way to your new home cannot be deducted.
Travel expenses. The cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home can be deducted. This includes expenses for the day you arrive. You can include any lodging expenses you had in the area of your former home within one day after you could not live in your former home because your furniture had been moved. However, you can deduct expenses for only one trip to your new home for yourself and members of your household. However, all of you do not have to travel together to be able to take this deduction. If you use your own car, calculate your deduction as explained under Travel by Car, earlier.
Moves Outside the United States
To deduct allowable expenses for a move outside the United States, you must be a United States citizen or resident alien who moves to the area of a new place of work outside the United States or its possessions. You must meet the requirements of the tax law for deducting moving expenses.
In addition to the expenses discussed earlier, the following may be deductible for moves outside the United States.
Storage expenses. All reasonable expenses of moving your personal effects to and from storage can be deducted. You can also deduct the reasonable expenses of storing your personal effects for all or part of the time the new job location remains your main job location. The new job location must be outside the United States.
Moving expenses allocable to excluded foreign income. If you live and work outside the United States, you may be able to exclude from income part of the income you earn in the foreign country. You may also be able to claim a foreign housing exclusion or deduction. Please note that if you claim the foreign earned income or foreign housing exclusions, you cannot deduct the part of your allowable moving expenses that relates to the excluded income.
1) Bad debt expense: If you are owed money and are not going to receive it, you may be able to write this off.
2) Traditional IRA Contributions: Whether you can take this deduction depends on if you have a retirement plan at work or not. You WILL have to pay taxes on when you take it out though.
3) Moving expenses for work: must be 50 miles away
4) Charity Donations: you can deduct money and services/goods, as well as the related miles you drove
5) American Opportunity Credit: refundable credit of $2500 for four years of high education if you qualify
6) Student Loan Interest Deduction: can deduct interest payments up to $2500
7) Unemployment expenses: can deduct business cards, resume costs, etc. to find a new job
8) Child Care Deduction: If under age 12, you can pay an outside party to take care of your kids and deduct that amount
9) Child Tax Credit: if child is under 17, can you deduct $1000 for each kid
10) Earned Income Credit: if you are a low-income earner and have qualifying children, you can take this credit on your tax return. 
In most situations when a taxpayer disposes of property, taxes must be paid on any gain at the time of sale. However, if a taxpayer exchanges business or investment property solely for other business or investment property similar to the one originally held, that is of a “like-kind,” section 1031 provides that no gain or loss will be recognized.
If as part of the exchange, the taxpayer also receives other property or money (i.e., non-like-kind), gain must be recognized on the exchange to the extent of the other property and money received. It is important to note that in the event that there are losses, these are not recognized.
Who may make a Sec. 1031 exchange?
Any owners of business and investment property—individuals, C corporations, S corporations, partnerships, limited liability companies, trusts, and any other taxpaying entity—may participate in a Sec 1031 exchange.
Like-kind property
To qualify under Sec. 1031, both the property given up and the property received must meet certain requirements. Both properties must be held for use in a trade or business or for investment.
Properties are of a like-kind if they are of the same nature or character, even if they differ in grade or quality. Most real estate will be considered like-kind to other real estate, regardless of its’ state; for example, improved real property and unimproved real property. Therefore, a lot with an office building is of a like-kind to a vacant lot. However, real property in the United States and real property outside the United States are not considered to be of like-kind.
Personal property of a like class are like-kind properties; however, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not considered like-kind.
It is important to note that the rules pertaining to what qualifies as like-kind personal property are much more restrictive than those relating to real property, an example of this can be seen where cars are not considered like-kind to bikes.
Both real property and personal property can qualify for like-kind exchanges, but real property cannot be considered a like-kind to personal property, it’s just a case where we have to compare apples with apples.
Exclusions. Under 1031 exchange, certain types of property are not eligible for like-kind treatment:
· Inventory or stock in trade;
· Stocks, bonds, or notes;
· Other securities or debts;
· Partnership interests; and
· Certificates of trust.
Time is of the essence.
Like in most things, time is of the essence in a 1031 exchange. While it is not imperative that there be a simultaneous swap of properties, in a 1031 exchange you must meet two-time lines or the entire gain on the transaction will be taxable. These time limits are hard limits and cannot be extended in any circumstances except for situations in which a presidential disaster is declared.
· The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties.
· The second limit is that the exchange be completed no later than 180 days after the sale of the exchanged property or the income tax return due date in the year the relinquished property was sold (whichever is earliest). The replacement property received must be substantially the same as property identified within the 45-day limit described in the first limiting factor.
Assumption of liabilities
If the relinquished property is subject to a liability, or any of the taxpayer’s liabilities are assumed, the net aggregate amount of those liabilities is treated as cash received in the exchange. Consequently, if the taxpayer transfers relinquished property subject to a liability, the taxpayer will have gain realized on the transaction to the extent of the lesser of the gain realized or the amount of the liability to which the relinquished property is subject.
Special rules determine the amount of boot a taxpayer receives when each party to a like-kind exchange assumes a liability of the other party, depending on whether any net consideration was received as a result of the difference in the liabilities exchanged and whether any cash (or other non-like-kind property) changed hands to account for a difference in the net values of the exchanged properties. If a taxpayer is deemed to receive net consideration on the liabilities (i.e., the liabilities the taxpayer gives up are more than the liabilities received), the boot is equal to the amount of that net consideration plus the amount of any cash received (or minus the amount of any cash paid) to account for a difference in the net values of the exchanged properties.
If a taxpayer is deemed to pay net consideration on the liabilities (i.e., the liabilities given up are less than the liabilities received) and the taxpayer receives cash from the other party to account for this difference in the net property values, the boot is the amount of cash received. If a taxpayer is deemed to pay net consideration on the liabilities and also pays cash to the other party to account for a difference in net property values, the taxpayer does not have any boot.
Structures of a 1031 exchange
To accomplish a Sec. 1031 exchange, there obviously must be an exchange of properties. The simplest way this can be achieve is by having a simultaneous exchange of one property for another. However, deferred exchanges and reverse exchanges may also be used even though they are more complex, they offer a great deal of flexibility.
Deferred exchanges
A deferred exchange occurs when the property received in an exchange is received after the transfer of the property given up, allowing a taxpayer to dispose of property and subsequently acquire like-kind replacement property.
A deferred exchange is different than the case of a taxpayer simply selling one property and using the proceeds to purchase another piece of property; this transaction would be taxable. In a deferred exchange, the disposition of the relinquished property (and the acquisition of the replacement property) must be mutually dependent parts of one integrated transaction. Taxpayers that engage in deferred exchanges usually use qualified intermediaries (QIs) under written exchange agreements.
Reverse exchanges
A reverse exchange is done whereby the replacement property is acquired before the relinquished property is transferred. The acquired property is literally “parked” for no more than 180 before disposing of the relinquished property.
Restrictions for deferred and reverse exchanges
Please note that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from considered a like-kind exchange and make all gain immediately taxable.
If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the proceeds that are not like-kind property.
Using a qualified intermediary or other exchange facilitator is one way to avoid premature receipt of cash or other proceeds until the exchange is completed. You or your agent can not act as your own facilitator.
Computing the basis in the new property
In-order to comply with section 1031 rules, it is vital that the basis of the property be adjusted and tracked. This is due to the fact that gains are merely deferred and not forgiven. The basis of the property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction.
When the replacement property is ultimately sold not as part of another exchange, the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
Reporting Sec. 1031 exchanges
A taxpayer is required to report a Section 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges. This form is filed with the taxpayer’s tax return for the year in which the exchange took place.
Requirement for Form 8824:
· Descriptions of the properties exchanged;
· The dates on which the properties were identified and transferred;
· A disclosure of any relationship between the parties to the exchange;
· The value of the like-kind and any other property received;
· Any gain or loss on the sale of other (non-like-kind) property given up;
· Any cash received or paid, or any liabilities relieved or assumed; and
· The adjusted basis of the like-kind property given up and any realized gain.
If the rules for like-kind exchanges are not followed, a tax payer may be held liable for taxes, penalties, and interest on your transactions.
Under the IRS rules, a taxpayer is allowed to deduct expenses related to business use of a home, but only if the space is used “exclusively” on a “regular basis.” To qualify for a home office deduction, you must meet one of the following requirements:
A separate structure not attached to your dwelling unit that is used regularly and exclusively for your trade or profession also qualifies as a home office under the IRS definition.
The exclusive-use test is satisfied if a specific portion of the taxpayer’s home is used solely for business purposes or inventory storage. The regular-basis test is satisfied if the space is used on a continuing basis for business purposes. Incidental business use does not qualify.
In determining the principal place of business, the IRS considers two factors: Does the taxpayer spend more business-related time in the home office than anywhere else? Are the most significant revenue-generating activities performed in the home office? Both of these factors must be considered when determining the principal place of business.
Employees
To qualify for the home-office deduction, an employee must satisfy two additional criteria. First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job). Second, the taxpayer does not rent all or part of the home to the employer and use the rented portion to perform services as an employee for the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction.
Expenses
Home office expenses are classified into three categories:
Direct Business Expenses relate to expenses incurred for the business part of your home such as additional phone lines, long-distance calls, and optional phone services. Basic local telephone service charges (that is, monthly access charges) for the first phone line in the residence generally do not qualify for the deduction.
Indirect Business Expenses are expenditures that are related to running your home such as mortgage or rent, insurance, real estate taxes, utilities, and repairs.
Unrelated Expenses such as painting a room that is not used for business or lawn care are not deductible.
Deduction Limit
You can deduct all your business expenses related to the use of your home if your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation). But, if your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.
Nondeductible expenses such as insurance, utilities, and depreciation that are allocable to the business are limited to the gross income from the business use of your home minus the sum of the following:
If your deductions are greater than the current year’s limit, you can carry over the excess to the next year. They are subject to the deduction limit for that year, whether or not you live in the same home during that year.
Sale of Residence
If you use property partly as a home and partly for business, tax rules generally permit a $500,000 (married filing jointly) or $250,000 (single or married filing separately) exclusion on the gain from the sale of a primary residence provided certain ownership and use tests are met during the 5-year period ending on the date of the sale:
If the part of your property used for business is within your home, such as a room used as a home office for a business there is no need to allocate gain on the sale of the property between the business part of the property and the part used as a home. However, if you used part of your property as a home and a separate part of it, such as an outbuilding, for business other rules apply such as whether the use test was met (or not met) for the business part and whether or not there was business use in the year of the sale.
If you need more information about whether you qualify for the exclusion, please don’t hesitate to call us.
Simplified Home Office Deduction
If you’re one of the more than 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction), don’t forget about the new simplified option available for taxpayers starting with 2013 tax returns. Taxpayers claiming the optional deduction will complete a significantly simplified form.
The new optional deduction is capped at $1,500 per year based on $5 a square foot for up to 300 square feet. Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.
Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
Tax Deductions
The “home office” tax deduction is valuable because it converts a portion of otherwise nondeductible expenses such as mortgage, rent, utilities and homeowners insurance into a deduction.
Remember however, that an individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the “principal place of business” as defined above. The IRS applies a 2-part test to determine if the home office is the principal place of business.
If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction cannot be taken.
A home office also increases your business miles because travel from your home office to a business destination–whether it’s meeting clients, picking up supplies, or visiting a job site–counts as business miles. And, you can depreciate furniture and equipment (purchased new for your business or converted to business use), as well as expense new equipment used in your business under the Section 179 expense election.
Taxpayers taking a deduction for business use of their home must complete Form 8829. If you have a home office or are considering one, please call us. We’ll be happy to help you take advantage of these deductions.
The receipt of income is not limited to the receipt of money, you can also receive income in the form of property or services. From an employee’s perspective income is viewed as wages and fringe benefits received from an employer. We will be exploring other forms of income to include that from bartering, partnerships, S corporations, and royalties. It is important to note that some income might be taxable while others aren’t.
Income is generally taxable unless it is specifically exempt by the operation of law. Taxable and non-taxable income must both be report on your tax return. However, tax is only levied on the income that’s taxable.
Constructively-received income.
Income is viewed as being received and taxable if it is available to you irrespective of the fact that it is not actually in your hands at the close of the period.
For example, an employee check mailed before year end for services performed in December, is not received until the first week in January. This wage is considered income received for December and is tax in that same month.
Assignment of income.
Income received by any agent on your behalf is deemed to be income received by you and should be included in your total income in the year received. This is due to the fact that the agent acted on your behalf so in essence you have constructively received that income when they did.
If for example with you are a philanthropic person and with your employer you designate that a percentage of your salary should be directly paid to a particular organization. That amount must be considered and included in your income when the organization receives it.
Unearned or Prepaid income.
From a cash basis point of view, prepaid income, such as compensation for future services, is generally included in your income in the year the income is received. Such income can be deferred if the accruals method of accounting is used and thus the income is recognized in the period service is rendered.
Employee Compensation
As a generally rule, one should include in gross income all income received irrespective of the form of receipt. This includes all wages, salaries, commissions, fees, tips and even fringe benefits and stock options.
Employed persons should receive a Form W-2, Wage and Tax Statement, from their employer at the end of the year. This shows the pay received for services performed. Self-employed persons would need to prepare their financial statement to arrive at income for the period.
Childcare providers.
As stated earlier, all payment received should be include in total income. Therefore, if you provide child care, either in the child’s home or in your home or other place of business, the pay you receive must be included in your income.
It is worth noting that if you babysit for friends, relatives or even the neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.
If you are not an employee, you are probably a self-employed independent contractor and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.
Rental Income.
Generally, if your primary reason for undertaking an activity is for income or profit, any amounts received is viewed as income. This is also the case if you are involved in the rental activity with continuity and regularity, your rental activity is a business.
If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by:
Partnership Income
A partnership does not pay taxes, rather the income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner’s distributive share of these items.
A partner is required to report his or her distributive share of these items on his or her tax return whether or not they have actually been distributed. However, the distributive share of the partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took place.
S Corporation Income
Like a partnership, in general an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder’s pro rata share. You must report your share of these items on your return. Generally, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate.
Royalty Income
Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as ordinary income.
Part I of Schedule E (Form 1040), Supplemental Income and Loss is utilized to report this form of income. However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ.
It is important that as the end of the year approaches taxpayers consider the amount of withholding that are being deducted from their pay, in fact, they are encouraged to perform a tax withholding checkup to ensure that they are not allowing more to be withheld than is needed. Also, by performing this checkup now, taxpayers can adjust their withholding to avoid paying less than the required taxes and thus avoid an unexpected tax bill later.
Who would benefit from a withholding check-up:
1. Taxpayers who received large tax refunds in past years
Having large refunds in prior years might be due to the taxpayers having too much taxes withheld from their paychecks over and about what is required. When a taxpayer has too much tax withheld from their paycheck, they end up paying too much tax during the year, hence the large tax refund. They can change their withholding to pay just the right amount of taxes and have money upfront rather than waiting for a bigger refund.
2. Taxpayers who owed taxes in years past
The goal here is to get the amount of taxes withheld to be as close as possible to the taxes due. Taxpayers with too little tax withheld might find themselves with a tax bill at the end of the year. Under-withholding can lead to both a tax bill and an additional penalty. Similar to overpayment of taxes, tax payers can remedy this situation by adjusting their withholdings so that withholding and taxes due are as close as possible.
3. People with a second job
It is important that taxpayers who work more than one job check the total amount of taxes they have withheld so that it approximates taxes due as close as possible and make adjustments as necessary. This includes adjusting their withholdings up or do so that their withholding covers the total amount of the taxes they owe, based on their combined income from all their jobs.
4. Taxpayers who make estimated tax payments
Also, there are some taxpayers who make quarterly estimated tax payments throughout the year. Among these persons are: self-employed individuals, partners, and S corporation shareholders. Some of these persons also have an employer. If this is the case, these taxpayers can often forgo making these quarterly payments by having more tax taken out of their pay via withholdings.
5. People with a new job
If you are starting a new job it is imperative that you ensure that enough taxes are being withheld from your pay. This should be to the point where your withholdings are enough to cover the taxes due from your old and new job. withheld.
Form W-4 is used by employees to make the adjustment to their withholdings. To make sure their employer withholds the right amount of tax, employees can prepare a new Form W-4, Employee’s Withholding Allowance Certificate. In many cases, this is all they need to do. The employer uses the form to figure the amount of federal income tax to be withheld from pay. This takes time, so taxpayers should make adjustments as soon as possible so the changes can take affect during the final pay periods of 2017.
Consider establishing an employee stock ownership plan (ESOP).
If you own a business and need to diversify your investment portfolio, consider establishing an ESOP. ESOP’s are the most common form of employee ownership in the U.S. and are used by companies for several purposes, among them motivating and rewarding employees and being able to borrow money to acquire new assets in pretax dollars. In addition, a properly funded ESOP provides you with a mechanism for selling your shares with no current tax liability. Consult a specialist in this area to learn about additional benefits.
Make sure there is a succession plan in place.
Have you provided for a succession plan for both management and ownership of your business in the event of your death or incapacity? Many business owners wait too long to recognize the benefits of making a succession plan. These benefits include ensuring an orderly transition at the lowest possible tax cost. Waiting too long can be expensive from a financial perspective (covering gift and income taxes, life insurance premiums, appraiser fees, and legal and accounting fees) and a non-financial perspective (intra-family and intra-company squabbles).
Consider the limited liability company (LLC) and limited liability partnership (LLP) forms of ownership.
These entity forms should be considered for both tax and non-tax reasons.
Avoid nondeductible compensation.
Compensation can only be deducted if it is reasonable. Recent court decisions have allowed business owners to deduct compensation when (1) the corporation’s success was due to the shareholder-employee, (2) the bonus policy was consistent, and (3) the corporation did not provide unusual corporate prerequisites and fringe benefits.
Purchase corporate owned life insurance (COLI).
COLI can be a tax-effective tool for funding deferred executive compensation, funding company redemption of stock as part of a succession plan and providing many employees with life insurance in a highly leveraged program. Consult your insurance and tax advisers when considering this technique.
Consider establishing a SIMPLE retirement plan.
If you have no more than 100 employees and no other qualified plan, you may set up a Savings Incentive Match Plan for Employees (SIMPLE) into which an employee may contribute up to $12,500 per year if you’re under 50 years old and $15,500 a year if you’re over 50 in 2017 (same as 2016). As an employer, you are required to make matching contributions. Talk with a benefits specialist to fully understand the rules and advantages and disadvantages of these accounts.
Establish a Keogh retirement plan before December 31st.
If you are self-employed and want to deduct contributions to a new Keogh retirement plan for this tax year, you must establish the plan by December 31st. You don’t actually have to put the money into your Keogh(s) until the due date of your tax return. Consult with a specialist in this area to ensure that you establish the Keogh or Keoghs that maximize your flexibility and your annual contributions.
Section 179 expensing.
Businesses may be able to expense up to $510,000 in 2017 for equipment purchases of qualifying property placed in service during the filing year, instead of depreciating the expenditures over a longer time period. The limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year 2017 exceeds $2,030,000.
Don’t forget deductions for health insurance premiums.
If you are self-employed (or are a partner or a 2-percent S corporation shareholder-employee) you may deduct 100 percent of your medical insurance premiums for yourself and your family as an adjustment to gross income. The adjustment does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income from the business under which the plan was established. You may not deduct premiums paid during a calendar month in which you or your spouse is eligible for employer-paid health benefits.
Review whether compensation may be subject to self-employment taxes.
If you are a sole proprietor, an active partner in a partnership, or a manager in a limited liability company, the net earned income you receive from the entity may be subject to self-employment taxes.
Don’t overlook minimum distributions at age 70½ and rack up a 50 percent penalty.
Minimum distributions from qualified retirement plans and IRAs must begin by April 1 of the year after the year in which you reach age 70½. The amount of the minimum distribution is calculated based on your life expectancy or the joint and last survivor life expectancy of you and your designated beneficiary. If the amount distributed is less than the minimum required amount, an excise tax equal to 50 percent of the amount of the shortfall is imposed.
Don’t double up your first minimum distributions and pay unnecessary income and excise taxes.
Minimum distributions are generally required at age seventy and one-half, but you are allowed to delay the first distribution until April 1 of the year following the year you reach age seventy and one-half. In subsequent years, the required distribution must be made by the end of the calendar year. This creates the potential to double up in distributions in the year after you reach age 70½. This double-up may push you into higher tax rates than normal. In many cases, this pitfall can be avoided by simply taking the first distribution in the year in which you reach age 70½.
Don’t forget filing requirements for household employees.
Employers of household employees must withhold and pay social security taxes annually if they paid a domestic employee more than $2,000 a year in 2017 (same as 2016). Federal employment taxes for household employees are reported on your individual income tax return (Form 1040, Schedule H). To avoid underpayment of estimated tax penalties, employers will be required to pay these taxes for domestic employees by increasing their own wage withholding or quarterly estimated tax payments. Although the federal filing is now required annually, many states still have quarterly filing requirements.
Consider funding a nondeductible regular or Roth IRA.
Although nondeductible IRAs are not as advantageous as deductible IRAs, you still receive the benefits of tax-deferred income. Note, the income thresholds to qualify for making deductible IRA contributions, even if you or your spouse is an active participant in an employer plan, are increasing.
The $100,000 income test for converting a traditional IRA to a ROTH IRA was permanently eliminated in 2010, allowing anyone to complete the conversion.
You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10 percent additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.
Caution: You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. However, the amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10 percent additional tax on early distributions.
Calculate your tax liability as if filing jointly and separately.
In certain situations, filing separately may save money for a married couple. If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, filing separately may lower your total taxes. Filing separately may also lower the phase-out of itemized deductions and personal exemptions, which are based on adjusted gross income. When choosing your filing status, you should also factor in the state tax implications.
Avoid the hobby loss rules.
If you choose self-employment over a second job to earn additional income, avoid the hobby loss rules if you incur a loss. The IRS looks at a number of tests, not just the elements of personal pleasure or recreation involved in the activity.
Review your will and plan ahead for post-mortem tax strategies.
A number of tax planning strategies can be implemented soon after death. Some of these, such as disclaimers, must be implemented within a certain period of time after death. A number of special elections are also available on a decedent’s final individual income tax return. Also, review your will as the estate tax laws are in flux and your will may have been written with differing limits in effect. In 2017, estates of $5,490,000 (up from $5,450,000 in 2016) are exempt from the estate tax with a 40 percent maximum tax rate (made permanent starting in tax year 2013).
Check to see if you qualify for the Child Tax Credit.
A $1,000 tax credit is available for each dependent child (including stepchildren and eligible foster children) under the age of 17 at the end of the taxable year. The child credit generally is available only to the extent of a taxpayer’s regular income tax liability. However, for a taxpayer with three or more children, this limitation is increased by the excess of Social Security taxes paid over the sum of other nonrefundable credits and any earned income tax credit allowed to the taxpayer. For 2017 (as in previous years), the income threshold is $3,000.
For more information concerning these financial planning ideas, please call the office of Metro Accounting And Tax Services at 407-240-5143.
To determine if you are really running a business or just enjoying a hobby you must take into account the facts and circumstances of your situation. A hobby for tax purposes is defined as an activity engaged in “for sport or recreation, not to make a profit.” So even if you earn occasional income from doing such an activity, the primary purpose must be something other than a profit motive.
So, from horse breeding to glass blowing, many persons enjoy hobbies that are also income generating. A taxpayer is required to report all income on their tax return even if it is earned from participation is a related hobby activity.
