Business Financial Records

More than 500,000 small businesses are born every year, according to the Small Business Administration (SBA). Every year, a few of those small businesses find their way to me and ask questions like: How do I keep my business finances straight? When should I start keeping financial records? What tools should I use to manage it all?

 

Every business is different but they all have one thing in common – they can’t make good decisions without getting control over and understanding their finances. Establishing financial systems and processes is essential. Hiring a qualified bookkeeper or accountant is one way to get started, but many new businesses don’t have the budget.

 

I only have the capacity to help a few new businesses every year. For those I can’t get to, here are three steps that business owners and entrepreneurs can take to get control over and understand their finances, and to make good financial decisions:

 

  1. Separate Business and Personal Finances

Open a separate business account to avoid commingling personal and business funds. Don’t wait – open the account as soon as possible. If you can, do it before incurring any business expenses. Apply for a business credit card to avoid putting business expenses on your personal credit card. Separating personal and business finances allows for a transparent view of your business progress. It also helps to establish that you are operating real business, not a hobby.

 

  1. Track All Financial Activity

Maintain a record of all business income and expenses. Expenses should be tracked by category, such as rent and advertising, so you know where your funds are going. The IRS does not specify a particular system or format for business records. The only requirement is that your records are accurate, complete, and provide enough detail to identify the underlying source documents. Source documents may be kept electronically. Computer software packages purchased online or in retail stores can be very helpful, easy to use, and require very little knowledge of bookkeeping and accounting.

 

  1. Plan and Monitor

Even without a formal budget, you need to plan for monthly and annual income and expenses. Having a plan for your finances helps to prioritize your business activities and provides a baseline to monitor your progress. Didn’t meet your plan? Don’t see it as a failure; it’s an opportunity to assess your plan and adjust your activities.

 

Paying a qualified and experienced professional to help set-up sufficient record keeping is a great option. But if that’s not in your budget, taking these three steps will help you feel confident that your records can help you to make good decisions for your business and to satisfy the IRS.

Year-end Donation Time is Here!

Tomorrow is Thanksgiving, the beginning of Giving Season and that annual scurry to make charitable tax deductions before year-end. Non-profit organizations typically receive a large percentage of their donations in November and December. So now is a great time to remember four important facts about charitable tax deductions, before you write that check or click “Donate” on that website.

 

Whatever charity your heart tells you to support, you also expect to save some tax money. But how can be sure that your donation is deductible? Just in time for Giving Season, here are answers to four common questions about charitable donations – Which, Who, What, and How:

 

Which Donations are Deductible?

You can only deduct donations to qualified charities that meet IRS non-profit status requirements. Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. A list of qualified charities is posted on the IRS’ “Exempt Organizations Select Check” tool.

 

Who Can Take a Deduction?

Under current tax law, donations to qualified charities can only be deducted by taxpayers who itemize their deductions using IRS Schedule A. Donation deductions could be limited if your adjusted gross income exceeds a specified amount, based on your filing status.

 

What Documentation is Needed?

You must maintain a bank record or other written communication from the charity. Documentation must contain the name of the organization, the date of the donation and the amount. Donations of $250 or more must be acknowledged in writing by the charity stating the date and amount of the donation. Your deduction could be reduced by the value of anything you received in return, such as the cost of a fundraising dinner.

 

How about Property Donations?

Donations don’t have to be monetary. You can also donate items such as clothing, household goods, vehicles, stock, or real estate. Property donations are subject to more reporting rules than monetary donations. Donated vehicles valued at more than $500 and donated real property and other items valued over $5,000 are subject to even more rules and documentation requirements.

 

Want more information? Consult a qualified tax professional or check out the IRS website at here.

 

Too Late to Reduce or Avoid 2017 Tax Penalties?

All year, you’ve been meaning to check whether your tax withholding and estimated payments will cover your tax liability. But 2017 has been super busy. It’s mid-November, and you’re just getting around to it. Is it too late to reduce or avoid tax penalties if you owe? Maybe not…

 

To avoid a penalty for 2017, tax withholdings or estimates must total 90% of your 2017 tax liability, or 100% of your 2016 tax liability, whichever is lower. Wage earners usually have taxes withheld from their pay throughout the year. Self-employed individuals and wage earners with a side gig need to make estimated tax payments.

 

Since 2010, the IRS has seen an increase in the number of taxpayers assessed underpayment penalties and interest, up 40% from 7.2 million a year to 10 million. Interest on unpaid amounts is calculated based on IRS rates, and accrues daily until the amount due is paid. That can really add up!

 

Here are four ways to avoid being one of those statistics:

 

  1. Increase tax withholdings from wages for the rest of the year by submitting a new IRS Form W-4 and a new state withholding authorization with your employer. Reducing the number of exemptions that you claim increases the amount of tax withheld. Don’t overdo it! Avoid over withholding and giving Uncle Sam an interest-free loan until you get your 2017 refund.