The rules on how to report the income and expenses earned and incurred depends on whether the activity participated in is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. In general, you are allowed to deduct ordinary and necessary hobby expenses with certain limitations. An ordinary and necessary hobby expense is one that’s considered common and accepted for the activity. A “necessary” expense is one that’s considered helpful and appropriate for the activity.
Since a hobby is not a business, hobbyists are not entitled to the same tax deductions that businesspeople can claim. As a hobbyist, you can usually deduct your hobby expenses up to the amount of your hobby income. But any expenses that exceed your hobby income are considered personal losses and are not deductible from your other income.
Here are four things to consider:
1) Determine if the activity is a business or a hobby. If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby, and base their determination on all the facts and circumstances of their activity.
· Whether you carry on the activity in a businesslike manner
· Whether the time and effort you put into the activity indicate that you intend to make it profitable
· Whether you depend on income from the activity for your livelihood
· Whether your losses are due to circumstances beyond your control, or are normal in the startup phase of your type of business
· Whether you adjust your methods of operation in an attempt to improve profitability
· Whether you (or your advisors) have the knowledge needed to carry on the activity as a successful business
· Whether you were successful in making a profit in similar activities in the past
· Whether the activity makes a profit in some years, and how much profit it makes
· Whether you can expect to make a future profit from the appreciation of the assets used in the activity
2) Allowable hobby deductions. Taxpayers can usually deduct ordinary and necessary hobby expenses within certain limits:
o Ordinary expense is common and accepted for the activity.
o Necessary expense is appropriate for the activity.
3) Limits on hobby expenses. Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
4) How to deduct hobby expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions and must be taken in the following order:
Proper estate planning can help to increase the size of your estate, whether large or small. Its basic purposes are to help you to decide how your property will be distributed after your death, to help assure that your property will be distributed in an orderly and efficient way and to minimize the amount of taxes paid by your estate. This Financial Guide gives you a roadmap to the estate planning process, in particular we will be examining wills, trusts, post-mortem letters, living wills, life insurance, life time gifts and disclaimers.
The goal is to get started so that you’ll be able to provide for your heirs, lessen the administrative burden on your survivors, and to understand what you’ll have to do to minimize your estate and income taxes. It will enable you to approach your attorney and other professional advisors with a clearer idea of what the process should entail. Should you need further assistance in your tax planning endeavors, the advisors at Metro Accounting And Tax Services, CPA are ready to help. Call the office today at 470-240-5143.
Wills
The will is the foundation of good estate planning and it’s critical to obtain competent legal help when drafting a will. A will that is poorly drafted or does not dot every legal “i” and cross every legal “t” can be the cause of endless trouble for your survivors.
It is recommended that you do not keep original copies of your will in a safe deposit box. Instead, keep them in a fireproof safe at home and give copies to your attorney and your executor as well.
Many people believe they do not need a will, but there are many good reasons, other than saving estate taxes, for having a valid and updated will.
Why You Need a Will
There are five basic reasons to prepare a will:
1. To Choose Beneficiaries. The laws of the state in which you live determine how your property will be distributed if you die without a valid will. For example, in most states the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to his or her spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings if there are no parents). These distributions may be contrary to what you want. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive. You may also wish to leave property to a charity after your death, and a will may be needed to accomplish this goal.
2. To Minimize Taxes. Many people feel they do not need a will because they believe their taxable estate is below that taxable amount for federal estate tax purposes. However, your taxable estate may be larger than you think. For example, life insurance, qualified retirement plan benefits, and IRAs typically pass outside of a will or of estate administration. But these assets are still part of your federal estate and can cause your estate to go over the threshold amount. Also, in some states, an estate becomes subject to state death taxes at a point well below the federal threshold. A properly prepared will is necessary to implement estate tax reduction strategies.
Periodically reviewing your estate plan is advisable to take into account the changes in estate and gift tax rules, as well as rules on items that affect the size of your estate including retirement and education funding plans. Amounts subject to estate tax, and estate and gift tax rates, are scheduled to change periodically in future years.
3. To Appoint a Guardian. Your will should name a guardian for your minor children in the event of your death and/or the death of your spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.
4. To Name an Executor. Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you would not have chosen. Obviously, there is an advantage, as well as peace of mind, in selecting an executor you trust.
5. To Establish Domicile. You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.
You should review your will every two or three years, or whenever your circumstances change. Changes that warrant revising your estate plan might include:
Trusts
Today, trusts are not just used by the very wealthy, people with a wide range of income levels use them as estate planning tools too, despite the fact that trusts are complex and costly to set up and run, and require a higher level of services from an attorney than a will does.
What is a Trust?
A trust owns its own property (holds the title). When it is set up, the trust appears on official papers and records as the legal owner of any property that is placed into it. The trust’s principal is the property that the trust owns, as distinguished from the interest or dividends earned by that property. The terms of the trust dictate who will get the benefit of the income from the trust property, how long the trust will last, and so on.
The trustee is the person or entity whose job it is to administer and manage the trust: make investment decisions, pay taxes, make sure the terms of the trust are carried out, and take care of the trust’s property. Generally speaking, the trust must pay income tax on any of its undistributed interest or other income.
There are basically two types of trusts:
Another way to categorize trusts is the living (or inter vivos) trust, which is set up by a living person, or a testamentary trust, which is created by a will.
What is a Trust Used For?
A trust can be used for many worthwhile purposes:
Giving property to children. People generally do not want to give property to a minor child outright because of the financial risks involved (e.g., the child could squander it). Many people give property to a minor through a trust. The trust’s terms can be written so that the child does not get outright ownership until he or she has achieved a certain age so that the child receives only the income from the trust property until that time. Another way to give property to a minor is via the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. These provisions, which apply in most states, provide for a custodianship over property given to a minor.
Reducing estate taxes. As noted earlier, if you leave everything to your spouse, it passes free of federal estate tax. However, when your surviving spouse dies, anything in his or her estate over the exclusion amount (also called “exemption amount”) would be subject to estate tax. The exclusion amount for 2017 is $5,490,000. In 2016 it was $5,450,000 and in 2015 it was $5,430,000. In 2014 it was $5,340,000, in 2013 it was $5,250,000, in 2012 it was $5,125,00, in 2011 it was $5,000,000, and there was no limit in 2010. The credit shelter trust or bypass trust is used to shelter up to the exclusion amount from the estate tax. Here’s a simplified example of how it might work:
Example: Simon and Sylvia have an estate worth $4 million. Simon’s will put $2,000,000 worth of assets in a bypass trust. The ultimate beneficiary of this trust is Simon and Sylvia’s daughter. (The beneficiary can be anyone other than Sylvia.) Sylvia is to receive the income from that trust for her life, but her rights in the trust are limited so that she is not considered the owner. The rest of Simon’s estate ($2,000,000) is left to Sylvia in his will.
Assuming Simon dies in 2017, the $2,000,000 in the bypass trust is sheltered by his estate tax exemption. The $2,000,000 that goes to Sylvia is deducted from the estate because of the marital deduction. Thus, on Simon’s death, the federal estate tax due is zero. When Sylvia dies, her estate will include only the $2,000,000 (if she still has it), plus any other assets she has accumulated. It will not include the $2,000,000 put into the bypass trust, which will be exempt from tax because of the $2,000,000 estate tax exemption.
Thus, the federal estate tax on Sylvia will apply only to her assets in excess of $5,490,000. Result: The family has sheltered assets worth $4 million from estate tax in the Simon/Sylvia generation. Without the bypass trust, the estate tax would have applied to an additional $2,000,000 of the estate.
Wills may be drafted to leave a bypass trust an amount equal to the exclusion amount in the year of death, rather than a specific dollar amount. However, because amounts change, review of the estate plan may be needed to keep the desired balance between what the spouse is to get and what trust beneficiaries are to get.
Leaving an asset to a spouse. The marital deduction trust allows the first spouse to die to place estate assets in a trust for the surviving spouse, instead of leaving them to him or her outright. If the legal requirements are met, the estate gets the marital deduction, but can still preserve assets for heirs other than the surviving spouse. Typically, the income of such trusts will go to the surviving spouse for life and the principal will go to children. All of the income must go to the surviving spouse for the trust to qualify for the marital deduction. It must be paid out at least once a year. The spouse may have some access to the principal. When the second spouse dies, the property is included in his or her estate for estate tax purposes.
Pay estate tax. Complex and expensive arrangements, life insurance trusts are usually used to finance future estate taxes on an estate that contains a business interest or real estate.
Post-Mortem Letters
Does anyone but you know where your tax records and supporting tax documents are located? How about deeds, titles, wills, insurance papers? Does anyone know who your accountant is? Your lawyer? Your broker? If you pass away without leaving your heirs this information, it will cause a lot of headaches. Worse than that, part of your estate may have to be spent in needless taxes, claims, or expenses because the information is missing.
The post-mortem letter is an often-overlooked estate planning tool. It tells your executors and survivors what they need to know to maximize your estate such as the location of assets, records, and contacts. Without the post-mortem letter, you risk losing part of your estate’s assets because necessary documentation cannot be located.
Livings Wills
A living will, which is sometimes called a health care proxy, makes known your wishes as to what medical treatment or measures you want to have if you become incapacitated and unable to make the decision yourself. It tells family and physicians whether you want to be kept alive through mechanical means or whether you would prefer not to have such means used. If there is no living will, this decision is left up to the family, or the physicians, to decide. Stating your preference in a living will can take some of the burden off family members and decrease the stress in an emergency.
Life Insurance
The main purpose of life insurance is to provide for the welfare of survivors. But life insurance can also serve as an estate planning tool. For example, it can be used to finance the payment of future estate taxes or to finance a buy-out of a deceased’s interest in a business. It can also be used to pay funeral and final expenses and debts.
If the decedent owns the policy, the proceeds will be included in the estate and subject to estate tax. However, if the decedent gives away all incidents of ownership in the policy, and names a beneficiary other than the estate, the proceeds will not be included in the estate.
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Disclaimers
The disclaimer is a way for an heir to refuse all or part of property that would otherwise pass to him or her, via will, intestacy laws, or by operation of law. An effective disclaimer passes the property to the next beneficiary in line.
With a properly drawn disclaimer, the property is treated as if it had passed directly from the decedent to the next-in-line beneficiary. This may save thousands of dollars in estate taxes. The provision for a disclaimer in a will and the wise use of a disclaimer allows intra-family income shifting for maximum use of the estate tax marital deduction, the unified credit, and the lower income tax brackets.
It is important to note that disclaimers can also be used to provide for financial contingencies. For example, a beneficiary can disclaim an interest if someone else is in need of funds.
Lifetime Gifts
The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income. You can make annual gifts in 2017 of up to $14,000 ($28,000 for a married couple) to as many donees as you desire. The $14,000 is excluded from the federal gift tax so that you will not incur gift tax liability. Further, each $14,000 you give away during your lifetime reduces your estate for federal estate tax purp
Many tax benefits are available to you when you sell your principal residence. However, the rules are complex and personal guidance is necessary to take full advantage of these benefits so that you and your tax advisor can best work together to minimize the tax on the gain. This financial guide by Metro Accounting And Tax Services, CPA discusses the key rules so that you can minimize the tax on the gain.
The IRS allows an exclusion of up to $250,000 of the gain on the sale of your main home ($500,000 if you are married and file a joint return. Most taxpayers can take advantage of the exclusion and will not have to pay any tax on the sale of a main home as long as they meet the IRS ownership and use tests (see below).
It is important to note that if you have a loss from the sale, it is a personal loss. You cannot deduct the loss.
If you don’t qualify for exclusion and your gain exceeds the exclusion, or you used part of the property in business or for rent, you have a taxable gain and must report the sale of your main home on your tax return on IRS Form 8949 and Schedule D.
Principal Residence
Usually, the home you live in most of the time is your main home. In addition to a standard dwelling unit, your home can also be a houseboat, mobile home, cooperative apartment, or condominium.
Example: You own and live in a house in town. You also own beach property, which you use in the summer months. The town property is your main home; the beach property is not.
Example: You own a house, but you live in another house that you rent. The rented home is your main home.
Where a second residence has soared in value and you want to sell, some tax advisors have suggested moving to the second residence for the required period to qualify for exclusion on its sale. If this is your situation, please consult with a tax professional.
How to Figure Gain or Loss
Key information for determining gain or loss is the selling price, the amount realized, and the adjusted basis.
The selling price is the total amount you receive for your home. It includes money, all notes, mortgages or other debts assumed by the buyer as part of the sale, and the fair market value of any other property or any services you receive. Next, you deduct the selling expenses such as commissions, advertising, legal fees, and loan charges paid by the seller from the selling price.
The difference is the “amount realized.” If the amount realized is more than your home’s “adjusted basis,” discussed later, the difference is your gain. If the amount realized is less than the adjusted basis, the difference is your loss.
However, it does not include amounts you received for personal property sold with your home. Personal property is property that is not a permanent part of the home, such as furniture, draperies, and lawn equipment.
Jointly owned home. If you and your spouse sell your jointly owned home and file a joint return, you figure and report your gain or loss as one taxpayer. If you file separate returns, each of you must figure and report your own gain or loss according to your ownership interest in the home. Your ownership interest is determined by state law.
If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure and report your own gain or loss according to your ownership interest in the home. Each of you applies the exclusion rules individual basis.
Trading homes. If you trade your old home for another home, treat the trade as a sale and a purchase.
Foreclosure or repossession. If your home was foreclosed on or repossessed, you have what the IRS calls a disposition and will need to determine if you have ordinary income, gain, or loss. The amount of your gain or loss depends on whether you were personally liable for repaying the debt secured by the home and whether the outstanding loan balance is more than the fair market value (FMV) of the property.
If you were not personally liable for repaying the debt secured by the home, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer.
If you were personally liable for repaying the debt secured by the home and the debt is canceled, the amount realized on the foreclosure or repossession includes the smaller of the outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or the Fair Market Value (FMV) of the transferred property.
In addition to any gain or loss, if you were personally liable for the debt you may have ordinary income. If the canceled debt is more than the home’s fair market value, you have ordinary income equal to the difference. However, the income from cancellation of debt is not taxed to you if the cancellation is intended as a gift, or if you are insolvent or bankrupt.
Example: You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new house priced at $80,000 (its fair market value). You are considered to have sold your old home for $50,000 and to have had a gain of $9,000 ($50,000 minus $41,000). If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, $50,000 would still be considered the sales price of the old home (the trade-in allowed plus the mortgage assumed).
Transfer to spouse. If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss, even if you receive cash or other consideration for the home. Therefore, the rules explained in this Guide do not apply.
If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.
If you buy or build a new home, its basis will not be affected by your transfer of your old home to your spouse, or to your former spouse incident to divorce. The basis of the home you transferred will not affect the basis of your new home.
Basis
You will need to know your basis in your home as a starting point for determining any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you acquired it in some other way, its basis is either its fair market value when you received it or the adjusted basis of the person you received it from.
While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis is used to figure gain or loss on the sale of your home.
Cost as Basis
The cost of property is the amount you pay for it in cash or other property.
Purchase. If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Your cost includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home.
Seller-paid points. If you bought your home after April 3, 1994, you must reduce the basis of your home by any points the seller paid, whether or not you deducted them. If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by the amount of seller-paid points only if you chose to deduct them as home mortgage interest in the year paid.
Settlement fees or closing costs. When buying your home, you may have to pay settlement fees or closing costs in addition to the contract price of the property. You can include in your basis the settlement fees and closing costs that are for buying the home. You cannot include in your basis the fees and costs that are for getting a mortgage loan. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.
Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
Some of the settlement fees or closing costs that you can include in the basis of your property are:
Some settlement fees and closing costs not included in your basis are:
Real estate taxes.
Real estate taxes for the year you bought your home may affect your basis, as follows:
If you pay taxes that the seller owed on the home up to the date of sale and the seller does not reimburse you, then the taxes are added to the basis of your home.
If you pay taxes that the seller owed on the home up to the date of sale and the seller does reimburse you, then the taxes do not affect the basis of your home.
If the seller pays taxes for you (taxes owed beginning on the date of sale) and you do not reimburse the seller, then the taxes are subtracted from the basis of your home.
If the seller pays taxes for you (taxes owed beginning on the date of sale) and you reimburse the seller, then the taxes do not affect the basis of your home.
Construction. If you contracted to have your house built on land you own, your basis is the cost of the land plus the amount it cost you to complete the house. This amount includes the cost of labor and materials, or the amounts paid to the contractor, and any architect’s fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building your home. Your cost includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. You may have to reduce the basis by points the seller paid for you. If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Do not include the value of your own labor, or any other labor you did not pay for, in the cost of the house.
Cooperative apartment. Your basis in the apartment is usually the cost of your stock in the co-op housing corporation, which may include your share of a mortgage on the apartment building.
Condominium. Your basis is generally its cost to you. The same rules apply as for any other home.
Basis Other Than Cost
If your home was acquired in a transaction other than a traditional purchase (such as gift, inheritance, trade, or from a spouse), you may have to use a basis other than cost, such as fair market value.
Note: Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.
Home received as gift. If your home was a gift, its basis to you is the same as the donor’s adjusted basis when the gift was made. However, if the donor’s adjusted basis was more than the fair market value of the home when it was given to you, you must use that fair market value as your basis for measuring any loss on its sale.
If you use the donor’s adjusted basis to figure a gain and get a loss, and then use the fair market value to figure a loss and get a gain, you have neither a gain nor a loss on the sale or disposition.
If you received your home as a gift and its fair market value was more than the donor’s adjusted basis at the time of the gift, you may be able to add to your basis any federal gift tax paid on the gift. If the gift was before 1977, the basis cannot be increased to more than fair market value of the home when it was given to you. On the other hand, if you received your home as a gift after 1976, you would add to your basis the part of the federal gift tax paid that is due to the home’s “net increase” in value (value less donor’s adjusted basis).
Home received from spouse. You may have received your home from your spouse or from your former spouse incident to your divorce.
Example: Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse’s death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the fair market value of the community property becomes the basis of the entire property, including the portion belonging to the surviving spouse. For this to apply, at least, half of the community interest must be included in the decedent’s gross estate, whether or not the estate must file a return.
Home received in trade.
If you acquired your home in a trade for other property, the basis of your home is generally its fair market value at the time of the trade. If you traded one home for another, you have made a sale and purchase. In that case, you may have realized a capital gain.
For all your tax planning strategies call the office today 470-240-5143.
Tax breaks for charitable giving aren’t limited to individuals, small businesses can benefit too. If you own a small to medium size business and are committed to giving back to the community through charitable giving, here’s what you should know.
1. Verify that the Organization is a Qualified Charity.
Once you’ve identified a charity, you’ll need to make sure it is a qualified charitable organization under the IRS. Qualified organizations must meet specific requirements as well as IRS criteria and are often referred to as 501(c)(3) organizations. Note that not all tax-exempt organizations are 501(c)(3) status, however.
There are two ways to verify whether a charity is qualified: use the IRS online search tool or ask the charity to send you a copy of their IRS determination letter confirming their exempt status.
2. Make Sure the Deduction is Eligible
Not all deductions are created equal. In order to take the deduction on a tax return, you need to make sure it qualifies. Charitable giving includes the following: cash donations, sponsorship of local charity events, in-kind contributions such as property such as inventory or equipment.
Lobbying. A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks the loss of its tax-exempt status. As such, you cannot claim a charitable deduction (or business expense) for amounts paid to an organization if both of the following apply.
Further, if a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues.
3. Understand the Limitations
Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations.
Note: Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Likewise, if the payments are charitable contributions or gifts, you cannot deduct them as business expenses.
Sole Proprietorships
As a sole proprietor (or single-member LLC), you file your business taxes using Schedule C of individual tax form 1040. Your business does not make charitable contributions separately. Charitable contributions are deducted using Schedule A, and you must itemize in order to take the deductions.
Partnerships
Partnerships do not pay income taxes. Rather, the income and expenses (including deductions for charitable contributions) are passed on to the partners on each partner’s individual Schedule K-1. If the partnership makes a charitable contribution, then each partner takes a percentage share of the deduction on his or her personal tax return. For example, if the partnership has four equal partners and donates a total of $2,000 to a qualified charitable organization in 2017, each partner can claim a $500 charitable deductions on his or her 2017 tax return.
Note: A donation of cash or property reduces the value of the partnership. For example, if a partnership donates office equipment to a qualified charity, the office equipment is no longer owned by the partnership, and the total value of the partnership is reduced. Therefore, each partner’s share of the total value of the partnership is reduced accordingly.
S-Corporations
S-Corporations are similar to Partnerships, with each shareholder receiving a Schedule K-1 showing the amount of charitable contribution.
C-Corporations
Unlike sole proprietors, Partnerships and S-corporations, C-Corporations are separate entities from their owners. As such, a corporation can make charitable contributions and take deductions for those contributions.
4. Categorize Donations
Each category of donation has its own criteria with regard to whether it’s deductible and to what extent. For example, mileage and travel expenses related to services performed for the charitable organization are deductible but time spent on volunteering your services is not. Here’s another example: As a board member, your duties may include hosting fundraising events. While the time you spend as a board member is not deductible, expenses related to hosting the fundraiser such as stationery for invitations and telephone costs related to the event are deductible.
Generally, you can deduct up to 50 percent of adjusted gross income. Non-cash donations of more than $500 require completion of Form 8283, which is attached to your tax return. In addition, contributions are only deductible in the tax year in which they’re made.
5. Keep Good Records
The types of records you must keep vary according to the type of donation (cash, non-cash, out of pocket expenses when donating your services) and the importance of keeping good records cannot be overstated.
Ask for–and make sure you receive–a letter from any organizations stating that said organization received a contribution from your business. You should also keep canceled checks, bank and credit card statements, and payroll deduction records as proof or your donation. Further, the IRS requires proof of payment and an acknowledgment letter for donations of $250 or more.
Here are six things to keep in mind about charitable donations and written acknowledgments:
1. Taxpayers who make single donations of $250 or more to a charity must have one of the following:
2. The $250 threshold doesn’t mean a taxpayer adds up separate contributions of less than $250 throughout the year. For example, if someone gave a $25 offering to his or her church each week, they don’t need an acknowledgment from the church, even though their contributions for the year are more than $250.
3. Contributions made by payroll deduction are treated as separate contributions for each pay period.
4. If a taxpayer makes a payment that is partly for goods and services, their deductible contribution is the amount of the payment that is more than the value of those goods and services.
5. A taxpayer must get the acknowledgment on or before the earlier of these two dates:
6. If the acknowledgment doesn’t show the date of the contribution, the taxpayers must also have a bank record or receipt that does show the date.
If you’re a small business owner, don’t hesitate to call if you have any questions about charitable donations.
An attempt to overhaul the current tax structure is currently taking place in both the House and the Senate. From a tax payers perspective, it is important to note that whatever new tax bill is agreed upon, there will be no effect on the filing of taxes for the next tax season. So I just wanted to let everone know that there is no need to panic as this bill, whatever it turns out to be, will not affect the tax fillings for the year 2017.
Standard Deductions
The House & Senate versions are almost the same. The Proposals would eliminate:
– Personal & dependent exemption deductions.
– The House version eliminates the Age and blind addons – the Senate version retains them.
Categories: Proposed Currently
1) Joint Filers $24,400 $12,700
2) Single + 1 Qualifying Child $18,300 $9,350
3) Others: $12,200 $6,350
Standard Deduction Example
Current Proposed
Single $6,350 + $4,050 (1 exemptions) $10,400 $12,000
Single + 2 $6,350 + (3 exemptions) (3x$4,050) $18,500 $12,000
MFJ $12,700 + (2 exemptions) (2x$4,050) $20,800 $24,000
MFJ + 2 $12,700 + (4 exemptions) (4x$4,050) $28,900 $24,000
MFJ + 4 $12,700 + (6 exemptions) (6x$4,050) $37,000 $24,000
Individual Tax Brackets
Proposed:
• House: 12%, 25%, 35% and 39.6%
• Senate: 10%, 12%, 22.5%, 25%, 32.5%, 35%, 38.5%
Currently:
• Seven Tax Brackets 10%, 15%, 25%, 28%, 33%, 35% & 39.6%
House Version
% S HH MFJ MFS
12% 45,000 87,500 90,000 45,000
25% 200,000 200,000 260,000 130,000
35% 500,000 500,000 1mil 500,000
39.6%
Senate Version
% S HH MFJ MFS
10 9,250 13,600 19,050 9,525
12 38,700 51,800 77,400 38,700
22.5 60,000 60,000 120,000 60,000
25 170,000 170,000 290,000 145,000
32.5 200,000 200,000 390,000 195,000
35 500,000 500,000 1Mil 500,000,
38.5
12% Bracket
A) Phased Out – House Only
B) The tax benefit of the 12% bracket is phased out at $6 for Every
$100 AGI exceeds:
1) $1 Mil for Single Individuals
2) $1.2 Mil for MFJ
Itemized Deductions
• Medical Expenses
• House – Repealed
• Senate – Retained
• Taxes
• House – $10,000 of Property Tax
• Senate – None
Home Mortgage Interest
House
Senate
Charity
Certain Miscellaneous, Repealed – House & Senate
*However, Senate Version allows Disaster Losses
Senate Version Repeals all Tier II
Child & Family Credits
Due Diligence
· Senate Version
1.) Adds HH Due Diligence
2) $500 Penalty
Kiddie Tax
• House Version
1) Changes the computation
2) Cuts connection to parent’s return
• Senate Version
1) Changes the computation
2) Cuts connection to parent’s return
3) Unearned Income taxed at Fiduciary Rates
Education – House Only
• Credits Consolidated.
1) AOTC – Only One
2) Extended To 5 Years
3) 5th Year
1) Only half credit
2) Only $500 Refundable
• Education Loans
1) Forgiven Because of Death or Disability
2) No COD Income
• Repealed Benefits
1) Above the line Deduction
2) U.S. Savings Bonds Interest
3) Employer Provided Education Assistance
Alimony • House Only
1) For Decrees After 2017
2) Not Deductible To Payer
3) Not Income To Recipient
Moving Expense • House & Senate
1) Repealed
2) Employer Reimbursement Taxable
Adoption Credit • House
1) Original Draft Axed Both the Credit and Tax-Free Reimbursement
2) Amended to Retain Credit
• Senate – Not Mentioned
Archer MSA – House Only
1) No Further Contributions
2) Can Rolled Into An HSA
Home Sale Exclusion – House Only
1) Phase Out – $1 or every $ AGI Exceeds
1) $500,000 MFJ
2) $250,000 Single
• Ownership/Use – House & Senate
1) 5 out of 8 Years
Employee Fringe Benefits • House Repealed
1) Achievement Awards
2) Dependent Care Assistance –2023
3) Transportation – Transit passes etc.
• Senate Repealed
1) Bicycle Commuting
Credits • House Only
1) Electric Vehicle – Repealed
2) Mtg Credit Certificates Repealed
3) Wind Energy, Geothermal & Fuel Cell Restored along with Solar Thru 2022 – Subject to The Existing Phaseouts
Capital Gains • Essentially Same For House & Senate
1) 0% Below the Old 15% Tax Bracket
2) $77.3K MFJ $51.7K HH $38.6 Others
3) 15% Below 20% Tax Bracket
4) $479K MFJ $239 MFS $425 Others
5) 20% On The Balance
AMT • Repealed – House & Senate
AMT Tax Credit House
1) 50% in 2019 thru 2021
2) Balance in 2022
Who is Self-Employed?
According to the IRS, generally a person is considered self-employed if any of the following apply to you.
1) If you are engaged in a trade or line of business as a sole proprietor or as an independent contractor, that is, you will receive a 1099 at the end of the year.
2) If you are a member of a partnership whereby you’ll receive a K1 from the business at the end of the year.
3) If you are otherwise engaged in any business venture for yourself, this includes any part-time business gig.
If you made or received a payment as a small business or as a self-employed person, you are generally required to file an information return to the IRS.
What are My Self-Employed Tax Obligations?
As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly. This is similar to the scheme that exist for an employed person whereby tax is withheld from their paychecks every time they are paid.
Unlike an employed person, self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. It should be noted that in general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other taxes like income tax.
Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business operations. This is done by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040.
You are required to file an income tax return if your net earnings from self-employment (excluding church income) were $400 or more or if you had church income of $108.28 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the instructions to Form 1040.
It is important to note that the self-employment tax rule is applicable irrespective of the age of the tax payer or even if the tax payer is already receiving social security or Medicare benefits. The SE tax rate on one’s earnings is calculated at 15.3% (12.4% social security tax plus 2.9% Medicare tax).
Also of importance is the fact that the maximum earnings subject to SE tax is the first $118,500 of your combined wages, tips, and net earnings in 2016.
All your combined wages, tips, and net earnings in 2016 are subject to any combination of the 2.9% Medicare part of SE tax, Medicare tax, or Medicare part of railroad retirement tax.
If wages and tips you receive as an employee are subject to either social security or the Tier 1 part of railroad retirement tax, or both, and total at least $118,500, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings. Deduct one-half of your SE tax as an adjustment to income on line 27 of Form 1040.
If you are married filing a joint return and your income exceeds $250, 000, if you are single and your income exceeds $125, 000 or you are head of household or qualifying widow(er) earning is over $200,000, an additional Medicare tax of 0.9% may apply. The threshold amount for applying the Additional Medicare Tax on the self-employment income is reduced by the amount of wages subject to Additional Medicare Tax (but not below zero) if you have both wages and self-employment income.
Making My Quarterly Payments?
Because of your self-employed status, estimated tax is the method used to pay Social Security and Medicare taxes and income tax this is due to the fact that you do not have an employer withholding these taxes for you. Form 1040-ES is used to figure these taxes and basically contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.
Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.
Blank vouchers are also included in Form 1040-ES that you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
Filing My Annual Return?
In-order to file your annual tax return, you will need to use Schedule C or Schedule C-EZ to report your income or loss from any business you operated or a profession you practiced as a sole proprietor. Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To find out if you can use Schedule C-EZ, see the instructions in the Schedule C-EZ form.
In order to report your Social Security and Medicare taxes, you must file Schedule SE Form 1040, Self-Employment Tax. Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year.
For all your small business tax and accounting related issues, the staff at Metro Accounting and Tax Services, CPA is your trusted partners. Call us today at 470-240-5143.
The decision to get married is more about romance than finances for most people. However, it should be noted that money is an integral part of what creates a compatible couple. For anyone getting married, it would be foolish to ignore the financial consequences of marriage – specifically, the tax implications. Smart couples face a number of key tax decisions that can save or cost them thousands of extra dollars per year in taxes. Today, Metro Accounting And Tax Services, CPAwill review the very important implications of getting married.
What are the major differences between married and unmarried couples?
When it comes to legal rights and being married vs. unmarried, there are several major issues to consider. Specifically, unmarried couples do not:
Have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, you may not have the right to do so.
What estate and financial planning steps are particularly important for unmarried couples?
The following steps are particularly important for couples who are not married:
Do married couples need life insurance?
The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case of your death. Therefore, married couples typically need more life insurance than their single counterparts. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance. Here are some typical families that need life insurance:
If one spouse changes their name after marriage, who should be notified?
You should notify all organizations with which you previously corresponded with your maiden name. The following is good list to start with:
Do I need to update my will when I get married?
Absolutely. Your will should be updated often, especially when such a significant life event occurs. Otherwise you spouse and other intended beneficiaries may not get what you intended upon your death.
What are the tax implications of marriage?
Once you are married you are entitled to file a joint income tax return. While this simplifies the filing process, you may find your tax bill either higher or lower than if each of you had remained single. Where it’s higher it’s because when you file jointly more of your income is taxed in the higher tax brackets. This is frequently referred to as the “marriage tax penalty.” Tax law changes in the form of marriage penalty relief were made permanent by the American Taxpayer Relief Act of 2012, but don’t eliminate the penalty for taxpayers in the higher brackets.
You cannot avoid the marriage penalty by filing separate returns after you’re married. In fact filing as “married filing separately” can actually increase your taxes. Consult Metro Accounting And Tax Services, CPA if you have any questions about the best filing status for your situation.
Note: Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or not.
In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
How can married couples hold property?
There are several ways of owning property after marriage, but keep in mind that they may vary from state to state. Here are the most common:
For these and other pertinent life changing events, let the Financial Advisors at Metro Accounting And Tax Services, CPA be your trusted financial partner. Call the office at 470-240-5143.
As a small business owner one of the biggest hurdles you’ll face in running your own business is trying to stay on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux making the Internal Revenue Code barely understandable to most people.
“Ignorance of the law is no excuse”, is perhaps most often applied in tax settings and it is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” excuse. However, it is surprising how many small businesses actually overpay their taxes, neglecting to take deductions they’re legally entitled to that can help them lower their tax bill.
Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have Metro Accounting And Tax Services, CPA handle your taxes.
As tax professionals, we have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.
When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.
A. All Start-Up Costs Are Immediately Deductible
Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start up and organizational costs are generally called capital expenditures.
Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.
Starting in tax year 2011, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized.
For example:
Let’s say you started a LLC in 2017. You have $10,000 in deductible startup costs and $2,000 in costs to set up the LLC. Here’s how the deduction might work:
B. Overpaying the IRS Makes You “Audit Proof”
The IRS doesn’t care if you over pay your taxes. All they care about is that you pay the right amount of taxes. They also care if you pay less taxes than you owe and you can’t substantiate your deductions.
It is important to note that even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.
C. Being incorporated enables you to take more deductions.
Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.
D. The home office deduction is a red flag for an audit.
While it used to be a red flag, this is no longer true–as long as you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio however, may raise a red flag and lead to an audit.
E. If you don’t take the home office deduction, business expenses are not deductible.
You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.
F. Requesting an extension on your taxes is an extension to pay taxes.
Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.
G. Part-time business owners cannot set up self-employed pensions.
If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor.
And, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If you have any questions, don’t hesitate to give us a call.
Part 1
By explaining what you need to make full use of your credit report, to determine your credit standing, and to maximize your chances for credit approval this Guide developed by Metro Accounting And Tax Services, CPA will help you to:
1)Better understand your credit report,
2)Know the meaning of jargon used in the credit industry, and
3)Find out exactly what you can do to improve your credit standing.
One question that is frequently asked is how do lenders determine who is approved for a credit card, mortgage, or car loan? Why are some individuals flooded with credit card offers while others get turned down routinely?
Because creditors keep their evaluation standards secret, it is difficult for you to know just how to improve your credit rating, that is, until now. This Financial Guide explains how, and gives you a look into the practices of lenders and credit bureaus.
Credit Evaluation Factors
When you apply for a loan, how is your application processed? In some cases, such as applying for a loan from your bank, it may as simple as going to the bank, giving brief information about why you need a loan, signing a loan contract and getting a check immediately. Other banks use loan committees – a group of bank employees who decide which applications to approve. Still others use sophisticated, complex computer analysis to evaluate applications.
Other creditors use credit scoring, this is the process in which point values are assigned to various credit characteristics. Those who get enough “points” get credit. Credit scoring can vary in complexity, according to the creditor’s policy.
Most creditors also have certain minimum requirements before they will consider an application. For instance, anyone who does not have a minimum annual income (perhaps $25,000) or who has been through bankruptcy may be automatically rejected.
However, most credit-scoring systems are more complicated than depicted here, with many different pieces of data selected to be analyzed for each application. A clerk enters information from both the credit application and the credit report onto a computer system, and the system evaluates it and produces an acceptance or rejection letter. Smaller creditors using a simpler credit scoring system have each loan evaluated by a loan officer who makes the decision.
The Age Factor
If a lender’s credit experience shows that people in a certain age group have a better record of paying their bills than people of other ages, the lender may – legally – give a higher score to the better-paying age group.
However, the Equal Credit Opportunity Act (ECOA), a federal law intended to prevent discrimination in lending, does not allow lenders to discriminate against people age 62 or over. The ECOA requires creditors using a scoring system to give those aged 62 and older an age-factor score at least as high as that given to anyone under age 62.
For example: A lender gives the following age scores to applicants:
A) Age 18 -25 Point = 1
B) Age 26 – 35 Points = 5
C) Age 36 – 45 Points = 4
D) Age 47 – 61 Points = 3
E) Age 62 and above Points = 5
To prevent discrimination against older people, the lender must give anyone age 62 or older at least 5 points for age, since 5 points is the highest score available to anyone under 62 (i.e., those aged 26-35).
The Residency Factor
Creditors may take into account your geographic location in scoring your length of time at one address. If you live in a city, where people move more often, the length of time at your address will probably count less than if you live in the country.
It is important to note that many creditors give a higher score to those who have lived at the same address for at least two years. Some lenders just give extra points for living in the same area for two years or more.
Also of importance is the fact that if your address is a post office box, you may find yourself turned down for credit. Also, to fight fraud, some creditors screen out applicants whose addresses indicate commercial offices, mail drops, or prisons.
Since post office boxes or rural delivery boxes are commonplace in rural areas, however, a lender may issue a card to that address while rejecting applicants with a P.O. Box in a large city.
People who own their homes earn a higher score than renters.
The “Authorized User” Or Payment History Factor
An authorized user is someone who has permission to use a credit card but is not legally liable for the bills. If you are an authorized user on someone’s account, the payment history will likely be reported in your credit file, but you will not be able to rely on it to help you build your own credit rating.
Please not that “an authorized user status” usually will neither help you nor hurt you when you apply for a loan.
The Bank Card History Factor
The reason a bankcard is a strong reference is that it shows a bank has trusted you with hundreds or even thousands of dollars on the basis of just your signature. Also, bankcards are more difficult to get than department store cards or travel and entertainment cards, so your qualifications must have been closely scrutinized when you applied.
So, one of the best things you can have on a credit report is a bankcard-a Visa, MasterCard or Discover card that has been paid on time over a period. In a scoring system, a good bankcard reference usually carries more weight than a department store card or American Express card.
Department store charge cards have lower credit limits and if used will typically have a higher debt to limit ratio, which has a negative impact on credit scores.
In addition, American Express is a charge card. As such users must pay in full, the amount due when the monthly statement arrives. There is no minimum payment, interest rate, or spending limit, and while American Express reports the high balance to credit bureaus, it doesn’t impact FICO credit scores.
The Checking And Savings Account Factor
People who have checking and savings accounts usually score better than those who do not. Some banks give you extra points if you have checking or savings accounts with them. Some banks also give discounts on loan rates when you hold other accounts with them.
As always, the CPAs at Metro Accounting And Tax Services, stand ready to assist you with all your accounting and any financial planning issues you might be experiencing in your business or personal life. Call the office today at 470-240-5143 for expert guidance.
In the spirit of helping business owners run and operate their businesses in an efficient manner, Metro Accounting And Tax Services, CPA has developed this business guide to ask the question, are you in a job or are you running a business? The goal here is to help small business owners make the transition from just going to a job to running a business. For all your accounting and business planning needs the CPAs at our office are ready to help you in this transformation process. Call us @ 470-240-5143.
As a business consulting “guru”, Michael Gerber observations concerning small businesses have had a profound impact on how business owners and aspirants saw their businesses and their role as a business owner.
Gerber observed that most people go into business for the wrong reason. Most people that start businesses are nothing but skilled technicians. They do a good job of what the business provides to the customer. They believe they can earn more by doing it in their own business than for someone else. They leave and open their own shop. This is what Gerber calls an “entrepreneurial seizure.”
There is the belief by these technicians that they will find more freedom in their business but they discover it is the hardest job in the world. There is no escape. They are the ones who are doing all the work! They are literally the “business!” But if they are the business, they haven’t really created a business at all. They have only created a job for themselves! They work longer hours and they work harder by trying to do everything themselves. The goal of every business owner according to Gerber should be to get their business set up and working efficiently but without them.
To empahsize, the role of the business owner is to create a business that works independently of him or herself. There is an “end point” where the business functions independently of the owner. At this point, the business owner may choose to sell it or not. By then, he or she will have created a ready-to-sell “money making machine” and may choose whether to devote effort to it or not. The business can also be duplicated from place to place.
The model for this effort is the “turnkey franchise,” such as McDonalds. The franchise creator, by establishing, documenting, and testing detailed systems, Ray Kroc made a uniform business with a certain look, providing a consistent experience to the customer. Ray controlled the design of the restaurant, sold uniformly made food and equipment, and provided the “scripts” for the service people. These scripts contained detailed procedures for preparing the food.
Likewise, the business owner should start with an idea of what this business should look like. This includes an organizational chart that could start with the business owner in each box. The chart documents the organization with responsibilities for chief executive, marketing, accounting, finance, and production employees. Gradually, the business owner tests, measures, and documents procedures for each position then replaces them with others until he or she isn’t needed at all.
The shorthand phrase for the business systems could be “Here’s how we do it here.”
The business becomes a learning place where each person finds satisfaction in performing their parts to the best of their abilities.
Small business owners should be grateful to Michael Gerber for his profound observations and the challenge he has presented to us. Each morning, we should ask ourselves: “Am I going to a business, or am I going to a job?” If we are going to a job, we have Gerber’s model for change.
Employees must think in order to provide outstanding service. Gerber’s approach can sometimes be inflexible when dealing with changes we deal with today.
More important than “Here’s how we do it here,” we need to know “What’s important here.” We need to define the values of our business. People need to be more important than the systems that are supposed to serve them. Systems shouldn’t override common sense.
Reducing your spending is one sure fire way to accumulate assets for retirement, education or other major goals in life. It has been shown that these savings can add up over the years to a substantially increased ones’ nest egg.
There is that familiar saying that “A penny saved is a penny earned” but this expression overlooks the impact of taxes; a saved penny is, in fact, worth more, often much more, than an earned penny because you pay tax on an earned penny but not on the penny you save.
Thus, tax-free savings, with earnings compounding over the years, can really increase your nest egg, making it worthwhile to explore the following money-saving techniques.
This Financial Guide compiled by Metro Accounting And Tax Services, CPA, provides you with 10 tips for making sure that more of your money is slated for saving and investment. To get started you should:
A. Prepare a Financial Plan
While the importance of a financial plan is appreciated by most people appreciate, too many put it off to tomorrow and tomorrow never comes. It is important to identify your goals and determine how best to achieve them. A financial plan can help you do this.
B. Save Your Income
For every payroll period make sure that you save a percentage of your paycheck, this can be done through the use of an automatic savings plan. The percentage saved should be determined by your financial planning needs. Some people need to save 10 percent of their gross pay while others need to save more. If the amount saved goes to a 401(k) plan or another tax-deferred plan, so much the better.
But don’t stop with automatic savings. Put aside everything you can. If you invest $50 a month in a mutual fund, you could have as much as $25,000 in ten years, depending on the rate of return. A well-thought-out budget will help you determine how much you should and can save.
C. Cut Your Mortgage Costs
D. Cut Your Consumer Debt
It is imperative that you try to cut your consumer debt as much as you can. To save interest, you can consider replacing your consumer debt with a no-fee, no-points home equity loan. The interest on a home equity line is deductible, however, bear in mind that you are putting your home at risk.
Once you have paid off a car loan or other debt, keep sending that payment to a mutual fund or other investment.
E. Cut Your Credit Card Costs
There are many ways to cut your credit card costs, e.g., switching to a card that charges less interest.
Its best to try to pay for everything in cash. It’s a good way of disciplining yourself.
F. Cut Your Bank Fees
There are many ways to reduce your bank fees. Consider:
You should stop using your ATM card if you find you are withdrawing too much cash. Make yourself go to the bank and withdraw the money instead. This may help you to spend less cash.
G. Fine Tune Your Insurance Coverage
Here are some ways to save on insurance of all types:
H. Cut Your Utility Costs
Here are some thoughts to keep in mind in cutting utility costs:
I. Cut Your Phone Bills
Today’s cost-cutting competition among phone service providers offers many opportunities for savings on your phone bills, such as:
J. Forego One Big Expense per Year
Foregoing one big expense per year will really help. For instance, skip your yearly vacation this year or take a less expensive one. Another way to save one big yearly expense is to swap an expensive health club membership for a YMCA plan.
For help with all your accounting, taxes and financial planning needs give the accountants at Metro Accounting And Tax Services a call at 470-240-5143.
As the year end approaches, businesses are scrambling to implement tax saving strategies to reduce their 2017 tax burden. Here are a number of year-end tax planning strategies developed by Metro Accounting And Tax Services that businesses can use to achieve this goal.
It should be noted that these are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2017. If you’d like more information about tax planning for 2018, please call to schedule a consultation to discuss your specific tax and financial needs, and develop a plan that works for your business.
Deferring Income
Businesses using the cash method of accounting can defer income into 2018 by delaying end-of-year invoices, so payment is not received until 2018. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2018.
Purchase New Business Equipment
Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2017 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $510,000 for the first $2,030,000 million of property placed in service by December 31, 2017. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.03 million threshold and eliminated above amounts exceeding $2.5 million.
Bonus Depreciation. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019.
Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. It is important to note that property placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Please contact the Metro Accounting And Tax Services if you have any questions regarding qualified property.
Timing Of Purchases
If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here’s a simplified explanation:
Conventions. The tax rules for depreciation include “conventions” or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.
Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year of depreciation on that machine.
If you’re planning on buying equipment for your business, call the office and speak with a tax professional who can help you figure out the best time to buy that equipment and take full advantage of these tax rules.
Other Year-End Moves to Take Advantage Of
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees (average annual wages of $52,400 in 2017) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).
Business Energy Investment Tax Credit. Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2021, and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include geothermal electric, large wind (expires in 2019), and solar energy systems used to generate electricity, to heat or cool (or to provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible; however, passive solar and solar pool-heating systems excluded are excluded. Utilities are allowed to use the credits as well.
Repair Regulations. Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor rule by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small business with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call us at 470-240-5143 if you would like more information on this topic.
Partnership or S-Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2017 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity’s tax year.
Caution: Remember that by increasing basis, you’re putting more of your funds at risk. Consider whether the loss signals further troubles ahead.
Section 199 Deduction. Businesses with manufacturing activities could qualify for a Section 199 domestic production activities deduction. By accelerating salaries or bonuses attributable to domestic production gross receipts in the last quarter of 2017, businesses can increase the amount of this deduction. Please call to the office at 470-240-5143 to find out how your business can take advantage of Section 199.
Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2017. Call today if you need help setting up a retirement plan.
Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.
A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Tip: Year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.
If you need help developing a budget for your business, don’t hesitate to call Metro Accounting And Tax Services @ 470-240-5143.
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How would you like to legally deduct every dime you spend on vacation this year? This financial guide offers strategies that help you do just that.
Mark is the owner of a small business and he decided that he wanted to take a two-week trip around the US. So, he did–and was able to legally deduct every dime that he spent on his “vacation.” Here’s how he did it.