 

  1. Pay estimated tax for 2017 if you expect to owe at least $1,000, after tax withholdings and refundable credits. Estimated tax payments are normally due on April 15, June 15, September 15and January 15 of the following year, unless the due date falls on a weekend or holiday. Paying amounts due in advance of the fourth quarter payment deadline on January 16, 2018, will stop the clock on 2017 interest accruals.

 

  1. Taxpayers who receive income unevenly during the year can make estimated tax payments as funds are earned or received. That means if most of your income comes in during the last few months of the year, you can make lower estimated tax payments earlier in the year and higher payment amounts later in the year.

 

  1. Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled or retired.

 

Think that the IRS loves to charge penalties? No! They want to help taxpayers avoid penalties. To raise awareness, the IRS recently launched a new “Pay as You Go, So You Don’t Owe” web page, with tips and resources designed to help taxpayers. Portions of the site focus on self-employed taxpayers, including those with side gigs. The sharing economy page explains tax withholding and estimated tax payments to reduce or avoid tax penalties.

Tax Scam Calls Still Happening

It’s still happening. It happened to me just last week. I came home to a voicemail telling me that four warrants are out for my arrest and I need to pay up or turn myself in. Of course, the caller conveniently provided a callback number. The caller also sounded automated. Who would fall for that? You might be surprised…

 

Hundreds of unsuspecting taxpayers are still being defrauded of thousands of dollars. Otherwise, the scam callers would stop. It wouldn’t be worth their time. Taxpayers should not take the bait and fall for this trick. But it can be really intimidating to get a threatening call about what is already a scary topic – your taxes.

 

Four tips to help taxpayers avoid getting scared enough to become a scam victim:

 

  1. The IRS initiates most contacts through regular mail delivered by the United States Postal Service.

 

  1. The real IRS will not:
  • Call to demand immediate payment
  • Call someone who owes taxes without first sending a bill in the mail
  • Demand tax payment without allowing the taxpayer to appeal the amount owed
  • Require a taxpayer to pay in a certain way, such as with a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten to bring in law enforcement to arrest a taxpayer who doesn’t pay
  • Threaten a lawsuit

 

  1. Special circumstances when the IRS will come to a home or business include:
  • When a taxpayer has an overdue tax bill
  • When the IRS needs to secure a delinquent tax return or a delinquent employment tax payment
  • To tour a business as part of an audit
  • As part of a criminal investigation

 

  1. IRS Revenue Agents who may conduct a visit to a taxpayers home or business carry two forms of official identification that have serial numbers. Taxpayers can check both IDs. Revenue Agents conducting audits may call taxpayers to set up appointments, after having first notified them by mail. By the time the IRS visits a taxpayer at home, the taxpayer would be well aware of the audit.

 

Have you been called or visited by someone impersonating the IRS? Don’t be scared or intimidated. Hang up the phone and visit IRS.gov for information about how to detect and report tax scams.

 

Taxes and Rental Property

If you got to the beach this summer, you probably noticed those huge vacation homes lining the shore line. Owners rent them out for the season, or by the week or month. Some property owners rent houses or apartments year-round. Others rent out an extra bedroom or their basement for extra money.

 

Renting out a residence, such as a summer vacation home, when you are not using it, or a portion of your home, you may be eligible to deduct expenses against the rental income. You might even be able to deduct expenses in excess of the rental income and claim a loss that can offset other income. Sounds great; as long as you qualify based on the tax rules and limits.

 

Four rental property tax rules and limits that you need to know:

 

  1. Rental Days Personal Days

You cannot claim a tax loss on a rental property for the year if you use it personally for 14 days, or 10 percent of days the home is rented out, whichever is greater. In that case, you can only deduct rental expenses up to the amount of rental income. Exception — a day spent making repairs or improvements do not count as a personal day if you have the records to back it up.

 

  1. Deductible Expenses

In general, income from a rental property is taxable. Deductions from that income can be taken for expenses related to the rental, such as mortgage interest, property taxes, insurance, repairs, and utilities. If you are renting out your basement or some other portion of your home, expenses related to the rental portion can be allocated to offset rental income. Direct rental expenses, such as painting or repairing the rented portion, can be 100% deducted.

 

  1. At-Risk and Passive Activity Limits

The deductible portion of losses from rental real estate activity may be limited under two sets of rules: at-risk rules and passive activity limits. These rules apply if you are not at risk of loss for a property placed in service after 1986 that is operated as a passive activity. In most cases, real estate rental activities are considered to be passive. There are exceptions, but these rules can limit deductible losses.

 

  1. Depreciation

The cost of income-producing property can be deducted yearly by depreciating the property. The amount of depreciation deduction is determined by basis in the property used as a rental, the recovery period established by IRS rules, and the depreciation method used. Depreciation reduces the property’s basis for figuring gain or loss upon sale or exchange.

 

So if you plan to rent out your vacation property or your basement, you need to know the rules and limitations. Get more details about the tax rules and limits for your rental property from the IRS at https://www.irs.gov/pub/irs-pdf/p527.pdf