1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible. That’s not the case and that will not pass the muster test with the IRS. In-order to make the trip deductible, you must have at least one business appointment before you leave in order to establish the “prior set business purpose” required by the IRS. Keeping this in mind, before he left for his trip, Mark set up appointments with business colleagues in the various cities that he planned to visit.
In this instance Mark is a manufacturer of green office products looking to expand his business and distribute more product. One possible way to establish business contacts–if he doesn’t already have them–is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination.
If Mark wanted to vacation in Hawaii for example and he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business.
It is imperative for Mark to document the business purpose of his trip by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.
2. Make Sure your Trip is All “Business Travel.”
In order to deduct all of your on-the-road business expenses, the travel must be business related. The IRS states that travel expenses are 100 percent deductible as long as your trip is business related and you are traveling away from your regular place of business longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home.
Let’s say Mark wanted to go to a regional meeting in Las Vegas, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.
Contrary to popular belief, you don’t need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.
3. Make sure that you deduct all of your on-the-road -expenses for each day you’re away.
You are allowed for every day you are on business travel to deduct 100 percent of lodging, tips, car rentals, and 50 percent of your food. Mark spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50 percent of this amount, or $25 per day. The IRS doesn’t require receipts for travel expense under $75 per expense–except for lodging.
If Mark pays $6 for drinks on the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.
He would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, place and business reason for the expense.
A receipt is however needed for all paid lodging. If Mark stays in the Bates Motel and spends $50 on lodging, will he need a receipt? The answer is yes as you need receipts for all paid lodging.
Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry-cleaning receipt and have your clothing dry cleaned within a day or two of getting home.
4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, did you know that you can deduct all on-the-road expenses during the weekend.
Mark makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.
5. Make the majority of your trip days business days.
The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities, otherwise, you cannot make any transportation deductions.
If Mark spends six days in Las Vegas. He leaves early on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?
All of them. Thursday is a business day since it includes traveling – even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.
Since Mark accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days of lodging costs, dry cleaning costs, shoe shines, and tips. The important point is that Mark would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.
With proper planning, Metro Accounting And Tax Services, CPA will show you how you can deduct most of your vacations if you combine them with business. Call the Office today, 470-240-5143 and we’ll show you how.
According to some business experts, having a healthy stream of cash flow is more important than your business’s ability to deliver its goods and services!
That’s a hard pill to swallow, but consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business! This cash flow guide was developed by Metro Accounting And Tax Services, CPA to help the small business owner navigate the choppy seas of running a business and being cash positive. For all your accounting needs please call the office at 470-240-5143 for expert advice and guidance.
Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflows and outflows. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables.
Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.
A certified accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.
Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.
Theoretically, even profitable companies can go bankrupt if they lack the cash flow and are unable to pay their bill when they become due. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.
Analyzing Your Cash Flow
The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.
· Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
· Inventory Management. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
· Cashflow Gaps. Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.
Plan cash flows. A failure to properly plan cash flow is one of the leading causes of small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.
A business’s monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.
Prepare a cash flow statement. Preparing, monitoring and managing your cash flow statement is critical to the effective and efficient running of any business operations. This aid in assessing the vitality of the business entity. The first signs of financial woe appear in your cash flow statement, giving you ample time to recognize a forthcoming problem and enough breathing space to deal with the underlying issues. With the periodic cash flow analysis, you can head off any unpleasant financial glitches and avoid unwanted surprises. You’ll be able to dial into the root cause of the problem and recognize aspects of your business that have the ability to cause and exacerbate cash flow gaps.
As always, the CPAs at Metro Accounting And Tax Services, stand ready to assist you with your cash flow or any other accounting issues you are experiencing in your business. Call the office today at 470-240-5143 for expert guidance.
Based on IRS guidelines, a taxpayer is allowed to deduct expenses related to business use of a home, but only if the space is used “exclusively” on a “regular basis” for business purposes. To qualify for a home office deduction, you must meet one of the following requirements:
A separate structure not attached to your dwelling unit that is used regularly and exclusively for your trade or profession also qualifies as a home office under the IRS definition.
The exclusive-use test is satisfied if a specific portion of the taxpayer’s home is used solely for business purposes or inventory storage. The regular-basis test is satisfied if the space is used on a continuing basis for business purposes. Incidental business use does not qualify.
In determining the principal place of business, the IRS considers two factors: Does the taxpayer spend more business-related time in the home office than anywhere else? Are the most significant revenue-generating activities performed in the home office? Both of these factors must be considered when determining the principal place of business.
Employees
To qualify for the home-office deduction, an employee must satisfy two additional criteria. First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job). Second, the taxpayer does not rent all or part of the home to the employer and use the rented portion to perform services as an employee for the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction.
Expenses
Home office expenses are classified into three categories:
Direct Business Expenses relate to expenses incurred for the business part of your home such as additional phone lines, long-distance calls, and optional phone services. Basic local telephone service charges (that is, monthly access charges) for the first phone line in the residence generally do not qualify for the deduction.
Indirect Business Expenses are expenditures that are related to running your home such as mortgage or rent, insurance, real estate taxes, utilities, and repairs.
Unrelated Expenses such as painting a room that is not used for business or lawn care are not deductible.
Deduction Limit
You can deduct all your business expenses related to the use of your home if your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation). But, if your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.
Nondeductible expenses such as insurance, utilities, and depreciation that are allocable to the business are limited to the gross income from the business use of your home minus the sum of the following:
If your deductions are greater than the current year’s limit, you can carry over the excess to the next year. They are subject to the deduction limit for that year, whether or not you live in the same home during that year.
Simplified Home Office Deduction
If you’re one of the more than 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction), don’t forget about the new simplified option available for taxpayers starting with 2013 tax returns. Taxpayers claiming the optional deduction will complete a significantly simplified form.
The new optional deduction is capped at $1,500 per year based on $5 a square foot for up to 300 square feet. Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.
Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
Tax Deductions
The “home office” tax deduction is valuable because it converts a portion of otherwise nondeductible expenses such as mortgage, rent, utilities and homeowners insurance into a deduction.
Remember however, that an individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the “principal place of business” as defined above. The IRS applies a 2-part test to determine if the home office is the principal place of business.
If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction cannot be taken.
A home office also increases your business miles because travel from your home office to a business destination–whether it’s meeting clients, picking up supplies, or visiting a job site–counts as business miles. And, you can depreciate furniture and equipment (purchased new for your business or converted to business use), as well as expense new equipment used in your business under the Section 179 expense election.
Taxpayers taking a deduction for business use of their home must complete Form 8829.
If you have a home office or are considering one, please call us.
Metro Accounting And Tax Services, CPA, 470-240-5143. We’ll be happy to help
You take advantage of these deductions.
In order to do your taxes, you’ll need to Keep detailed records of your income, expenses, and other information you report on your tax return. A complete set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.
There are several types of records that you should keep. Most experts believe it’s wise to keep most types of records for at least seven years, and some you should keep these records indefinately.
It is imperative that you keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.
Here’s a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:
While you’re storing your current year’s income and expense records, be sure to keep your bank account and loan records too, even though you don’t report them on your tax return. If the IRS believes you’ve underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be your saving grace.
One frequent question asked by tax payers is how long should they keep these records for. It is recommended that you keep the records of your current year’s income and expenses for as long as you may be called upon to prove the income or deduction if you’re audited.
For federal tax purposes, this is generally three years from the date you file your return (or the date it’s due, if that’s later), or two years from the date you actually pay the tax that’s due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:
1) You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2) You do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years
3) You file a fraudulent return; keep records indefinitely.
4) You do not file a return; keep records indefinitely.
5) You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
6) You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7) Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Another frequent question asked is if old tax returns should be kept, and if so for how long? The answer to this question again is a resounding yes.
One of the benefits of keeping your tax returns from year to year is that you can look at last year’s return while preparing this year’s. It’s a handy reference and reminds you of deductions you may have forgotten.
Another reason to keep your old tax returns is that there may be information in an old return that you need later.
Another reason to keep your tax returns is that if the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You’d think the IRS would have them handy, but that’s not the way it works. More than likely, your old returns are stored in a computer, in a storage area, or on microfilm somewhere. Usually, your IRS auditor has just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor’s request.
You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.
If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.
You’ll need to keep some other types of tax records and receipts because they tell you how much you paid for something that you may later sell.
These tax records may include:
These records should be kept for as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.
There are other records you should keep, even though they don’t appear to have any use for your tax returns. Here are a few examples:
Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.
Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.
To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It’s also helpful to keep each year’s records separate and clearly labeled.
If you have your own business, or if you’re a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.
If you donate to a charity, you must have receipts to prove your donation and beginning in 2007, contributions in cash or by check aren’t deductible at all unless substantiated by one of the following:
Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.
Also, if you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.
If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.
If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.
It’s important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.
If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.
Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.
If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.
This Financial Guide explains when and to what extent points paid on the purchase of a home or on a refinancing are deductible. It explains the rules for deducting points and discusses special circumstances and situations.
What Are Points?
The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
Points are prepaid interest and may be deductible as home mortgage interest if you itemize deductions on Form 1040, Schedule A. Generally, if you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you cannot deduct all the interest on your mortgage and you cannot deduct all your points.
One important point to note is that a borrower is treated as paying any points that a home seller pays on his or her behalf to obtain the mortgage.
Deductibility test.
Generally, the borrower cannot deduct the full amount of points in the year paid. Because they are prepaid interest, the borrower generally is required to deduct them over the life (term) of the mortgage.
However, the borrower can fully deduct points in the year paid if all of the following tests are applicable:
Home improvement loan. You can also fully deduct in the year paid points paid on a loan to improve your main home if statements (1) through (5) above are true.
Non-Deductible Amounts
You cannot deduct amounts charged by the lender for specific services connected to the loan that are not considered to be interest. These amounts cannot be deducted in the year paid or over the life of the mortgage. Examples of these charges are:
Points Paid by Seller
The term “points” includes loan placement fees that the seller pays to the lender on behalf of the buyer to secure the financing arrangement. The seller cannot deduct these fees as interest. But they are a selling expense that reduces the seller’s amount realized. The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. If all the tests explained earlier are met, the buyer can deduct the points in the year paid. If any of those tests is not met, the buyer deducts the points over the life of the loan.
Funds Provided Are Less than Points
If you meet all the tests referred to earlier; except that the funds you provided were less than the points charged to you (test 9), you can deduct the points in the year paid, up to the amount of funds you provided. In addition, you can deduct any points paid by the seller.
A) When you took out a $ 200,000 mortgage loan to buy your home in December, you were charged one point ($2,000). You meet all the nine tests for deducting points in the year paid, except the only funds you provided were a $1750 down payment. Of the $2,000 charged for points, you can deduct $1,750 in the year paid. You spread the remaining $250 over the life of the mortgage.
B) The facts are the same as above, except that the person who sold you your home also paid one point ($2,000) to help you get your mortgage. In the year paid, you can deduct $3,750 ($1750 of the amount you were charged plus the $2,000 paid by the seller). You must reduce the basis of your home by the $2,000 paid by the seller.
Excess Points
If you meet all the tests except that the points paid were more than generally paid in your area (test 3), you should deduct in the year paid only the points that are generally charged. You must spread any additional points over the life of the mortgage.
Points Paid on Second Home
The general rule of instant deductibility does not apply to points you pay on loans secured by your second home. You can deduct these points only over the life of the loan.
Mortgage Ends Early
If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.
A mortgage may end early due to a prepayment, refinancing, foreclosure, or any similar event.
A) Joan paid $3,000 in points in 2006 that she had to spread out over the 15-year life of the mortgage. She had deducted $1,200 of these points through 2011. Joan prepaid her mortgage in full in 2012. She can deduct the remaining $1,800 of points in 2012.
Points Paid on Refinancing
Even in the case of a refinancing and the mortgage is secure by your main home, generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them.
However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first five tests listed earlier; you can fully deduct the part of the points related to the improvement in the year paid. You can deduct the rest of the points over the life of the loan.
A) In 1999, Joe Gibbs got a mortgage to buy a home. The interest rate on that mortgage loan was 11 percent. In 2008, Joe refinanced that mortgage with a 15-year $100,000 mortgage loan that has an interest rate of 7 percent. The mortgage is secured by his home. To get the new loan, he had to pay three points ($3,000). Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Joe paid the points out of his private funds, rather than out of the proceeds of the new loan. The payment of points is an established practice in the area and the points charged are not more than the amount generally charged there. Joe’s first payment on the new loan was due July 1. He made six payments on the loan in 2008 and is a cash basis taxpayer.
Joe used the funds from the new mortgage to repay his existing mortgage. Although the new mortgage loan was for Joe’s continued ownership of his main home, it was not for the purchase or improvement of that home. For that reason, Joe does not meet all the tests, and he cannot deduct all of the points in 2008. He can deduct two points ($2,000) ratable over the life of the loan. He deducts $67 [($2,000 ÷ 180 months) x 6 payments] of the points in 2008. The other point ($1,000) was a fee for services and is not deductible.
B) The facts are the same as above, except that Joe used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Joe deducts 25 percent ($25,000 ÷ $100,000) of the $2,000 prepaid interest in 2008. His deduction is $500 ($2,000 x 0.25).
Joe also deducts the ratable part of the remaining $1,500 ($2,000 – $500) prepaid interest that must be spread over the life of the loan. This is $50 [($1,500 ÷ 180 months) x 6 payments] in 2008. The total amount Joe deducts in 2008 is $550 ($500 + $50).
It is important to note also that you cannot fully deduct points paid on a mortgage that exceeds the limits on the home mortage.
The mortgage interest statement (Form 1098) you receive should show not only the total interest paid during the year but also your deductible points.
The statement will show the total interest you paid during the year. If you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. However, it should not show any interest that was paid for you by a government agency.
As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan.
Since charities ask for larger and more frequent donations from the public these days, soliciting by mail, telephone, television, and radio, for example, they should be checked out before you donate money or time. Here are some tips on how to maximize your charity dollar and avoid scams.
Avoid Being Ripped-Off
Avoid being ripped-off by charities, here are some basic, common-sense suggestions for avoiding rip-offs in making charitable contributions:
Volunteering
Although volunteering your time can be personally rewarding, it is important to consider the following factors before committing yourself:
Tip: Although the value of your time as a volunteer is not deductible, out-of-pocket expenses (including transportation costs) are generally deductible.
Direct Mail Solicitation
As the old saying goes, trust but verify. Many charities use direct mail to raise funds. While the overwhelming majority of these appeals are accurate and truthful, be aware of the following:
Caution: Deceptive-invoice appeals are most often aimed at businesses, not individuals. If you receive one of these, contact your local Better Business Bureau.
Public Education Solicitation
If you respond to mail appeals, you should be aware that certain charities consider this to be a significant part of their educational budgets. In a recent survey, half of 150 well-known national charities included their direct mail and other fund-raising appeals in their public education programs. This practice makes fund-raising drives look like a smaller part of a charity’s expenses than they are. These 75 charities allocated $160 million of their direct mail and other appeal costs to public education programs.
For example: A charity whose purpose is to combat cruelty to animals uses direct mail to raise funds. The cost of a nationwide direct mail campaign is $1 million much more than the $200,000 the charity has budgeted for its program of research grants. This embarrassingly high allotment for fund-raising costs can be significantly reduced if the direct mail pieces include some information about cruelty to animals. Since the information is considered educational, the charity calls it a program expense and allots half the cost of the mailing to public education, thus reducing fund-raising expenses from $1 million to only $500,000, and bumping up program spending from $200,000 to $700,000.
The line between pure fund-raising and genuine public education activities is not always clear. However, if the charity is confident that the fund-raising appeal truly serves its educational purposes, it should be willing to disclose this fact in the appeal. This disclosure allows donors to make an informed decision about whether to support the activity.
Giving of Money or Time
If approached by a charity to make a contribution of time or money, ask questions – and do not give until you are satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of any reluctance to answer reasonable questions.
Caution: Contributions to tax-exempt organizations are not always tax-deductible.
Caution: Registration, by itself, does not mean that the state or local government endorses the charity.
Sweepstakes Appeals
For many years it has been the practice of companies to use sweepstakes mailings to promote their products, this practice have recently become popular with charities. Here are some points to consider when reviewing a sweepstakes appeal.
* If you wish to participate, read the sweepstakes promotion and direct mail contents carefully. Your entry may be discarded if the rules are not followed to the letter.
Caution: For a national campaign, the probability of winning the big prize may be quite low. Some campaigns involve mailings of a half-million to ten million or more letters.
Caution: If you are considering a donation, check out the appeal as you would any other request for funds. Does it clearly specify the programs your gift would be supporting? Do not hesitate to ask for more information on the charity’s finances and activities.
Charity Thrift Stores
Becuase all charity thrift stores do not necessarily operate the same way, it is important to find out if the charity is benefiting from thrift sales. There are three major types of thrift store operations:
Tip: The fair market value of goods donated to a thrift store is deductible as a charitable donation, as long as the store is operated by a charity. To determine the fair market value, visit a thrift store and check the going rate for comparable items. If you are donating directly to a for-profit thrift store or if your merchandise is sold on a consignment basis whereby you get a percentage of the sale, the thrift contribution is not deductible.
Tip: Remember to ask for a receipt that is properly authorized by the charity. It is up to the donor to set a value on the donated item.
Caution: If you plan to donate a large or unusual item, check with the charity first to determine if it is acceptable.
If you are approached to donate goods for thrift purposes, ask how the charity will benefit financially. If the goods will be sold by the charity to a third party such as an independently managed thrift store, then ask what the charity’s share will be.
Tip: Sometimes the charity receives a small percentage, e.g., 5 to 20 percent of the gross or a flat fee per bag of goods collected.
Charity Fundraiser
Dinners, luncheons, galas, tournaments, circuses, and other events are often put on by charities to raise funds. Here are some points to consider before deciding to participate in such events.
Tip: If you decide not to use the tickets, give them back to the charity. In order to be able to deduct the full amount paid, you must either refuse to accept the tickets or return them to the charitable organization. In this way, you will not have received value for your payment.
Caution: Make donations by check or money order out to the full name of the charity and not to the sponsoring show company or to an individual who may be collecting donations in person.
Tip: Ask the charity what anticipated portion of the purchase price will benefit the organization.
Caution: It has happened that the number of children eligible to receive free tickets has been limited or transportation has not been arranged. So, in effect, free tickets given to the few needy children who attend the event are paid for many times over by businesses and individuals who purchase tickets.
Affinity Credit Cards
Also, you may receive an offer to apply for an affinity credit card bearing the name and logo of a particular charity. Sometimes this is offered exclusively to an organization’s donors or members, these cards are issued by banks and credit card companies under agreements worked out with individual charities. These cards are just like other credit cards, but the specified charity gets some kind of financial benefit.
All affinity credit cards are not created equal. Offers vary in terms of how the charity benefits as well as the terms of the credit agreement with consumers. So check the terms carefully!
Caution: Consider the specific terms as you would any credit card offer: the amount of the interest rate/finance charges, the amount of the annual fee, if any, the amount of late fees and over-the-limit fees, if any, and the length of the grace period, or amount of time after which finance charges begin to accrue on any unpaid balance.
The charity usually receives a benefit in one or more of the following ways:
Caution: Make sure the promotional literature states exactly how the charity benefits. For example, one affinity card offer declared that a specified national charity would receive half of one percent of all transactions made with the card (that works out to 5 cents for every $10 worth of purchases). If the financial benefit for the charity is not spelled out, then ask.
Caution: Contributions made by a bank and/or credit card company through the use of an affinity credit card are not deductible to consumers as charitable donations for federal income tax purposes.
Remember also to consider your interest in the charity and not to hesitate to seek out more information on the charity’s programs and finances.
Tip: If saving money is your bottom line, make a direct donation to the charity and seek a credit card with the best terms and lowest interest rates, regardless of affinity.
Charity Marketing
When considerting promotions that partner charities and businesses make the following points should be kept in mind:
Natural Disaster Appeal
When disaster strikes be very careful about your chartiy givings. The tragedy of a flood, massive fire, hurricane, earthquake, or another disaster always triggers an outpouring of public support and concern. During such crises, watch out for fraudulent appeals by some who see disasters as an opportunity to take advantage of American concern and generosity.
Examine your options instead of giving to the first charity from which you receive an appeal. There will be a variety of relief efforts responding to the diverse needs of disaster victims. Be wary of appeals that are long on emotion and short on what the charity will do to address the specific disaster.
Caution: Ask how much of your gift will be used for the crisis and how much will go towards other programs and to administrative and fund-raising costs. And find out what the charity intends to do with any excess contributions remaining after the crisis has ended.
Check with organizations before donating goods for overseas disaster relief. Most groups involved in overseas relief will not accept donated goods since purchasing goods overseas is often less expensive and more efficient. If a charity accepts donated items, ask about their arrangements for shipping and distribution.
Some charities change their program focus during a crisis in order to respond to the changing needs of disaster victims. Do not assume the charity will carry out the same activities throughout a crisis situation.
Police and Fire Fighter Affiliation
For charities claiming affiliation with Police and Firefighters, potential donors should be aware of the following points.
Caution:
Children Affiliated Charities
Not all sponsorship programs are alike. Sponsored donations usually benefit a project for an entire community (for example, medical care, education, food) and not the sponsored child exclusively. Some groups believe this is the most effective way to make significant and lasting changes in a child’s living conditions. Other organizations do give a certain amount of the contribution directly to the sponsored child. Before deciding to participate in a sponsorship program, you may want to consider the following:
Tip: Contact other child sponsors to get a sense of their overall satisfaction with the organization.
Local or National Charity
While some organizations are a single entity under one name, others may be a network of local affiliates or chapters. If you give to a local chapter or affiliate, do not assume your donation will be spent locally. Nor should you assume that a chapter’s operations are fully controlled by the national office.
Many different types of relationships can exist between a charity’s national office and its chapters. Here are three possible relationships chapters:
Caution: The bottom line for you is that, depending on the organization’s structure, the local affiliate may carry out different activities from those of the national office. It is important to inquire about this difference. In addition, donors may want to identify how much of a local affiliate’s contributions are spent on local programs.
Caution: When considering a donation to a local chapter, it is wise to check out the chapter separately.
Government and Non-Profit Agencies
When Government and Non-Profit Agencies solicits donations beaware of the following:
In continuation of our discussion on LLCs, Metro Accounting And Tax Services, CPA, presents this guide with the intent that small business owners will fully grasp the merits of forming LLCs. For this and all your accounting needs don’t hesitate to contact our office at 470-240-5143, our CPAs are ready to answer your questions and point you in the right direction.
Advantages of a LLC
A LLC is really the art of combining the best aspects of partnerships and corporations.
A Limited Liability Company, or LLC, is not a corporation, although it offers many of the same advantages. An LLC is best described as a combination of a corporation and a partnership. LLCs offer the limited liability of a corporation while allowing more flexibility in managing the business and organization.
An LLC does not pay any income tax itself. It’s a “flow through” entity that allows profits and losses to flow through to the tax returns of the individual members, avoiding the double taxation of C corporations.
While setting up an LLC can be more difficult than creating a partnership (or sole proprietorship), running one is significantly easier than running a corporation. Here are the main features of an LLC:
Limited Personal Liability
Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can’t pay a creditor — such as a supplier, a lender, or a landlord — the creditor cannot legally come after any LLC member’s house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they’ve invested in the LLC. This feature is often called “limited liability.”
While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute.
LLC Taxes
Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a “pass-through entity,” like a partnership or sole proprietorship. This means that business income passes through the business to the LLC members, who report their share of profits — or losses — on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.
While an LLC itself doesn’t pay taxes, co-owned LLCs must file Form 1065, an informational return, with the IRS each year. This form, the same one that a partnership files, sets out each LLC member’s share of the LLC’s profits (or losses), which the IRS reviews to make sure the LLC members are correctly reporting their income.
LLC Management
The owners of most small LLCs participate equally in the management of their business. This arrangement is called “member management.”
The alternative management structure — somewhat awkwardly called “manager management” — means that you designate one or more owners (or even an outsider) to take responsibility for managing the LLC. The non-managing owners (sometimes family members who have invested in the company) simply sit back and share in LLC profits. In a manager-managed LLC, only the named managers get to vote on management decisions and act as agents of the LLC.
Exceptions to Limited Liability
While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however — the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:
This last exception is the most important. In some circumstances, a court might say that the LLC doesn’t really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:
A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client’s back; your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.
In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they’re personally guaranteed.
You should consider forming a LLC (limited liability company) if you are concerned about personal exposure to lawsuits arising from your business. A LLC generally limits the liability of the company to its assets and protects the owner from being personally liable for any excess debts that the company’s assest fail to cover. For example, if you decide to open a store-front business that deals directly with the public, you may worry that your commercial liability insurance won’t fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better because it instantly gives you personal protection against these and other potential claims against your business.
Not all businesses can operate as LLCs, however. Businesses in the banking, trust, and insurance industry, for example, are typically prohibited from forming LLCs.
LLC or a S-corporation, which is the better choice?
While the S-corporation’s special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.
An LLC may offer several classes of membership interests while an S-corporation may only have one class of stock.
Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S-corporation is limited to no more than 100 shareholders. Also, S-corporations cannot be owned by C-corporations, other S-corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.
Is an operating agreement needed?
An LLC operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners establish each owner’s percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves.
Although most states’ LLC laws don’t require a written operating agreement, you shouldn’t consider starting business without one. Here’s why an operating agreement is necessary:
Are LLCs required to hold meetings?
Although a corporation’s failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in many states. In California for example, an LLC’s failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC’s Articles of Organization or Operating Agreement do not expressly require such meetings.
Exceptions to Limited Liability
While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however — the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:
In some circumstances, a court might say that the LLC doesn’t really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. This is called “Piercing Of The Veil“. To keep this from happening, make sure you and your co-owners:
A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client’s back; your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.
In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they’re personally guaranteed.
If like thousands of other persons, you are having trouble paying your debts, it is important to take action. Doing nothing can lead to much larger problems in the future–and even bigger debts, such as the loss of assets such as your house, and a bad credit record. This Financial Guide suggests how you can get started on the road to financial freedom by reducing your debts and exercise better manage your hard-earned money.
How can you tell when you have too much debt? What if bill collectors are not calling yet, but you are having difficulty paying monthly bills? The following are tell-tale signs that you need to look closely at your situation and take action.
If you find any of these statements apply to you, you may need to learn more about managing debt before you try to reestablish credit.
Let’s Get Started
Here are some specific steps you can take if you are in financial trouble:
1. Review each debt. Make sure that the debt creditors claim you owe is really what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.
2. Contact your creditors. Let your creditors know that you are having difficulty making your payments. Tell them why you are having trouble–perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.
If you own an automobile, most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.
3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and healthcare) and optional expenses (such as entertainment and vacation travel). Stick to the plan.
It is recommended that you try self-budgeting before taking more extreme measures.
4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation or using a car sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.
5. Pay down debts using savings. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense.
If you own more than one automobile selling off one might not be a bad idea as such sale will not only provide you with needed cash but it will also reduce your insurance and other maintenance expenses.
6. Find out if you are eligible for social services. Government assistance includes unemployment compensation, Temporary Assistance for Needy Families (TANF) formerly Aid to Families with Dependent Children (AFDC), food stamps, now known as Supplemental Nutrition Assistance Program (SNAP), low-income energy assistance, Medicaid, and Social Security (including disability). Other resources may be available from churches and community groups.
7. Try to consolidate your debts. There are a number of ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage. However, be very wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.
8. Prepare a financial plan. A financial plan can alleviate financial worries about the future and ensure that you will meet your financial goals whether they relate to retirement, asset acquisition, education, or just vacations.
For your financial guidance let the Advisors at Metro Accounting And Tax Services, CPA be your partner in the process of getting your life back on track. Call us today @ 470-240-5143.
As is often times the case, a passive activity is any business activity in which the tax payer is not an active participant, for example, real estate rental activity in which the owner is not actively engaged for a set amount of time per year.
Non-passive activities are businesses in which the taxpayer works on a regular, continuous, and substantial basis. In addition, passive income does not include salaries, portfolio, or investment income.
The passive activity loss rules are applied at the individual level but its impact extends to virtually every business or rental activity whether reported on Schedules C, F, or E, as well as to flow through income and losses from partnerships, S- Corporations, and trusts.
As a generally rule the law does not apply to regular C-Corporations but it does have limited application to closely held corporations. Passive activities can be categorized as either:
1) Rental activity – both equipment and real estate rentals
2) Business activity – businesses in which there is not a material participation on a regular or continuous basis by the taxpayer
On a tax return, income can be categorized as being derived from either a passive or non-passive activity involvement. Passive activity income are those incomes derived without any material participation in the activity undertaken. In the case of a partnership, a limited partner’s income is considered passive as there is no material participation on his part.
The important point to note is that the level of participation is the key determining factor for the income categorization as passive as opposed to active income.
However, it is to be noted that rental activity is deemed a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. The rule applies to all individuals, estates and trusts, personal service corporations and even to closely held corporations. The rule is also applicable to owners of partnerships, s corporations and grantor trusts.
By definition your passive activity loss for the tax year is the excess of all passive activity deductions over all passive activity income. These losses are generally not allowed but there is a special allowance under which some or all of your passive activity loss may be allowed.
The CPAs at Metro Accounting And Tax Services will be happy to show how this is possible. Call the office today 470-240-5143.
This business structure guide was developed by Metro Accounting and Tax Services, CPA, with a view of helping current and prospective business owners decide on the business structure that’s in-line with their business goals and the one that will provide the greatest tax benefit.
When going into business it is important to select the correct form of business structure you want to establish. This decision can have many life and tax related consequences if not done properly. The type of entity formed will determine among other things, which income tax form or forms you’ll have to file.
The most common types of business structures are: Sole Proprietorship, Partnership, Corporation, S Corporation and Limited Liability Company (LLC).
Sole Proprietorship
A sole proprietor is someone who owns an unincorporated business by himself or herself. A sole proprietor has unlimited liability for the debts of the company. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.
A sole proprietor who is liable for:
1) Income tax generally uses form 1040, that is U.S Individual Tax Return and Schedule C (Form 1040) Profit or Loss from Business or Schedule C-EZ (Form 1040), Net Profit from Business.
2) Self-employment tax uses Schedule SE (Form 1040).
3) Estimated taxes files Form 1040-ES.
4) Social security and Medicare taxes and all income tax withholdings files Form 941, Employer’s Quarterly Federal Tax Return, Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees and Form 944 for the Employer’s Annual Federal Tax Return.
5) For providing information on Social security and Medicare tax withholdings, files Form W-2, wage and tax Statement prepared for employees and Form W-3, Transmittal of Wages and Tax Statements is provided to the Social Security Administration.
6) For Federal unemployment tax (FUTA), files Form 940, Employer’s Annual Federal Unemployment Tax Return.
Partnership
A partnership is the business engagement of two or more persons with the goal of carrying on a trade or business with the intent to make a profit. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses from its operations as it does not pay income tax. Instead, any gains or losses are “passes through” to the partners according to their profit sharing agreement. Each partner includes his or her share of the partnership’s income or loss on his or her individual tax return.
Partners are not employees of the partnership, they are owners and they are not issued Form W-2. Instead a partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the required filling due date. The K-1 basically record the Partner’s share of profit or loss over the period.
A partnership or a partner may use the following forms for tax purposes depending of their individual situation:
1) Annual tax return for the partnership uses Form 1065, U.S, Return of Partnership Income.
2) For the filling of employment taxes, use Form 941, Employer’s Quarterly Federal Tax Return and Form 943, Employer’s Annual Federal Tax Return for Agricultural purposes.
Partners in a partnership may be required to file:
1) Income Tax – Form 1040, Individual Income Tax Return and Schedule E, Supplemental Income and Loss (Form 1040).
2) Self-employment tax – Schedule SE (Form 1040)
3) Estimated tax – 1040-ES, Estimated Tax for Individuals
Corporation
A Corporation is made up of shareholders. Prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions.
From an income tax perspective, a corporation is recognized as a separate taxpaying entity. The corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. Shareholders are limited to their contributed capital for the liability of the company.
The profit of the corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any losses of the corporation.
Forms that might be required to be filled by the corporation includes:
1) For Income Tax – 1120, U.S. Corporation Income Tax Return
2) For Estimated Tax – 1120-W, Estimated Tax for Corporations
3) For Employment Taxes – 941, Employer’s Quarterly Federal Tax Return, or 943, Employer’s Annual Federal Tax Return for Agricultural Employees
4) Unemployment tax – 940, Employer’s Annual Federal Unemployment (FUTA) Tax return
S Corporation
It is important to note that a S Corporation is firstly another business structure that elects to be treated as a S Corporation for tax purposes. So, we might have a corporation that elects to be treated as a S corporation to avoid paying taxes twice. With the S corporation status, corporate income, losses, deductions, and credits are passed through to the shareholders for federal tax purposes. Shareholders of S corporation report the flow-through income and losses on their personal tax returns and are assess tax at their individual income tax rates.
This allows the S corporation to avoid double taxation on corporate income, that is at the corporate level and then at the dividend level. This is one of the advantages why corporations often times make the S election.
S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
The election to S status is done by the corporation submitting Form 2553, Election by a Small Business Corporation. This form must be signed by all the shareholders.
Forms that might be required to be filled by the S-corporation includes:
1) For Income Tax – 1120S, U.S. Corporation Income Tax Return, 1120s Sch. K-1
2) For Estimated Tax – 1120-W, Estimated Tax for Corporations and 8109
3) For Employment Taxes – 941, Employer’s Quarterly Federal Tax Return, or 943, Employer’s Annual Federal Tax Return for Agricultural Employees
4) Unemployment tax – 940, Employer’s Annual Federal Unemployment (FUTA) Tax return,
Forms that might be required to be filled by the S-corporation Shareholders.
1) For Income Tax – 1040 & Schedule E or other forms referenced on the K-1.
2) For Estimated Tax – 1040 ES
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. As of such, each state may use different regulations, and it is imperative that you check with the state in which you want to form your Limited Liability Company for their regulations.
Owners of a LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.
However, a few types of businesses generally cannot be LLCs. These includes banks and insurance companies. Again, please check your state’s requirements and the federal tax regulations before you proceed.
Classifications
The IRS will treat a LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”), depending on elections made by the LLC and the number of members it has.
A two-member domestic LLC is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.
A LLC with only one member is treated as a disregarded entity as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.
Entity Classification Election
An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances.
This guide was developed by Metro Accounting And Tax Services, CPA to aid individuals and business owners avoid tax penalties via the payment of estimated taxes. It is said that there are two things that are unavoidable in life, that is death and taxes. Taxes must be paid as you earn or receive income during the year, this is done either through withholding or through estimated tax payments.
If there is a shortfall in the payment of your taxes, whether due to the fact that the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. Self-employed persons are also generally required to make estimated tax payments. Estimated tax payment covers income tax and other taxes such as self-employment tax and alternative minimum tax.
You may be assessed a tax penalty if you don’t pay enough tax through withholding or estimated tax payments. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
Who Must Pay Estimated Tax
If you expect to owe taxes of $1,000 or more when your return is filed, you generally have to make estimated tax payments. This goes for Individuals, including sole proprietors, partners, and S corporation shareholders.
Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. For the current year you may have to pay estimated taxes if the prior year tax was more than zero.
Who Does Not Have To Pay Estimated Tax
Wage and salary earners can avoid having to pay estimated taxes by asking their employer to withhold more tax from their earnings. This change is done via Form W4. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.
Figuring Your Estimated Tax
To figure your estimated tax, Form 1040-ES is used for individuals, including sole proprietors, partners, and S corporation shareholders.
Your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year are taken into consideration.
It may be helpful to use your income, deductions, and credits for the prior year as a starting point. You need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high in one quarter, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. Similarly, if you estimated your earnings too low in one quarter, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. It is imperative that you estimate your income as accurately as you can to avoid penalties.
It is important to note that you must make adjustments both for changes in your own situation and for recent changes in the tax law.
Corporations generally use Form 1120-W to figure their estimated tax payments.
When To Pay Estimated Taxes
For estimated tax purposes, the year is divided into four payment periods. For each period payment can be made to the IRS online, by phone, or by mail.
Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using this system. It might be easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. as long as you’ve paid enough in by the end of the quarter. The EFTPS also allows you to view a history of your payments, so you know how much and when you made your estimated tax payments.
Corporations are required to use the Electronic Federal Tax Payment System for all estimated tax payments.
Penalty for Underpayment of Estimated Tax
You may have to pay a penalty if you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments.
The penalty may also be waived if:
For guidance with all your accounting and tax matters, don’t hesitate to call the office 470-240-5143. We’ll provide you with knowledgeable expert advice to help you make the right decision and avoid tax penalties.
All Things QuickBooks Online
Posting Transactions
There are two types of transactions you’ll need to consider when using QuickBooks Online. These are posting and non-posting transactions. This accounting Guide developed by Metro Accounting and Tax Services, CPA, is designed to help QBO users understand the differences between both types of transactions. It is also important for QBO user to understand the difference between accrual and cash basis accounting, sales vs income recording and reporting. For more guidance on this and all things QBO, don’t hesitate to call the office at 470-240-5143.
Posting transactions record debits and credits to the general ledger. For example, an invoice prepared for a customer posts as a debit to accounts receivable and a credit to an income account. Posting transactions in QuickBooks Online related to Customer Sales include:
1. Invoice
2. Receive Payment
3. Credit memo
4. Sales receipt
5. Refund
Non-Posting Transactions
Non-posting transactions on the other hand facilitate the business cycle by storing detailed information which may be used in a related posting transaction. They do not post a debit or credit to the general ledger.
For example, an estimate is a non-posting transaction; it stores detailed information about proposed products and services you would like to sell to a customer, including notes and attachments related to the proposed sale.
Upon acceptance of the estimate and delivery of the goods and services, you can convert the estimate into an invoice. The invoice will debit and credit the general ledger; the estimate does not.
If the estimate is not accepted by the customer, it is marked as rejected and nothing will post to the general ledger. Non-posting transactions in QuickBooks Online related to Customer Sales include:
1. Estimate
2. Delayed charges
3. Delayed credit
Accrual vs. Cash Basis of Accounting
For posting transactions, the date the transaction is recorded may be different than the date it is reported. The accrual basis accounting method involves reporting income at the time it is earned, not when the payment is made by the customer.
For example, credit sales are made to a customer on 1/1/2017. Payment is received for the sales on 2/1/2017.
On 1/1/2017 the sales would be recorded as usual but because payment was not received at that time, Accounts Receivable would be debited instead of the bank or cash account. This is what the accrual method of accounting does, it allows you to record the sales transaction even though no payment was received for the sales at that time.
The cash basis accounting method involves reporting income in the period the cash is received from the customer, regardless of when the product was sold or when the service was performed.
For the cash basis accounting method, in the above example sales would be recorded on 2/1/2017 when the cash is actually received. Accounts receivable would not play a part in this basis of accounting.
Sales vs. Income: Recording
To record a sale in QBO, use a sales form with a product/service item. Sales forms are used to record financial transactions related to money coming into the business.
Sales forms are found on the Quick Create menu in the Customers column. When you use product/service items on a sales form (invoice or sales receipt), sales activity will be posted to the income account that is mapped in the product/service item’s Sales Information section in the field that is labeled Income Account.
If you do not use a sales form or product/service item, you can record income directly by using any transaction that lets you select an income account from an account dropdown menu. For example, a deposit will be posted to the income account you select. A deposit transaction will not be included in Sales reports.
Sales vs. Income Reporting
It’s important to understand the difference in terminology between sales vs. income in QuickBooks Online.
• Income (or Revenue) is recorded directly by selecting an income account from an account drop-down field on a transaction, such as a deposit or journal entry.
On a Profit & Loss report, you can drill down into the income account and find this transaction.
On a Sales Report, transactions recorded directly to accounts will not be included.
• Sales are recorded by using a sales form and product/service item to record the income to the account mapped to that product/service item.
In the end, the sale may be recorded to the same income account as if you had posted it there directly, but using product service items gives you more options for reporting and more control on how activity is recorded.
On a Profit & Loss report, you can drill down into the income account and find transactions posted directly to income accounts and transactions posted by sales forms using product/service items mapped to that income account.
On a Sales Report, only transactions recorded using sales forms and product/service items will be included.
All posting transactions record activity to the general ledger and can be found on a financial report, such as the Profit & Loss report. However, only transactions posted using product/service items on sales forms will be found on QuickBooks On line’s sales reports.
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business operates to make a profit. For expert guidance on this and other accounting issues you might be facing in your business contact the office of Metro Accounting And Taxes, CPA and we’ll guide you through the maze of accounting possibilities.
1) What can I deduct?
2) Cost of Goods Sold
3) Capital Expenditures
4) Personal Expenses Vs Business Expenses
5) Business Use of Your Home
6) Business Use of Your Automobile
7) Other Types of Business Expenses
It is important to note that if you do not carry on the activity to make a profit, you must report all of the gross income (without deductions) from the activity on Form 1040, line 21. Special limits apply to what expenses for a not-for-profit activity are deductible.
What Expenses Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. The cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold.
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are less than $10 million.
Capital Expenses
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. In general, there are three types of costs you capitalize.
Note: You can elect to deduct or amortize certain business start-up costs.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses
This list is not all inclusive of the types of business expenses that you can deduct. For additional information.
A) Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
B) Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
C) Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
D) Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
E) Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business
as business expenses.
F) Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
Call the office today for all your accounting needs, 470-240-5143.
There are a number of tax vehicles for turning charitable desires into tax deductions. While these techniques are quite complex, they can with the proper guidance provide substantial tax deductions. This Financial Guide by Metro Accounting And Tax Services, CPA, provides an introductory view of the ways to maximize your tax deduction while satisfying your charitable goals.
When an organization claims to be tax-exempt, it does not necessarily mean that contributions are deductible. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these offer tax-deductibility for donations.
The well-known mainstream charities generally provide deductibility for donations. But, surprisingly, some well-known organizations do not. If deductibility is a factor in your decision to make a contribution to a tax-exempt organization, especially if the amount is substantial, you might want to determine whether the organization qualifies for deductibility. IRS Publication 78, the Cumulative List of Organizations, is an annual list of those charities eligible for deductibility. You can also call the IRS (800-829-1040) about the deductibility of a contribution if you’re in doubt.
You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location. These three publicly available documents are:
· Form 1023: the application filed by the charity to obtain tax-exempt status.
· IRS Letter of Determination: the two-page IRS letter that notifies the organization of its tax-exempt status.
· Form 990: the financial/income tax form filed with the IRS annually by the charity. (Charities with a gross income of less than $25,000 and churches are not required to file this form). Among other things, Form 990 includes information on the charity’s income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity’s five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.
Even though the charity qualifies for deductibility, taxpayers are often disappointed to learn that their expected deductions are not allowed. Here are some of the common misconceptions about the deductibility of charitable contributions:
· If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. For example, if you pay $500 for a charity luncheon worth $200, only $300 can be deducted. An exception allows you to deduct the full amount if what you get in return is insubstantial in value (e.g., 2 percent of the value of your contribution) and the charity tells you the deductible amount.
· Since contributions are deductible only for the year in which they are actually paid or delivered, pledges are not deductible until they are paid.
· It’s a mistake to believe you can deduct estimated cash contributions. This was widely done though IRS required you to make a record of some kind at or around the time of the gift. But cash contributions in 2007 and after aren’t deductible at all unless substantiated by a receipt from the charity, a canceled check, a credit card statement or other supporting documentation from the charity.
· No donation of $250 or more is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
· Since contributions must be made to qualified organizations to be tax-deductible, donations made directly to needy individuals are not deductible.
Planned or Deferred Giving
There are a number of sophisticated techniques for giving money to a charity that differ substantially from the usual method of just writing a check. You’ve probably been approached by a number of charitable organizations suggesting ways you can save tax dollars through the use of planned or deferred giving techniques. Indeed, much of the revenue of many charities comes from the use of such techniques. However, not all charities have the resources to be able to offer sophisticated arrangements. Briefly stated, these various techniques, discussed below, work as follows:
A planned or deferred gift is a present commitment to make a gift in the future, either during your lifetime or pursuant to your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it certain tax benefits. Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but also might offer a current income tax deduction. If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale – all the while helping a charity.
Types of Planned and Deferred Gifts
There are several types of planned and deferred gifts: (1) life insurance, (2) charitable remainder annuity trust, (3) charitable remainder unit trust, (4) charitable lead annuity trust, (5) charitable lead unit trust, (6) charitable gift annuity, (7) pooled income fund.
Life Insurance
You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.
Charitable Remainder Annuity Trust
You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust’s termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.
Charitable Remainder Unit Trust
This is the same as the charitable remainder annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust’s assets each year to the non-charitable beneficiaries. Here, too, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.
Charitable Lead Annuity Trust
You transfer assets to a trust that pays a set amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).
You get a deduction for the value of the annual payments to the charity. You may still be liable for tax on the income earned by the trust. You keep the ability to pass on most of your assets to your heirs. Unlike the two trusts above, the charity gets the current income for a specified period and your heirs get the remainder.
Charitable Lead Unit Trust
This is the same as the lead annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust’s assets each year to the charities.
Here, too, the charity gets the current income for a specified period and your heirs get the remainder.
Charitable Gift Annuity
You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Your charitable deduction is the value of your gift minus the present value of your annuity.
Pooled Income Fund
You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.
Should You Make a Planned or Deferred Gift?
When determining whether to make a planned or deferred gift to a charity, ask whether you are ready to make a commitment to invest in a charitable organization. Keep in mind that despite the tax benefits, you will still be out-of-pocket after the deduction.
Some questions you should consider are:
· Does the gift fit into your estate and family plan?
· Is the charity viable, reputable, creditable, and reliable?
· Do you wish to support its programs?
Government and Non-Profit Agencies
· Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
· Contact the appropriate state government agency to verify a charity’s registration and to obtain financial information on a soliciting charity.
Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.
Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate and the type of asset transferred (e.g., cash, investments, business interests, real estate, retirement plan) and its appreciated value. Professional guidance is even more important here than ever because these of the complexity of these gifts. Call the office today at 470-240-5143 for expert guidance when trying to decide on your charitable giving.
Roth IRAs differ from other tax-favored retirement plans, including other IRAs (called “traditional IRAs”), in that they promise complete tax exemption on distribution. There are other important differences as well, and many qualifications about their use. This Financial Guide developed by Metro Accounting And Tax Services, shows how they work, how they compare with other retirement devices–and why YOU might want one, or more.
With most tax-favored retirement plans, the contribution to (i.e., investment in) the plan is deductible, the investment compounds tax-free until distributed, and distributions are taxable as received. There are variations from this pattern, as with 401(k)s where the exemption for salary diverted to a 401(k) takes the place of a deduction and for after-tax investments where invested capital is tax-free when distributed.
With a Roth IRA, there’s never an up-front deduction for contributions. Funds contributed compound tax-free until distributed (standard for all tax-favored plans) and distributions are completely exempt from income tax.
How Contributions Are Treated
The 2017 annual contribution limit to a Roth IRA is $5,500 (same as 2016). An additional “catch-up” contribution of $1,000 (same as 2016) is allowed for people age 50 or over bringing the contribution total to $6,500 for certain taxpayers. To make the full contribution, you must earn at least $5,500 in 2017 from personal services and have income (modified adjusted gross income or MAGI) below $118,000 if single or $186,000 on a joint return in 2017. The $5,500 limit in 2017 phases out on incomes between $118,000 and $133,000 (single filers) and $186,000 and $196,000 (joint filers). Also, the $5,500 limit is reduced for contributions to traditional IRAs though not SEP or SIMPLE IRAs.
You can contribute to a Roth IRA for your spouse, subject to the income limits above. So, assuming earnings (your own or combined with your spouse) of at least $11,000, up to $11,000 ($5,500 each) can go into the couple’s Roth IRAs. As with traditional IRAs, there’s a 6 percent penalty on excess contributions. The rule continues that the dollar limits are reduced by contributions to traditional IRAs.
How Withdrawals Are Treated
You may withdraw money from a Roth IRA at any time; however, taxes and penalty could apply depending on timing of contributions and withdrawals.
Qualified Distributions
Since all your investments in a Roth IRA are after-tax, your withdrawals, whenever you make them, are often tax-free. But the best kind of withdrawal, which allows earnings, as well as contributions and conversion, amounts to come out completely tax-free, are qualified distributions. These are withdrawals meeting the following conditions:
1. At least, five years have elapsed since the first year a Roth IRA contribution was made or, in the case of a conversion since the conversion occurred and
2. At least one of these additional conditions is met:
· The owner is age 59 1/2.
· The owner is disabled.
· The owner has died (distribution is to estate or heir).
· Withdrawal is for a first-time home that you build, rebuild, or buy (lifetime limit up to $10,000).
Note: A distribution used to buy, build or rebuild a first home must be used to pay qualified costs for the main home of a first-time home buyer who is either yourself, your spouse or you or your spouse’s child, grandchild, parent or another ancestor.
Non-Qualified Distributions
To discourage the use of pension funds for purposes other than normal retirement, the law imposes an additional 10 percent tax on certain early distributions from Roth IRAs unless an exception applies. Generally, early distributions are those you receive from an IRA before reaching age 59 1/2.
Exceptions. You may not have to pay the 10 percent additional tax in the following situations:
· You are disabled.
· You are the beneficiary of a deceased IRA owner.
· You use the distribution to pay certain qualified first-time homebuyer amounts.
· The distributions are part of a series of substantially equal payments.
· You have significant unreimbursed medical expenses.
· You are paying medical insurance premiums after losing your job.
· The distributions are not more than your qualified higher education expenses.
· The distribution is due to an IRS levy of the qualified plan.
· The distribution is a qualified reservist distribution.
Part of any distribution that is not a qualified distribution may be taxable as ordinary income and subject to the additional 10 percent tax on early distributions. Distributions of conversion contributions within a 5-year period following a conversion may be subject to the 10 percent early distribution tax, even if the contributions have been included as income in an earlier year.
Ordering Rules for Distributions
If you receive a distribution from your Roth IRA, that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions) and earnings are considered to be distributed from your Roth IRA. Order the distributions as follows.
1. Regular contributions.
2. Conversion contributions, on a first-in-first-out basis (generally, total conversions from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion contributions into account as follows:
o Taxable portion (the amount required to be included in gross income because of conversion) first, and then the
o Nontaxable portion.
3. Earnings on contributions.
Disregard rollover contributions from other Roth IRAs for this purpose.
Aggregation (grouping and adding) rules.
Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows.
· Add all distributions from all your Roth IRAs during the year together.
· Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. Add this total to the total undistributed regular contributions made in prior years.
· Add all conversion and rollover contributions made during the year together. For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution was made in 2011 and the conversion or rollover contribution was made in 2012, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2012.
Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA.
Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. Also, disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose.
Example: On October 15, 2007, Justin converted all $80,000 in his traditional IRA to his Roth IRA. His Forms 8606 from prior years show that $20,000 of the amount converted is his basis. Justin included $60,000 ($80,000 – $20,000) in his gross income. On February 23, 2007, Justin makes a regular contribution of $4,000 to a Roth IRA. On November 7, 2007, at age 60, Justin takes a $7,000 distribution from his Roth IRA.
· The first $4,000 of the distribution is a return of Justin’s regular contribution and is not includible in his income.
· The next $3,000 of the distribution is not includible in income because it was included previously.
Distributions after Owner’s Death
Qualified distributions after the owner’s death are tax-free to heirs. Nonqualified distributions after death, which are distributions where the 5-year holding period wasn’t met, are taxable income to heirs as they would be to the owner (the earnings are taxed), except there’s no penalty tax on early withdrawal. However, an owner’s surviving spouse can convert an inherited Roth IRA into his or her own Roth IRA. This way, distribution can be postponed, so that nonqualified amounts can become qualified, and the tax shelter prolonged.
Roth IRA assets left at death are subject to federal estate tax, just as traditional IRA assets are.
Converting from a Traditional IRA or Other Eligible Retirement Plan to a Roth IRA
The conversion of your traditional IRA to a Roth IRA was the feature that caused most excitement about Roth IRAs. Conversion means that what would be a taxable traditional IRA distribution can be made into a tax-exempt Roth IRA distribution. Starting in 2008, further conversion or rollover opportunities from other eligible retirement plans were made available to taxpayers.
Conversion Methods
You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used.
You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.
· Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
· Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.
· Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.
Note: Conversions made with the same trustee can be made by re-designating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.
Prior to 2008, you could only roll over (convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You can now roll over amounts from the following plans into a Roth IRA.
o A qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
o An annuity plan,
o A tax-sheltered annuity plan (section 403(b) plan),
o A deferred compensation plan of a state or local government (section 457 plan), or
o An IRA.
Any amount rolled over is subject to the same rules for converting a traditional IRA to a Roth IRA. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.
There is a cost to the rollover. The amount converted is fully taxable in the year converted, except for the portion of after-tax investment in the traditional IRA. So you must pay tax now (though there’s no early withdrawal penalty) for the opportunity to withdraw tax-free later, an opportunity that can extend to your heirs.
Starting in 2010, conversion is now allowed to all taxpayers. The prior income restriction allowing conversion only for taxpayers of income (again, MAGI) of $100,000 or less in the conversion year has been terminated. All taxpayers are able to convert a regular IRA to a Roth IRA starting in 2010. The conversion is a taxable distribution, which can be included as income during the conversion year or averaged over the next two years. The conversion is not subject to the 10 percent early distribution penalty.
Undoing a Conversion to a Roth IRA
Since everyone recognizes that conversion is a high-risk exercise, the law, and liberal IRS rules provide an escape hatch: You can undo a Roth IRA conversion by what IRS calls a “re-characterization.” This move, by which you move your conversion assets from a Roth IRA back to a traditional IRA, makes what would have been a taxable conversion into a tax-free rollover between traditional IRAs. Re-characterization can be done any time until the due date for the return for the year of conversion.
Example: If your assets are worth $180,000 at conversion and fall to $140,000 later, you’re taxed on up to $180,000, which is $40,000 more than you now have. Undoing-re-characterization-avoids the tax, and gets you out of the Roth IRA.
Tip: One reason to do this, dramatized by a volatile stock market, is where the value of your portfolio drops sharply after the conversion.
Can you undo one Roth IRA conversion and then make another one a reconversion? Yes, but only one time and subject to the following requirements: Reconversion must take place in the tax year following the original conversion to Roth IRA, and the reconversion date must also be more than 30 days after the previous recharacterization transfer from the Roth IRA back to the traditional IRA.
Withdrawal Requirements
You are not required to take distributions from your Roth IRA once you reach a particular age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs
Also, unlike traditional IRAs (but like other tax-favored retirement plans), a Roth IRA owner who continues working may continue to contribute to the Roth IRA.
Retirement Savings Contributions Credit
Also known as the saver’s credit, this credit helps low and moderate-income workers save for retirement. Taxpayers age 18 and over who are not full-time students and can’t be claimed as dependents, are allowed a tax credit for their contributions to a workplace retirement plan, traditional or Roth IRA if their modified adjusted gross income (MAGI) in 2017 for a married filer is below $62,000 ($61,500 in 2016). For heads-of-household MAGI is below $46,500 ($46,125 in 2016) and for others (single, married filing separately) it is below $31,000 ($30,750 in 2016). These amounts are indexed for inflation each year. The credit, up to $1,000, is a percentage from 10 to 50 percent of each dollar placed into a qualified retirement plan up to the first $2,000 ($4,000 married filing jointly). The lower the MAGI is, the higher the credit percentage, resulting in the maximum credit of $1,000 (50 percent of $2,000).
Note: Both you and your spouse may be eligible to receive this credit if you both contributed to a qualified retirement plan and meet the adjusted gross income limits.
The following table details the percentage of Saver’s credit based on Adjusted Gross Income (AGI):
| 2017 Saver’s Credit | Single Filers AGI | Head of Household AGI | Joint Filers AGI |
| 50% of contribution | $0-$18,500 | $0-$27,750 | $0-$37,000 |
| 20% of contribution | $18,501-$19,500 | $27,751-$30,000 | $37,001-$40,000 |
| 10% of contribution | $20,001-$31,000 | $30,001-$46,500 | $40,001-$62,000 |
| Credit Not Available | more than $31,000 | more than $46,500 | more than $62,000 |
| 2016 Saver’s Credit | Single Filers AGI | Head of Household AGI | Joint Filers AGI |
| 50% of contribution | $0-$18,500 | $0-$27,750 | $0-$37,000 |
| 20% of contribution | $18,501-$20,000 | $27,751-$30,000 | $37,001-$40,000 |
| 10% of contribution | $20,001-$30,750 | $30,001-$46,125 | $40,000-$61,500 |
| Credit Not Available | more than $30,750 | more than $46,125 | more than $61,500 |
| 2015 Saver’s Credit | Single Filers AGI | Head of Household AGI | Joint Filers AGI |
| 50% of contribution | $0-$18,250 | $0-$27,375 | $0-$36,500 |
| 20% of contribution | $18,251-$19,750 | $27,376-$29,625 | $36,501-$39,500 |
| 10% of contribution | $19,751-$30,500 | $29,626-$45,750 | $39,501-$61,000 |
| Credit Not Available | more than $30,500 | more than $45,750 | more than $61,000 |
Note: The saver’s credit is available in addition to any other tax savings that apply. Further, IRA contributions can be made until April 15 of the following year and still be considered in the current tax year.
Use in Estate Planning
Though Roth IRAs enjoy no estate tax relief, they are already figuring in estate plans. The aim is to build a large Roth IRA fund largely through conversion of traditional IRAs-to pass to beneficiaries in later generations. The beneficiaries will be tax exempt on withdrawals (of qualified distributions) and the Roth IRA tax shelter continues by spreading withdrawal over their lifetimes.
Long-term planning with Roth IRAs. If you would be allowed a deduction for a contribution to a traditional IRA, contributing to a Roth IRA means surrendering current tax reduction for future tax reduction (to zero) for qualified distributions. This can be presented as an after-tax return-on-investment calculation involving assumed future tax rates. The higher the projected tax rate at withdrawal, the more tax Roth IRA saves.
Comparable considerations apply to conversions to Roth IRAs. Here the taxpayer incurs substantial current tax cost (directly or indirectly reducing the amount invested) for future tax relief to the taxpayer or an heir. So the return on investment resulting from conversion increases as projected future rates rise.
A key element in making such projections is the possibility that current and future federal deficits will lead to future tax rate increases a factor which would tend to encourage current Roth IRA investment and conversion. On the other hand, there’s the question whether Roth IRA benefits currently promised will survive into future decades.
Highly sophisticated planning is required for Roth IRA conversions. Consultation with the qualified advisor at Metro Accounting And Tax Services is a must. Please call if you have any questions 470-240-5143.
This Financial Guide developed by Metro Accounting And Tax Services, shows you how to take advantage of all of the travel and entertainment expenses you’re legally entitled to and offers guidance on which expenses are deductible and what percentage of them you can deduct. It also discusses the importance of following IRS rules for keeping records and substantiating your expenses in order to avoid an audit.
Travel Expenses
Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls “away from home.”
1. First, local travel expenses. You can deduct local transportation expenses incurred for business purposes, for example, the cost of getting from one location to another via public transportation, rental car, or your own automobile. Meals and incidentals are not deductible as travel expenses, although as you will read later in this guide, you can deduct meals as an entertainment expense as long as certain conditions are met.
2. Second, you can deduct away from home travel expenses-including meals and incidentals; however, if your employer reimburses your travel expenses, your deductions are limited.
Local Transportation Costs
The cost of local business transportation includes rail fare and bus fare, as well as the costs of using and maintaining an automobile used for business purposes. For those whose main place of business is their personal residence, business trips from the home office and back are considered deductible transportation and not non-deductible commuting.
You generally cannot deduct lodging and meals unless you stay away overnight. Meals may be partially deductible as an entertainment expense as discussed below.
Away From-Home Travel Expenses
You can deduct one-half of the cost of meals (50 percent) and all of the expenses of lodging incurred while traveling away from home. The IRS also allows you to deduct 100 percent of your transportation expenses–as long as business is the primary reason for your trip.
To be deductible, travel expenses must be “ordinary and necessary”, although “necessary” is liberally defined as “helpful and appropriate,” not “indispensable.” Deduction is also denied for that part of any travel expense that is “lavish or extravagant,” though this rule does not bar deducting the cost of first class travel or deluxe accommodations or (subject to percentage limitations below) deluxe meals.
What does “away from home” mean?
To deduct the costs of lodging and meals (and incidentals-see below) you must generally stay somewhere overnight. In other words, away from your regular place of business longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home. Otherwise, your costs are considered local transportation costs and the costs of lodging and meals are not deductible.
Where is your “home” for tax purposes?
The general view is that your “home” for travel expense purposes is your place of business or your post of duty. It is not where your family lives. (Some courts say it’s the general area of your residence).
Example: Tony’s family lives in Boston and Tony works in Washington, DC. Tony spends the weekends in Boston and the weekdays in Washington, where he stays in a hotel and eats out. For tax purposes, Tony’s “home” is in Washington, not Boston, therefore, he cannot deduct any of the following expenses: cost of traveling back and forth between Washington and Boston, cost of eating out in Washington, cost of staying in a hotel in Washington, or any costs incurred traveling between his hotel in Washington and his job in Washington (the latter are considered non-deductible commuting costs).
There are some rules in the tax law concerning where a taxpayer’s “home” is for purposes of deducting travel expenses that are less clear such as when a taxpayer works at a temporary site or works in two different places.
We’ll cover these rules with the following two examples:
Example #1: Mark, who lives in Connecticut, works eight months out of the year in Connecticut (from which he usually earns about $50,000) and four months out of the year in Florida (from which he usually earns about $15,000). Mark’s “tax home” for travel expense purposes is Connecticut. Therefore, the costs of traveling to and from the “lesser” place of employment (Florida), as well as meals and lodging costs incurred while working in Florida, are deductible.
Example #2: Simone works and lives in New York. Occasionally, she must travel to Maryland on temporary assignments, where she spends up to a week at a time. Assuming Simone’s employer does not reimburse her for travel expenses, she can deduct the costs of meals and lodging while she’s in Maryland, as well as the costs of traveling to and from Maryland. This holds true because her work assignments in Maryland are considered temporary since they will end within a foreseeable time. If an assignment is considered indefinite, that is, expected to last for more than a year, under the tax law, travel, meal, and lodging costs are not deductible.
Here’s a list of some deductible away-from-home travel expenses:
· Meals (limited to 50 percent) and lodging while traveling or once you get to your away-from-home business destination.
· The cost of having your clothes cleaned and pressed away from home.
· Costs for telephone, fax or modem usage.
· Costs for secretarial services away-from-home.
· The costs of transportation between job sites or to and from hotels and terminals.
· Airfare, bus fare, rail fare, and charges related to shipping baggage or taking it with you.
· The cost of bringing or sending samples or displays, and of renting sample display rooms.
· The costs of keeping and operating a car, including garaging costs.
· The cost of keeping and operating an airplane, including hangar costs.
· Transportation costs between “temporary” job sites and hotels and restaurants.
· Incidentals, including computer rentals, stenographers’ fees.
· Tips related to the above.
However, many away-from-home travel expenses are not deductible or are restricted in some way. These include:
· Commuting expenses. The costs of traveling between your home and your job are not deductible.
· Travel as a form of education. Trips that are educational in a general way, or improve knowledge of a certain field but are not part of a taxpayer’s job, are not deductible.
· Costs of looking for a first job. If you are looking for a new job in your current field, you can deduct the travel expenses. Otherwise, you may not deduct them.
· Seeking a new location. Travel costs (and other costs) incurred while you are looking for a new place for your business (or for a new business) must be capitalized and cannot be deducted currently.
· Luxury water travel: If you travel using an ocean liner, a cruise ship, or some other type of “luxury” water transportation, the amount you can deduct is subject to a per-day limit.
· Seeking foreign customers: The costs of traveling abroad to find foreign markets for existing products are not deductible.
Entertainment Expenses
There are limits and restrictions on deducting meal and entertainment expenses. Most are deductible at 50 percent, there are a few exceptions. Meals and entertainment must be “ordinary and necessary” and not “lavish or extravagant” and directly related to or associated with your business. They must also be substantiated. For employees who are “fully reimbursed” , the limits are imposed on the employer, not the employee.
Your home is considered a place conducive to business. As such, entertaining at home may be deductible providing there was business intent and business was discussed. The amount of time that business was discussed does not matter. Likewise, if you hold a small party (less than 12 people) at your home and discuss business with your guests it may be deductible as well.
Reasonable costs for food and refreshments for year-end parties for employees, as well as sales seminars and presentations held at your home, are 100 percent deductible.
If you rent a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally cannot deduct more than the price of a non-luxury box seat ticket. Count each game or other performance as one event. Deduction for those seats is then subject to the 50 percent entertainment expense limit.
If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable.
Deductions are disallowed for depreciation and upkeep of “entertainment facilities”-yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. Costs of entertainment provided at such facilities are deductible subject to entertainment expense limitations.
Dues paid to country clubs or to social or golf and athletic clubs are not deductible. Dues that you pay to professional and civic organizations are deductible as long as your membership has a business purpose. Such organizations include business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.
How Do You Prove Expenses Are “Directly Related?”
Expenses are directly related if you can show:
· There was more than a general expectation of gaining some business benefit other than goodwill.
· You conducted business during the entertainment.
· Active conduct of business was your main purpose.
There is a presumption in the eyes of the IRS that events that take place in what it considers places non-conducive to doing business are not directly related to your business. These places include nightclubs, theaters, sporting events or cocktail parties. It also includes meetings with a group of people who are not business associates, at cocktail lounges, country clubs, or athletic clubs. However, you can overcome the presumption by showing that you engaged in a business discussion or otherwise conducted business during the event.
How Do You Meet The “Associated With” Test?
Even if you can’t show that the entertainment was “directly related” as discussed above, you can still deduct the expenses as long as you can prove the entertainment was “associated” with your business. To meet this test, the entertainment must directly precede or come after a substantial business discussion. Further, you must have had a clear business purpose when you took on the expense.
For Whom Can You Get The Deduction?
The person entertained must be a business associate. That is, someone who could reasonably be expected to be a customer or conduct business with you, including an employee or professional advisor.
In circumstances where it’s customary to entertain a business associate with his or her spouse, and your spouse also attends, entertainment of both spouses is deductible, thanks to the “closely connected rule.”
Recordkeeping and Substantiation Requirements
Tax law requires you to keep records that will prove the business purpose and amounts of your business travel, entertainment, and local transportation costs.
Which Records You Must Keep
You must substantiate the following business expenses:
· Travel expenses while away from home (including meals and lodging).
· Entertainment and arranging recreational activities, and
· Business gifts.
To substantiate these items, you must prove:
· The amount.
· The time and place of the travel, entertainment, or recreation, or the date and a description of the business gift.
· The business purpose, and
· The business relationship of the recipient of entertainment or gifts.
Keeping a diary or log book–and recording your business-related activities at or close to the time the expense is incurred–is one of the best ways to document your business expenses.
Here’s how these rules apply to your record-keeping for travel expenses, entertainment expenses, and business gifts.
Away-from-home travel expenses. You must document the following for each trip:
· The amount of each expense-e.g., the cost of each transportation, lodging and meal. You can group similar types of incidentals together-i.e., “meals, taxis.”
· The dates of your departure and return and the number of days you spent on business.
· Your destination.
· The business reason for the travel or the business benefit you expect.
Entertainment expenses. You must prove the following for each claimed deduction for entertainment expenses:
· The amount of each separate expense, though incidentals may be totaled on a daily basis.
· The date of the entertainment.
· The name, address, and type of entertainment-e.g., “dinner,” or “show”-but only if the type of entertainment is not obvious from the place name.
· The business reason for the entertainment and the nature of any business discussion that took place. Note: For business meals, you do not have to write down the nature of the discussion, but you or your employee must be present.
· The name, title, and occupation (showing business relation) of the people you entertained.
Business gifts. You must keep the following documentation for a business gift to substantiate the deduction:
· The cost of the gift and the date it was made.
· The business reason for the gift.
· The name, title, and occupation of the recipient.
· A description of the gift.
Employees “Fully Reimbursed”
Employees who are “fully reimbursed” by their employers are not subject to the deduction limits discussed in this Financial Guide, their employers are. “Fully reimbursed” means that all the following occur:
· You adequately account to your employer.
· You receive full reimbursement.
· You were required to, and did, return any excess reimbursement.
· In your Form W-2, Box 13 shows no amount with a Code L.
You adequately account to your employer by means of an expense account statement. If you are covered by and follow an “accountable plan,” and your reimbursements don’t exceed your expenses, you won’t have to report the reimbursements as gross income. Some per diem arrangements, that is, where you receive a flat amount per day and mileage allowances can avoid detailed expense accounting to the employer, but proof of time, place, and business purpose is still required.
However, if your employer’s reimbursement plan is not “accountable,” you must report the reimbursements as income, and you can then deduct the expenses you paid but you must deduct them as employee business expenses, subject to the 2 percent-of-adjusted-gross-income floor.
If you are reimbursed under an expense account for travel, transportation, entertainment, gifts, and other business expenses, here are the record-keeping and reporting rules that apply. If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether the reimbursement was paid to you under an accountable plan or a nonaccountable plan.
If you are covered by an “accountable plan,” and your reimbursements don’t exceed your expenses, you won’t have to report the reimbursements as gross income.
However, if your employer’s reimbursement plan in not “accountable,” you must report the reimbursements as income, and you can then deduct the expenses you paid. You must deduct them as employee business expenses, subject to the 2 percent-of-adjusted-gross-income floor. An accountable plan is one in which (1) your expenses are business related, (2) you adequately account for these expenses to your employer within a reasonable time and (3) you return any excess reimbursement within a reasonable time.
Auto Expenses
Self-employed individuals and employees who use their cars for business but either don’t get reimbursed or are reimbursed under an employer’s “non-accountable” reimbursement plan can deduct auto expenses. In the case of employees, expenses are deductible to the extent that auto expenses (together with other “miscellaneous itemized deductions”) exceed 2 percent of adjusted gross income.
If you use a car for business, you have two choices as to how to claim the deductions:
1. You can deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, chauffeur salaries, and depreciation, or
2. You can use the standard mileage deduction, which is an inflation-adjusted amount that is multiplied by the number of business miles driven.
For some, the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses. After we tell you about limits on auto depreciation, we’ll tell you how to determine which of these two methods is better for you tax-wise.
Expensing and depreciating vehicle costs. Deduction options and amounts depend on the percentage used for business. Also, if the car is used more than 50 percent for business, it can be included as business property and qualify for Section 179 expensing in the year of purchase. The deduction is reduced proportionately to the extent the car is used for personal purposes. If you take this deduction you can’t use the actual mileage for that vehicle in any year.
Depreciation. Assuming the car cost more than the Section 179 limit, or Section 179 is not available or is not claimed, depreciation is also allowed. Several depreciation options are available, but there are limits to the amount of depreciation that can be claimed per year. Depreciation otherwise allowable is reduced by the proportion of personal use (for example, a car used 20 percent for personal use is depreciated at 80 percent of the amount otherwise allowed). Accelerated depreciation is not allowed where personal use is 50 percent or more.
Finally, if you claimed accelerated depreciation in a prior year and your business use then falls to 50 percent or less, you become subject to “recapture” of the excess depreciation.
Of course, using the standard mileage deduction allows you to avoid these limits.
Determining whether to use the standard mileage deduction. If you opt for the standard mileage rate, you simply multiply current cents-per-mile rate by the number of business miles you drive for the year.
Be aware, however, that the standard mileage deduction may understate your costs. This is especially true for taxpayers who use the car 100 percent for business, or close to that percentage.
which method is better for you, make the calculations each way during the first year you use the car for business.
You may use the standard mileage for leased cars if you use it for the entire lease period. Or, you can deduct actual expenses instead, including leasing costs.
Recordkeeping is the best thing you can do to make the most of your auto deductions, not to mention essential to have this documentation in case of an audit. You won’t be able to determine which of the two options is better if you don’t know the number of miles driven and the total amount you spent on the car. Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method, you’ll have to keep receipts as well.
For all your tax planning strategies, let the CPAs at Metro Accounting And Tax Services, guide you through the maze of possibilities. Call the office today at 407-240-5143
This financial guide was developed by Metro Accounting And Tax Services, CPA with a view of helping business owners with strategic tax planning in their businesses. Can you save more money on yours taxes? We think so. Let the CPAs at Metro Accounting And Tax Services show you how.
7 Ways To Save Even More On Income Taxes In Your Business
1. Did you know you can use your previously funded IRA to fund the current year’s deductible contributions?
Well, you can. If you don’t have enough cash to make a deductible contribution to your IRA by April 15th (April 17th in 2018), here is how you can still take the tax deduction for that tax year. To get started, all you need is an existing IRA.
Begin by having $6,000 distributed to you from your IRA. Once you have the $6,000, immediately deposit it back into your IRA. If you do this before April 15th, this counts as your deductible contribution for the year. The best part of this is that you have 60 days to “make up” the $6,000 withdrawal (and avoid penalties and taxes). To do this, simply deposit a $6,000 “rollback” into the same IRA account by June 14th to avoid taxes and penalties on the original $6,000 distribution made to you.
This is a type of short-term loan from your IRA to make this year’s deductible contribution before the April 15th due date; however, you can only do this once in a 12-month period. If you don’t replace the money within 60 days, you may owe income tax and a 10 percent withdrawal penalty if you’re under the age of 59 1/2.
Note: A 2014 Tax Court opinion, Bobrow vs. Commissioner, T.C. Memo. 2014-21 held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period. The IRS issued a revised regulation regarding this decision, which became effective on January 1, 2015.
The ability of an IRA owner to transfer funds from one IRA trustee directly to another is not affected because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation.
2. Determine the “Best” Retirement Plan Option.
As a self-employed small business owner, there are several retirement plan options available to you, but understanding which option is most advantageous to you can be confusing. The “best” option for you may depend on whether you have employees and how much you want to save each year.
There are four basic types of plans:
We want to make sure you are getting the most out of your financial future, so contact us to determine your eligibility and to optimize the plan for you.
3. Have your landlord pay for leasehold improvements at your place of business.
Instead of paying for leasehold improvements at your place of business, you can ask your landlord to pay for them. In return, you offer to pay your landlord more in rent over the term of the lease. By financing your leasehold improvements this way, both you and your landlord can save money on taxes.
Ordinarily, you must deduct the cost of leasehold improvements made to your place of business over a 39-year period (similar to that of depreciating real estate); however, up to $250,000 in qualified leasehold (as well as restaurant and retail) improvements can be expensed using the Section 179 deduction (subject to certain rules), thanks to the passage of the PATH (Protection of Americans Against Tax Hikes) Act.
Note: The PATH Act changed the definition of qualified property from qualified leasehold improvements to qualified improvement property. The rules regarding qualified improvement property differ from those for qualified leasehold improvement property in that the improvement does not have to be made pursuant to a lease and does not have to be made to a building more than three-year-old. These rules still apply for defining qualified leasehold improvements, however.
In addition, the 15-year recovery period for leasehold, retail, and restaurant improvements was made permanent by the PATH Act as well.
Note: Qualified leasehold improvements completed before 2008 were eligible for a special 15-year recovery period. If in the year your lease term ends you move to another location, you can deduct the portion of the improvement cost that you have not previously deducted. This normal scenario won’t save you tax in the earlier years of the lease. Your landlord will have to put up the initial cash for the improvements, but you will cover that over time with increased payments in your rent. Since your landlord will be paying for the improvements, you will save tax early in the lease and your landlord will benefit as well!
During the same time, your landlord will gain depreciation deductions for the cost of the leasehold improvements. When you leave, your landlord will still have the improved property to offer other future tenants. It is a great opportunity for a win-win situation giving you faster access to invested monies.
4. Save by deducting home entertainment expenses.
If you entertain at home for the purpose of business, and if a business discussion takes place during the entertainment, then the cost of entertaining at your home is a deductible expense. In general, you can deduct only 50 percent of your business-related entertainment expenses, but there are some exceptions. If you have any questions, please don’t hesitate to call.
5. Deduct $25 for business gifts to associates without a receipt.
When you prepare your income tax return, don’t overlook the deductible benefit of business gifts during the holidays or at any other time of the year. Whether you are a rank-and-file employee, a self-employed individual, or even a shareholder-employee in your own corporation, you can deduct the cost of gifts made to clients and other business associates as a business expense. The law limits your maximum deduction to $25 in value for each recipient for which the gift was purchased with cash.
6. Deduct your home computer.
If you purchased a computer and use it for work-related purposes, you may be able to deduct the cost as long as you meet certain requirements: your computer must be used for convenience and as a condition of your employment, for instance, if you telecommute two days a week and work in the office the other three days.
If you are self-employed, another deduction you can take advantage of even if you don’t claim the home office deduction, is the Section 179 expense election, which allows you to write off new equipment in the year it was purchased as long as it is used for business more than 50 percent of the time (subject to certain rules).
7. Have your company buy you dinner.
If you are in a partnership or a shareholder-employee in a regular C or S corporation, and you have to work overtime, your company can, on occasion, provide you with meal money for dinner. The cost of this “fringe benefit” is 100 percent deductible for your company under Section 132 of the Internal Revenue Code and you don’t have to pay personal income tax on the value of the meal.
Your company can pay directly for the meal or can instead, provide you with dinner money. But, in order for this to work, the amount of money you receive for your meal must be reasonable. If the IRS decides that the amount of money you received from your employer was unreasonable, the entire amount will be considered taxable personal income and will not be deductible.
We will be glad to answer your questions concerning deductible meals related to overtime and any other questions you might have about the Section 132 “de minimis” fringe benefit.
For all your tax saving strategies, call the office today 407-240-5143.
This Financial Guide was developed by Metro Accounting and Tax Services, CPA to provide tax saving strategies for deferring income and maximizing deductions and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed. For all you tax saving strategies call the office today at 470-240-5143.
Before getting into the specifics, however, we would like to stress the importance of proper documentation. Many taxpayers forgo worthwhile tax deductions because they have neglected to keep receipts or records. Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, and charitable gifts and travel. But don’t do it just because the IRS says so. Neglecting to track these deductions can lead to overlooking them. You also need to maintain records regarding your income. If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.
The checklist items listed below are for general information only and should be tailored to your specific situation. If you think one of them fits your tax situation, we’d be happy to discuss it with you.
1) Avoid or Defer Income Recognition
Deferring taxable income makes sense for two reasons. Most individuals are in a higher tax bracket in their working years than they are during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Additionally, through the use of tax-deferred retirement accounts you can actually invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.
Tip: You can achieve the same effect of deferring income by accelerating deductions, for example, by paying a state estimated tax installment in December instead of at the following January due date.
2) Max Out Your 401(k) or Similar Employer Plan
Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.
Tip: Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.
3) If You Have Your Own Business, Set Up and Contribute to a Retirement Plan
If you have your own business, consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting businesses. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.
4) Contribute to an IRA
If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA. You may also be able to contribute to a spousal IRA -even where the spouse has little or no earned income. All IRAs defer the taxation of IRA investment income and in some cases, can be deductible or be withdrawn tax-free.
Tip: To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will ensure that you get the most tax-deferred earnings possible from your money.
5) Defer Bonuses or Other Earned Income
If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you’re self-employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements. This may even save taxes if you are in a lower tax bracket in the following year. Note, however, that the amount subject to social security or self-employment tax increases each year.
6) Accelerate Capital Losses and Defer Capital Gains
If you have investments on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements). For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 20 percent. However, make sure to consider the investment potential of the asset. It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss.
7) Watch Trading Activity in Your Portfolio
When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don’t withdraw them. So you may prefer a fund with low turnover, assuming satisfactory investment management. Turnover isn’t a tax consideration in tax-sheltered funds such as IRAs or 401(k)s. For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.
8) Use the Gift-Tax Exclusion to Shift Income
You can give away $14,000 ($28,000 if joined by a spouse) per donee in 2017 (same as 2016), per year without paying federal gift tax. You can give $14,000 to as many donees as you like. The income on these transfers will then be taxed at the donee’s tax rate, which is in many cases lower.
Note: Special rules apply to children under age 18. Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.
9) Invest in Treasury Securities
For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax. Also, investing in Treasury bills that mature in the next tax year results in a deferral of the tax until the next year.
10) Consider Tax-Exempt Municipal Bonds
Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher paying commercial bonds after reduction for taxes. Gain on sale of municipal bonds is taxable and loss is deductible. Tax-exempt interest is sometimes an element in the computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible.
11) Give Appreciated Assets to Charity
If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the property.
Tip: Many taxpayers also give depreciated assets to charity. Deduction is for fair market value; no loss deduction is allowed for depreciation in value of a personal asset. Depending on the item donated, there may be strict valuation rules and deduction limits.
12) Keep Track of Mileage Driven for Business, Medical or Charitable Purposes
If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2017, it’s 53.5 cents per mile for business, 17 cents for medical and moving purposes, and 14 cents for service for charitable organizations. You need to keep detailed daily records of the mileage driven for these purposes to substantiate the deduction.
13) Take Advantage of Your Employer’s Benefit Plans to Get an Effective Deduction for Items Such as Medical Expenses
Medical and dental expenses are generally only deductible to the extent they exceed 10 percent of your adjusted gross income (AGI). For most individuals, particularly those with high income, this eliminates the possibility for a deduction. You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans.
14) Check Out Separate Filing Status
Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:
Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes.
15) If Self-Employed, Take Advantage of Special Deductions
You may be able to expense up to $510,000 in 2017 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums as business expenses. You may also be able to establish a Keogh, SEP or SIMPLE IRA plan, or a Health Savings Account, as mentioned above.
16) If Self-Employed, Hire Your Child in the Business
If your child is under age 18, he or she is not subject to employment taxes from your unincorporated business (income taxes still apply). This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if he or she in under the age of 8 years old.
17) Take Out a Home-Equity Loan
Most consumer-related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home equity loan, however, can be deductible. It may be advisable to take out a home-equity loan to pay off other nondeductible obligations.
18) Bunch Your Itemized Deductions
Certain itemized deductions, such as medical or employment related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.
For all your tax saving strategies call Metro Accounting And Tax Services at 470-240-5143.
This Financial Guide was developed by Metro Accounting and Tax Services, CPA with a view of providing guidance to home-based businesses. For help with this and other business accounting issues, call the office today 470-240-5143.
The business owner must decide:
More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs – home-based businesspeople.
And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for “service-oriented” businesses, the opportunities seem to be endless.
This Financial Guide discusses some of the basics you should consider in starting a home-based business. It does not attempt to cover all aspects of home-based businesses, but rather, addresses the general requirements of what’s needed to start up a business in your home.
Is a Home-Based Business Right for You?
Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, and money take a few moments to answer the following questions:
Before you dive head first into a home-based business, it’s essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead, and then make improvements and adjustments along the road. While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has enough space for a business and whether you can successfully run the business from your home.
Compliance with Laws and Regulations
A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Zoning
Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration and Accounting Requirements
You may need the following:
If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.
Planning Techniques
Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
For help with this and other business accounting issues, call the office today 470-240-5143. Metro Accounting and Tax Services will guide you through the process of setting up and running your business.
One key to having a successful business is based on an understanding of your tax obligation. Metro Accounting And Tax Services has compiled the following tip to help you in the process. When you start a business, you need to know about income taxes, payroll taxes and much more. Here are five tax tips that can help you get your business off to a good start:
1. Business Structure. An early choice you need to make is to decide on the type of business structure you want to establish. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you have to file.
2. Business Taxes. There are four general types of taxes your business might face. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated quarterly tax payments.
3. Employer Identification Number (EIN). Similar to a social security number for individuals, you may need to get a social security number for your business, this is called an EIN and it is for federal tax purposes.
4. Accounting Method. An accounting method must be decided on as this is the set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.
5. Employee Health Care. If you employ fewer than 25 employees you might be eligible for The Small Business Health Care Tax Credit. This is a credit that helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. You’re eligible for the credit if you have fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.
For help in starting your business on the right note let the experts at Metro Accounting And Tax Services guide you through the process. Call the office at 407-240-5143
Don’t leave your children’s future to chance. Plan now to give them the brighter future they deserve. This guide was developed by Metro Accounting and Tax Services to help parents plan for the future educational needs of their children.
How can you properly fund your children’s education without draining your current cash flow? What should you do if they are a few years away from college and your education fund won’t be enough? How can you increase your chances of getting financial aid? What tax benefits might be available to you? This Financial Guide answers these questions.
With the costs of a college education rising every year, the keys to funding your child’s education are to plan early and invest shrewdly. However, there are steps you can take if you get a late start. Moreover, there are a number of effective techniques for increasing financial aid opportunities and reducing taxes. Here are some guidelines–geared to parents whose children are no older than elementary school age–for funding your child’s education.
Start Saving Early
We cannot emphasize enough that getting an early start is basic to funding your child’s education. The earlier you start, the more you’ll benefit from the compounding of interest.
College is expensive and proper planning can lessen the financial squeeze considerably–especially if you start when your child is young. According to the College Board, average published tuition and fees for full-time in-state students at public four-year colleges and universities increased 2.4 percent before adjusting for inflation, rising from $9,420 in 2015-16 to $9,650 in 2016-17. Average published tuition and fees at private nonprofit four-year institutions increased 3.6 percent before adjusting for inflation, rising from $32,330 in 2015-16 to $33,480 in 2016-17.
When should you start saving? This depends on how much you think your children’s education will cost. The best way is to start saving before they are born. The sooner you begin, the less money you will have to put away each year.
Example: Suppose you have one child, age six months, and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until the child is six years old, you’ll have to save almost double that amount every year for twelve years.
Another advantage of starting early is that you’ll have more flexibility when it comes to the type of investment you’ll use. You’ll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments after time.
Find Out How Much You’ll Need To Save
How much will your child’s education cost? It depends on whether your child attends a private or state school. For the 2016-2017 school year, the total expenses–tuition, fees, board, personal expenses, and books and supplies–for the average private college are about $45,370 per year and about $20,090 per year for the average in-state public college. However, these amounts are averages: the tuition, fees, and board for some private colleges can cost more than $60,000 per year whereas the costs for a state school can be kept under $10,000 per year. It should also be noted that in 2016-17 the average amount of grant aid for a full-time undergraduate student was about $5,880 and $19,290 for four-year public and private schools, respectively. More than 70 percent of full-time students receive grant aid to help pay for college.
Choose Your Investments
As with any investment, you should choose those that will provide you with a good return and that meet your level of risk tolerance. The ones you choose should depend on when you start your savings plan-the mix of investments if you start when your child is a toddler should be different from those used if you start when your child is age 12.
The following are often recommended as investments suitable for education funds:
1) Series EE Bonds are extremely safe investments.
2) U.S. Government Bonds are also safe investments that offer a relatively higher return. If you use zero-coupon bonds for your child’s education, you can time the receipt of the proceeds to fall in the year when you need the money. A drawback of such bonds is that a sale before their maturity date could result in a loss on the investment. Further, the accrued interest is taxable even though you don’t receive it until maturity.
3) CDs are safe, but usually provide a lower return than the rate of inflation. The interest is taxable.
4) Municipal Bonds, if they are highly rated, can provide an acceptable return from the tax-free interest if you’re in the higher income tax brackets. Zero-coupon municipals can be timed to fall due when you need the funds and are useful if you begin saving later in the child’s life.
5) Stocks contained in an appropriate mutual fund or portfolio can provide you with a higher yield at an acceptable risk level. Stock mutual funds can provide superior returns over the long term. Income and balanced funds can meet the investment needs of those who begin saving when the child is older.
6) Deferred Annuities provide you with tax deferral, but the yield may not be acceptable because of the relatively high cost of these investments. Further, amounts withdrawn before you reach age 59-1/2 may be subject to a 10 percent premature withdrawal penalty.
If You’re Caught Short
If you have insufficient savings for your child’s education when he or she is close to entering college, there are ways to generate additional funds both now and when your child is about to enter school:
Sources Of Financial Aid
Here is a summary of the possible sources of financial aid. The types of aid and tax implications change frequently, so consult your financial advisor for specifics when you’re approaching the time to seek financial aid.
Grants, the best type of financial aid because they do not have to be paid back, are amounts awarded by governments, schools, and other organizations. Some grants are need-based and others are not.
Loans may be need-based, and others are not. Here is a summary of loans:
Work-Study Programs. This is a program that is federally funded and based on the family’s financial need. The student works on-campus and receives partly subsidized pay. The receipt of work-study funds does not affect the level of “need” for purposes of need-based grants and loans.
To make a thorough investigation, you should fill out the financial aid application, which you can obtain from the school’s financial aid office. You will have to provide tax returns. The amount you are determined to be eligible for depends on your income, the size of your family, the number of family members currently attending college, and your assets.
Don’t leave your children’s future to chance, plan properly to give them a head start. Engage the financial advisors at Metro Accounting And Tax Services and we’ll help you chart the course of a brighter tomorrow for your children. Call the Office now 407-240-5143.
Life is constantly changing, in-fact as it is said the only constant there is, is change. With this in mind, Metro Accounting and Taxes developed this guide to ensuring that individuals facing changing situations, give forethought to the financial implications that such changes might bring.
What are the financial implications of marriages? Those who have recently changed their marital status or who are planning such a change may have important financial and legal decisions to make. These decisions might deal with property ownership, providing for children’s welfare, post-mortem planning, and day-to-day finances.
For the young, newly married couple, areas of financial concern primarily include: (1) life insurance, (2) form of property ownership, and (3) money management.
Life Insurance
When it comes to insurance needs, the basic rule is that you need enough coverage to sustain your family’s present income level should you die. If you are the only breadwinner, or if you plan on starting a family soon, then you should purchase enough life insurance to ensure the financial continuity of your family if you are not around.
Property Ownership
If you intend to buy a home or other property or if you and your spouse already own property together, then you need to consider the best way for you to hold that property. Will the property be held solely by one spouse? By both spouses jointly? Because of the complex legal implications of the various forms of property ownership, you should seek legal advice about this issue.
Money Management
It is important to carefully consider how the two of you will handle your day-to-day finances. New couples should be prepared to discuss financial goals, resolve differences (or at least agree to disagree) in spending habits, and establish a budget and/or saving and investment plan.
You’ll also need to think about whether you want a joint bank account, separate accounts, or both. How much do you want to spend on vacations? On monthly food bills? Entertainment? Gifts? Personal items? What are your long-term financial goals?
Do you have a financial plan? If you don’t, then now is the time to prepare one. Even if you do have a financial plan in place, since your marital status has changed it might be time to review and update it.
For these and other pertinent life changing events, let the Financial Advisors at Metro Accounting and Taxes be your trusted financial partner. Call the office at 470-240-5143.
Metro Accounting and Tax Services, CPA is dedicated to ensuring the accounting success of new and existing small businesses. We have created this guide to help small business owners understand the accounting treatment of gambling winnings and losses.
Do you like to gamble? Who doesn’t, especially when you’re winning.
Gambling income includes winnings from the lottery, horseracing and casinos. It also includes cash and non-cash prizes. You should know that gambling winnings are generally taxable and must be reported on your tax return. Taxpayers must report the fair market value of non-cash prizes like cars and trips to the IRS also.
The payer may issue a Form W-2G, Certain Gambling Winnings to the winning taxpayers based on the type of gambling, the amount they win and other factors. A copy of this form is also sent to the IRS. Taxpayers are also issued a Form W-2G if the payer withholds income tax from their winnings.
All gambling winnings must be reported for the year as income by the Taxpayer. This is shown on the tax return as “Other Income.” This is true even if the taxpayer doesn’t get a Form W-2G from the payer.
If you itemize your deduction, on Schedule A you are able to deduct your gambling losses. It is important to note that gambling losses can only be deducted up to the amount of gambling winnings. If you are going to claim your losses then you are required to keep all related receipts, tickets and statements.
If you are interested in avoiding errors in the classification and reporting of your taxes, contact Metro Accounting and Taxes, CPA today. We provide support with these and other accounting challenges you might face.
Metro Accounting & Tax Services, CPA is dedicated to ensuring the accounting success of new and existing small businesses. We have created this guide to help small business owners understand effective tax planning strategies that will reduce their tax liability and increase the bottom line.
WHAT IS TAX PLANNING?
Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business transactions to reduce or eliminate tax liability.
Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their CPAs, EAs, or tax advisors but tax planning is an ongoing process, and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA, EA, or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits, and deductions that are legally available to you.
TAX PLANNING STRATEGIES
Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:
In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.
The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.
Here are three examples where tax planning pays for most small business owners:
Maximizing Business Entertainment Expenses
Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.
In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.
The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records, and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!
Important Business Automobile Deductions
If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses (more about this below). In 2017, the mileage reimbursement rate is 53.5 cents per business mile (up from 54 cents per mile in 2016).
If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.
Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact the office.
Increase Your Bottom Line When You Work At Home
The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.
Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.
Section 179 expensing for tax year 2017 allows you to immediately deduct, rather than depreciate over time, up to $510,000, with a cap of $2,030,000 worth of qualified business property that you purchase during the year. The key word is “purchase.” Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification. Some deductions can be taken whether or not you qualify for the home office deduction itself.
TAX AVOIDANCE IS LEGAL, TAX EVASION IS NOT
Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:
1. Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
2. Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
3. Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.
If you’re ready to meet with a tax professional to discuss tax planning strategies for your business, call the office today 470-240-5143.
Metro Accounting & Taxes, CPA is dedicated to ensuring the accounting success of new and existing small businesses. We have created this guide to help small business owners understand the most common accounting errors performed by small businesses and ways to avoid them.
1) Mixing Personal and Business Expenses: Failing to properly separate finances can greatly complicate the filing process. If you use personal accounts to pay for business expenses and don’t keep an accurate record, it is easy to miss out on valuable deductions. Personal accounts are usually not monitored, compared to business accounts, leading some to claim expenses that were not used solely for the business. An easy solution to this issue is opening a separate account for running all business expenditures.
2) Not Keeping Expense Receipts: As with mixed bank accounts, failing to document expense receipts can cost business owners tax deductions. Many see keeping hundreds of receipts throughout the year as daunting. With modern technologies and accounting software, business owners can digitize their receipts, keep track of year-round expenses, and avoid the clutter of a physical paper trail.
3) Underutilizing Accounting Software: While QuickBooks, Microsoft Excel, and other software has made record-keeping easier than ever, not understanding these programs or failing to adopt them altogether can hamper business operations. Rushing to implement these programs can lead to human error, or may allow you to miss essential functionality. When using these programs for your business, be sure to thoroughly understand available tools and double check the information logged to avoid error.
4) Confusing Cash Flow and Profits: Many first-time business owners make the mistake of confusing their profits for cash flow. If services are supplied before receiving payment, you may show profit, but will be unable to pay the necessary bills for your business until payment is received. Regularly reviewing financial statements gives you an idea as to the positive or negative trends of your company’s cash flow and helps you better understand what adjustments can be made.
5) Trying To Do Too Much: For sole proprietors, the temptation to handle every aspect of your business by yourself can be strong. However, knowing when to hire professionals to help run and operate your company is essential. Whether it’s bringing on additional staff to run the daily operations of your business, or hiring a professional to keep your books up to date, delegating tasks helps your company maintain effective daily operations.
Contact Our Accounting Professionals Today
To avoid these common accounting mistakes and others, contact Metro Accounting & Taxes, CPA today. Our Atlanta accountant provides business owners with the support necessary to maintain long term financial stability.
Metro Accounting & Tax Services, CPA is dedicated to ensuring the accounting success of new and existing small businesses. We have created this guide to help small business owners that use their personal automobile for business purposes.
If you use your car in your job or business and you use it only for that purpose, you may be able to deduct its entire cost of operation. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use and you must keep records to support your claim.
You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.
To use the standard mileage rate, you must own or lease the car and:
Under the standard mileage rate deduction, you simply multiply the standard mileage rate by the number of business miles traveled during the year.
To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that’s business related. Including all the incidentals required to keep the car running such as: gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments
Your actual parking fees and tolls are deducted separately under both methods.
If you’re ready to meet with a tax professional to discuss which method is advantageous to your situation, call the office today 470-240-5143.
Issues that may cause problems for the owners of small construction businesses include: 1) The Accounting Methods Chosen, 2) The Capitalization of Indirect Costs to Long-Term Contracts, and 3) The classification of worker as Independent Contractor or Employee.
If you have an existing business or just starting one, it is important to understand and comply with the tax laws that affect your business. By recognizing the significance of these issues, small construction business owners can properly file their tax returns and avoid costly problems. Today we’ll discuss the accounting method issues.
Accounting Method Issues
You might be wondering what constitute accounting methods? Accounting methods are basically the set of rules use to determine when and how income and expenses are reported. It includes not only the overall method but also the accounting treatment of any material item.
Examples of accounting methods are cash receipts and disbursements, accrual, and combinations of both methods. Whichever method is elected, it must clearly reflect income. If your business operates as a C corporation with gross receipts in excess of $5 million, you generally are required to use an accrual method of accounting. If an inventory method is required because merchandise (or materials) is an income producing factor in the business, generally, an accrual method must be used for purchases and sales.
An exception to the requirements to use an accrual method is allowed for most small businesses with “average annual gross receipts” of $10 million or less. Instead the cash method of accounting is permitted. A business whose principal activity is mining, manufacturing, wholesale trade, retail trade or information industries will generally be ineligible to use this exception.
The accounting of inventory items is simplified by revenue procedure allowing their cost to be deducted in the year the merchandise is sold or paid for, whichever is later. Generally, the percentage of completion method is required for long term contracts. A long-term contract is one that is still in process at the end of your taxable year. For example, if work on a contract to construct a building begins in September 2010, and ends in January 2011, and the contractor used the calendar tax year, the contract is a long-term contract.
Home construction contracts are not subject to the percentage-of-completion method. In addition, general construction contracts are not subject to the percentage of completion method if certain completion time and gross receipts tests are satisfied. For all these exempt construction contracts, a taxpayer may use an “exempt contract” method, which includes the percentage of completion method, the exempt-contract percentage-of-completion method, the completed contract method, or any other permissible method.
Whether a method is permissible depends on a number of factors, such as the type of business entity, business activity, level of gross receipts, and existence or absence or merchandise as an income-producing factors in the business.
Taxpayers who are divorcing or recently divorced need to consider the impact divorce or separation may have on their taxes.
Alimony payments paid under a divorce or separation instrument are deductible by the payer, and the recipient must include it in income. Name or address changes and individual retirement account deductions are other items to consider.
· Child Support Payments are not Alimony. Taxpayers can deduct alimony paid under a divorce or separation decree, whether or not they itemize deductions on their return. Taxpayers must file Form 1040; enter the amount of alimony paid and their former spouse’s Social Security number or Individual Taxpayer Identification Number.
· Deduct Alimony Paid. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of taxes withheld from your wages.
· Report Alimony Received. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.
· IRA Considerations. A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse’s traditional IRA. They can only deduct contributions made to their own traditional IRA.
· Report Name Changes. Notify the Social Security Administration (SSA) of any name changes after a divorce. The name on a tax return must match SSA records. A name mismatch can cause problems in the processing of a return and may delay a refund.
For these and other tax related issues please contact a professional tax advisor for guidance.
Disasters are sometimes unavoidable and taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or insurance reimbursement.
Here are 11 things taxpayers can do to help reconstruct their records after a disaster:
· To establish the extent of the damage, taxpayers should take photographs or videos as soon after the disaster as possible.
· Taxpayers can contact the title company, escrow company, or bank that handled the purchase of their home to get copies of appropriate documents.
· Home owners should review their insurance policy as the policy usually lists the value of a building to establish a base figure for replacement.
· Taxpayers who made improvements to their home should contact the contractors who did the work to see if records are available. If possible, the home owner should get statements from the contractors to verify the work and cost. They can also get written accounts from friends and relatives who saw the house before and after any improvements.
· For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, the taxpayer can contact the attorney who handled the trust.
· When no other records are available, taxpayers can check the county assessor’s office for old records that might address the value of the property.
· There are several resources that can help someone determine the current fair-market value of most cars on the road. These resources are all available online and at most libraries:
o Kelley’s Blue Book
o National Automobile Dealers Association
o Edmunds
· Taxpayers can look on their mobile phone for pictures that show the damaged property before the disaster.
· Taxpayers can support the valuation of property with photographs, videos, canceled checks, receipts, or other evidence.
· If they bought items using a credit card or debit card, they should contact their credit card company or bank for past statements.
· If a taxpayer doesn’t have photographs or videos of their property, a simple method to help them remember what items they lost is to sketch pictures of each room that was impacted.
For assistance in arriving at loss calculation after a disaster please seek the professional assistance of a knowledgeable accountant.
Metro Accounting & Taxes, CPA is dedicated to ensuring the accounting success of all realtors and real estate investors. We have created this guide to help you understand the advantages of qualifying as a real estate professional and the tax benefits that can be derived from doing so.
Qualifying as a real estate professional can have significant tax implications with respect to both the passive activity loss rules and the net investment income tax (NIIT). Satisfying the real estate professional requirements enables a taxpayer to avoid the passive activity rule that ordinarily applies to a subset of the qualifying real estate professional’s activities – rental activities.
Instead, real estate professional’s rental activities are analyzed with respect to the general passive activity loss rules. This would sometimes allow the real estate professional to utilize current year operating losses from the rental activities against other types of income rather than only being able to utilize them against passive income. In addition, rental income recognized by a qualifying real estate professional who materially participates in the rental activities is not subject to the 3.8 percent net investment income tax.
It should be noted that simply working in real estate is not sufficient to qualify as a real estate professional. Under the applicable rules a taxpayer must pass two quantitative tests to be considered a qualified real estate professional:
1. It is required the taxpayer spend more than 50 percent of his or her personal service time in real property trade or business activities in which the taxpayer materially participates.
2. The taxpayer is also required to spend more than 750 hours in real property trade or business activities in which the taxpayer materially participates.
If a joint return is being filed, only one spouse is required to meet the above requirements. These requirements must be met annually. As a result, qualification in a prior year does not guarantee the same treatment in a subsequent year. Similarly, failing to meet the test in a given year does not preclude the individual from satisfying the requirements the following year.
Test # 1 – 50 percent personal service time and material participation
The first test essentially requires that the individual devote over 50 percent of his or her working hours to real estate activities in which he or she materially participates. As such, a person with a full-time job in an unrelated field will almost certainly struggle to satisfy this first prong of the requirement. Note that in order for a taxpayer’s time to count toward the 50 percent threshold, the taxpayer must first materially participate in the activity. Thus, it is important to first assess whether a taxpayer materially participates in a real property trade or business, and then compare the hours spent in all such activities to the total personal service time worked in all activities to see whether the first test has been satisfied.
Test # 2 – Spend > 750 hours in real property trade or business
The second test that must be met is the 750 hour test. The taxpayer carries the burden of proof to substantiate that he or she spends at least 750 hours per year performing services for these activities. It is imperative to keep accurate and detailed records that track specific tasks, meetings, responsibilities, locations, etc. This is very important as the IRS has recently been successful in court cases where taxpayers failed to provide adequate documentation to support their time spent in qualifying real estate activities.
Rental activity aggregation election
A taxpayer who satisfies these two tests, and therefore is a qualified real estate professional, is only part way there. Being a qualified real estate professional simply means that the taxpayer is not subject to the passive rule with respect to his or her rental real estate activities. But the taxpayer must still materially participate in his or her rental activities to avoid passive treatment with respect to those activities.
This determination is normally made on a property-by-property basis. In situations where the taxpayer owns many rental properties, it would ordinarily be difficult to meet the material participation thresholds for any one activity by itself. Fortunately, there is a potential solution to this problem. If a qualifying real estate professional holds a direct or indirect interest in multiple rental properties, he or she should consider making an election to aggregate the hours spent in all of rental activities in order to meet the material participation thresholds. It is important to note that hours devoted to a rental property held indirectly through a real estate investment trust (REIT) do not necessarily count for purposes of the hour tests. In other words, a taxpayer who invests in rental assets through both REIT and non-REIT structures may need to be cognizant of the hours spent on the non-REIT assets.
Seek professional advice
With recent legislation, court decisions, and increased IRS audit activity, the real estate professional rules have taken on renewed focus. Please discuss with your tax advisor the applicability of these specific rules to your situation to determine if you can qualify for and benefit from this designation.
To take advantage of the real estate professional classification, call 470-240-5143 or visit Metro Accounting & Taxes, today. Our CPA will provide you with the support necessary to maintain long term financial stability.
It is recommended that everyone in business make it a practice to keep accurate records. Keeping good records is very important to your business. Doing so will help you do the following:
Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success as it will enable the business to make informed decisions.
Prepare your financial statements
Preparation of accurate financial statements will require accurate records in the first instance. It’s like the old saying, “garbage in, garbage out”. The foundation of your financials rest on the accuracy of the information. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
Identify sources of your income
You will receive money or property from many sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.
Keep track of your deductible expenses
Unless you record them when they occur, you may forget expenses when you prepare your tax return.
Keep track of your basis in property
Your basis is the amount of your investment in property for tax purposes. You will use the basis to figure the gain or loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses.
Prepare your tax return
You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.
Support items reported on your tax returns
You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.
Have you received an IRS Notice or Letter? If yes don’t panic. Your notice or letter will explain the reason why you are being contacted by the IRS. You’ll be able to secure representation from an IRS Tax Resolution Expert to handle your case for you.
If you owe $10,000 or more you might be able to settle your debt for pennies on the dollar.
Why was I notified by the IRS?
You might be wondering why you were contacted by the IRS in the first place. The IRS sends out notices and letters for the following reasons:
What’s next?
Read each IRS notice or letter as they contain a lot of valuable information, so it’s very important that you read them carefully. If you need help in understanding the communication received please contact an IRS Tax Resolution Expert..
Respond
If your notice or letter requires a response by a specific date, pay attention to those dates and respond accordingly. Don’t ignore any deadlines as this will help you:
Keep a copy of all IRS notices or letters received.
It’s important to keep a copy of all notices or letters with your tax records. You will need these documents at a later date.
Contact an IRS Tax Resolution Expert for Help.
Do not make the mistake of taking on the IRS alone. Like not going to court without a lawyer, don’t try to handle your IRS case on your own. This might jeopardize your case and cost you more in the long run.
Real Estate Professionals generally must include in their gross income all amounts received as rent. Rental income is any payment received for the use or occupation of a property.
Expenses of renting a property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them
When to Report Income
Report rental income on your return for the year you actually or constructively receive it, if you are a cash basis taxpayer. You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.
Advance Rent
Advance rent is any amounts received before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.
Example:
You sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year’s rent and $5,000 as rent for the last year of the lease. You must include $10,000 in your income in the first year.
Security Deposits
Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.
Expenses Paid by Tenant
If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses.
Example A:
If your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill.
Example B:
While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Based on the facts in each example, include in your rental income both the net amount of the rent payment and the amount the tenant paid for the utility bills and the repairs. You can deduct the cost of the utility bills and repairs as a rental expense.
Property or Services In lieu of Rent
If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.
If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
Example:
Your tenant is a painter. He offers to paint your rental property instead of paying 2 months’ rent. You accept his offer. Include in your rental income the amount the tenant would have paid for 2 months’ rent. You can include that same amount as a rental expense for painting your property.
An individual may qualify to exclude from their income in a particular year, all or part of any gain from the sale of their main home. A main home is defined as the one in which you live most of the time.
Ownership and Use Tests
For you to be able to claim this exclusion, you must meet the ownership and use tests for the home in question. This means that during the 5-year period ending on the date of the sale, you must have:
Gain
If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income or $500,000 if a joint return was filled.
Loss
You cannot deduct a loss from the sale of your main home.
Reporting requirement
Only report the sale of your main home on your tax return if:
More Than One Home
Please note that if you have more than one home, you can exclude only the gain from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
Example A:
You own and live in a house in the city of Atlanta but you also own a beach front property in South Beach. This property is used for vacations during the summer months. The Atlanta house is your main home.
Example B:
You own a house, but you live in another house that you rent. The rented house is your main home.
Business Use or Rental of Home
Business use or rental properties also affords one the opportunity to exclude gains. You may be able to exclude the gain from the sale of a home that you have used for business or to produce rental income. But like residential sales, you must meet the ownership and use tests.
Example:
On May 30, 1997, Jack bought a house. He moved in on that date and lived in it until May 31, 1999, when he moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Jack moved back into the house on April 1, 2001, and lived there until he sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 – January 31, 2003), Jack owned and lived in the house for more than 2 years as shown in the table below.
| Five Year Period | Used as Home | Used as Rental |
|
2/1/98-5/31/99 |
16 months |
|
|
6/1/99-3/31/01 |
22 months |
|
|
4/1/01-1/31/03 |
22 months |
|
|
38 months |
22 months |
Jack can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed for renting the house.
This accounting guide was developed by Metro Accounting And Tax Services, CPA to help individuals and small businesses determine whether they are required to pay income tax. For all your accounting and tax related issues let us be your partner along the way.
The federal income tax system is a pay-as-you-go tax system. There are two ways to pay as you go:
1) Through withholding
2) Through estimated tax payments
Withholding
If you are an employee, your employer probably withholds income tax from your pay. This is done when you fill out the W-4 form when you were initially employed. The amount of taxes your employer withholds depends on:
a) The amount of your earnings
b) The information on Form W-4: 1) your marital status – married or single, 2) number of allowances claimed and 3) if you want additional amounts to be withheld.
c) If you did not fill out a Form W-4 at the commencement of employment, your employer must withhold at the highest tax rate as if you were single individual and claimed no allowances.
Apart from salaries and wages, taxes may also be withheld from other income you received over the period. These include pensions, bonuses, commissions, and even gambling winnings. Any amounts withheld is paid to the IRS on your behalf.
New Job
When you start a new job, you are required to fill out IRS Form W-4 and give it to your employer. If you need to change the information later, you must fill out a new W-4 to effect any changes.
If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid over-withholding if your employer agrees to use the part-year method.
Changing Your Tax Withholding
Events during the year may change your marital status or the number of exemptions you claimed initially, adjustments, deductions, or credits you expect to claim on your return. When this happens, you may need to give your employer a new Form W-4 to effect those changes.
Life Events
If a life event changes your withholding status or the number of allowances you are claiming, you must give your employer a new Form W-4 within 10 days after either of the following.
Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other reason. However, pay special attention to changing your withholding for the current year if such changes are due to events that occurred last year. If events in the prior year will cause a decrease in the number of your withholding allowances for this year, you must give your employer a new Form W-4 by December 1 of the prior year. If the event occurs in December of the prior year, submit a new Form W-4 within 10 days.
Having More Than One Jobs
If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. Then split your allowances between the Forms W-4 for each job. You cannot claim the same allowances with more than one employer at the same time. You can claim all your allowances with one employer and none with the other, or divide them any other way.
Married Filing A Joint Return
If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims.
Married Filing Separate Returns
If you and your spouse expect to file separate returns, each person would figure their allowances separately using the worksheets based on their own individual income, adjustments, deductions.
Getting the Right Amount of Taxes Withheld
The taxes withheld from your pay will in most cases be very close to the taxes you calculated on your return if:
But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations.
Exemption
A person can elect to be exempted from withholding for the current year only if both the following situations apply.
It is important to note that exemption from withholding only relates to federal income tax and not to Medicare or Social Security.
For all your accounting and tax related issues call the office @ 470-240-5143.
Navigating Quick-Book Online.
When you log into QuickBooks Online, the Home page is the first screen that appears. The top of the screen shows the name of the QuickBooks Online company (helpful when you are running more than one company in QuickBooks Online). Xxx hide the welcome information??
You’ll see Setup guide at the top of the Home page which can guide you through such steps as invoicing and getting set up by a pro. Clicking on Hide will collapse this guide so that you have more screen real estate available on this Home page.
Once it’s collapsed, you can click on Show in the guide to expand it again.
Below the Setup guide, you’ll see a graph related to your Profit and Loss, as well as an Expenses graph giving you a breakdown of types of expenses. You can change the date range for these areas. As you hover over any of the sections of these graphics, you will get more information about that section and you can drill down to get either a detail report related to totals or to an actual transaction.
Notice further down that there is an Income bar on the Home page showing you open invoices and which of them are overdue, as well as what was paid in the last 30 days.
On the right hand side of the Home page, there is a listing of bank and credit card balances, and, if those accounts are connected with the banks, you get information as to current bank or credit card balance versus the QuickBooks Online balance for each account, how many transactions have been downloaded and have not been matched or entered into QuickBooks Online. There is also a direct link to connect a bank or credit card account to its QuickBooks Online counterpart, as well as a drop-down to take you directly to the register for the bank or credit card account of your choice.
This section of the Home page acts as a reminder to review the bank feeds on a timely basis. You’ll learn more about the Banking Center later in this training.
Lastly, you’ll find a Tips area which you can browse in a carousel-like fashion by clicking on the sideways arrows.
At the top of the screen is a switch called Privacy. When you turn on Privacy, QuickBooks basically hides all the financial numbers on the screen to protect this sensitive information from anyone walking by your computer. This is really helpful if you’re working in QuickBooks Online and you’re in a public place such as an airport or a coffee shop.
On the left hand side of any QuickBooks Online company is the Navigation bar.
Because the Home page automatically opens when you open up QuickBooks Online, it directs the small business owner to review key metrics about their business. This is a good thing. Too often, small businesses enter transactions but don’t really look at their results until tax time. And that could be too late.
Having Duplicate Windows.
The tips below are based on Google’s Chrome browser, but many of them work in other browsers:
· Log in to your QuickBooks Online company (including the Test Drive company), right-click your browser tab, left-click Duplicate. Now you have two tabs logged in to the same QuickBooks Online Company.
· Pull one tab out of the window and you can work in QuickBooks Online on two different screens side-by-side. You can work on these two windows independently of each other. Repeat, as needed!
The way accounting professionals and clients manage financial information has changed significantly over the past few years. The rate at which businesses are migrating their workflows to the cloud is increasing rapidly and in 2016, the number of paid subscribers to QuickBooks Online surpassed 1.5 million.
Why are so many migrating to QuickBooks Online?
Technical Benefits
• QuickBooks Online is a true cloud-based application. Because it runs in a browser, users can access the company data from anywhere at any time. Multiple users of the same company account can be in different locations and easily work in the company at the same time.
• Access to data from multiple devices: computer, smartphone or tablet. The QuickBooks Online Mobile App for Android and IOS is included with QuickBooks Online subscriptions at no additional cost.
• Company data can be accessed from multiple operating systems, including Windows or Mac. This allows users of the same company data to use the platform they are most comfortable with. As long as the computer can run a supported browser and connect to the internet, you can access QuickBooks Online.
• All the data is hosted, backed up and secured by Intuit’s servers using 128 bit encryption. QuickBooks is updated frequently by the Intuit development team so you never have to install or update the program; it’s done for you behind the scenes.
9 Workflow Benefits For Clients
• Source documents can be attached to Customer and Vendor records, along with most transactions in QuickBooks. Users can snap a picture on their mobile device using the QuickBooks mobile app or upload a document from their computer. This allows for better collaboration between users and the accountant, and centralization of source documents.
• Automatically create invoices and send them to clients, including delayed customer charges for unbilled time and costs. Users can schedule Recurring Transactions to automate billing and record expenses that occur regularly and are for the same amount.
• Comprehensive Audit Log tracks all changes made to the company data including all changes to new and existing transactions, login information, list changes and access by third-party apps
• Schedule reports to be emailed to anyone at regular intervals
• Organize data with both class and location tracking to create segmented financial reports and provide detail about different profit centers • Connect QuickBooks to your online bank and credit card accounts. Transactions are downloaded automatically each day to the Banking Center where you can match them to existing transactions or create a new one.
• Set up Bank Rules to tell QuickBooks how to code downloaded Bank Feed transactions and automatically add them to the register • Invite unlimited report reader and time tracker users in QuickBooks Online Plus
• Subscribe to and use Intuit-approved third-party apps from inside QuickBooks Online
• The QuickBooks Apps for Mac and Windows gives users an experience similar to QuickBooks Desktop products.