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New IRS Standard Mileage Rates for 2020

Do you use your personal vehicle for business, charitable, medical or moving purposes? If yes, you could qualify you for an income tax deduction. How much you can deduct and how you report the expense depends on your particular situation. The rules say that qualified deductible vehicle expenses can total the greater of actual expenses or a standard rate. Both expense options are based on the number of miles driven for business, charitable, medical or moving.

Most people choose to use the standard rate because it’s easier and usually results in a larger deduction amount. The standard mileage rate is determined each year by the Internal Revenue Service based on data about the cost of operating and maintaining a vehicle, including passenger cars, vans, pickups and panel trucks.

The IRS recently issued the new standard mileage rates for 2020 to calculate the deductible costs of operating a vehicle for business, charitable, medical or moving purposes. Beginning on January 1, 2020, the standard mileage rates were reduced or stayed the same. Here are the details:
 

  • 57.5 cents per mile driven for business use, down 0.5 cents from the rate for 2019,
  • 17 cents per mile driven for medical or moving purposes, down 3 cents from 2019, and
  • 14 cents per mile driven in service of charitable organizations. The charitable rate is set by statute and remains unchanged.

Even at the lower rates, that standard mileage rate can really add up. Remember that you always have the option of calculating the actual costs of using your vehicle instead of using the standard mileage rates. Also remember that you have to track your mileage by category (e.g., business and personal) for each vehicle no matter which method you use.

Taking vehicle deductions for business, charitable, medical or moving purposes involves a lot of tracking, but the effort can be worth it. There are apps you can put on your phone to help. Once you get your system down, you’ll see that those deductions can add up and reduce the bottom line on your tax bill.

Reflections for 2019 – Plans for 2020

The end of one year and the beginning of another is the perfect time to reflect on and celebrate business and personal accomplishments from 2019. Definitely take time to pause and savor your successes. Reflecting on the goals you achieved in 2019 is also a great time to plan for what you want to achieve in 2020. You know what they say…A goal without a plan is just a dream

Whether you are expanding, launching something new or maintaining the status quo, 2020 will be different than 2019. That means setting new goals and making a new plan. Start by identifying an overarching change or improvement you want by the end of the year. Want higher profits? Increased cash flow? Need a new worker employee or automation? 

Change and improvement don’t happen without a plan to get it done. Follow these three tips to establish a plan that will get you what you want to achieve in 2020:

  • Gather the Numbers

Quantify all the applicable aspects of your goals. This task will require some research and could entail making estimates and assumptions. For example, how much profit growth do you want to achieve? Can you express that growth in dollars and as a percentage? How much would a new worker or automation project cost? How much of that cost would be one-time and how much would be ongoing? The more numbers you can nail down, the better.

  • Be Realistic

Keep market conditions and your resource capacity in mind when setting growth and other goals. It’s important to be realistic in order to ensure that your goals are achievable. Setting unrealistic objectives is not only discouraging, it can result in allocating resources – aka time and money – on activities that are unlikely to succeed. Better to target those resources on realistic, achievable goals.

  • Adjust As Needed

No matter how well you research the numbers and focus on what’s realistic, any view of future events is imperfect. Market conditions and other factors that you depended on when setting your goals could change. Periodically assess progress on meeting your objectives. Are you on track? Why or why not? Based on those answers, you may need to make some adjustments to the goals that you set at the beginning of the year.

The end of 2019 is the perfect time to savor your successes and to plan for what you want to achieve in 2020. Don’t let your goals turn into the dreams you never achieved. Establish a plan for 2020 and turn those dreams into your reality. 

Experts Predict Phishing Scams to Increase in 2020

Hospitals, accountants, law offices and other businesses have volumes of juicy, valuable personal and confidential information in their computer systems. Human beings who are imperfect work in those businesses Cyber thieves know that, so they work every day to break into computer systems to steal valuable financial and personal data. One popular method is to send “phishing” emails with links that infect the user’s computer and all the systems it touches.

Man wearing a mask in dark room in front of computer

Experts are predicting that phishing scams will increase in the 2020s, probably because they are so successful. The Seventh Annual Edition of Experian’s 2020 Data Breach Industry Forecast includes some scary predictions about phishing scams and their potential impact. Hackers are going to new heights to steal and exploit the vulnerabilities that exist in today’s technology.

You can read details of Experian’s Forecast here – https://www.experian.com/data-breach/data-breach-industry-forecast. But what can you do to protect your business?

Here are five tips to secure your computer environment and protect your data:

  • Phishing emails – Never open an email from a suspicious source, click on a link in a suspicious email or open an attachment without scanning it first. Otherwise, you could be a victim of a phishing attack and your data could be compromised. Never click links within pop-up windows, download “free” software from a pop-up, or follow email links that offer anti-spyware software. The links and pop-ups could be installing the spyware that they claim to be eliminating. 
  • Two-Factor Authentication – Many email providers now offer two-factor authentication to add an extra layer of protection. Often, two-factor authentication means the returning user must enter username and password plus another step, such as entering a security code sent via text to a mobile phone. A thief might snag you username and password but it’s highly unlikely they also would have the mobile phone to receive the security code.
  • Backup software/services – Critical files on computers should routinely be backed-up to external sources, such as a cloud storage service or an external hard drive. Periodically verify that the files are backed up and can be retrieved. Backups give you assurance in the event your business is victim to a phishing scam.
  • Anti-Virus Software – Anti-virus software scans computer files or memory for certain patterns that may indicate the presence of malicious software or definitions of known malware from cyber criminals. Anti-virus vendors find new issues and update malware daily, so it is important that you have the latest updates installed on your computer by setting it to automatically receive the latest updates.
  • Firewalls – Firewalls provide protection against outside attackers by shielding your computer or network and preventing malicious software from accessing your systems. Firewalls can be configured to block data from certain suspicious locations or applications while allowing relevant and necessary data through. But remember, firewalls do not prevent attacks; they protect against malicious traffic (unless the user accidentally installs malware – see “phishing”).

Huge volumes of valuable personal and confidential data mean that hackers will go to new heights to steal and exploit the vulnerabilities in our systems through phishing emails and other tools. Following the five security tips above will help to secure your computer environment and protect your data from cyber scams.

Do You Have to Take an RMD for 2019?

Are you age 70½ years or older? If yes, you need to pay attention to the Required Minimum Distribution (RMD) rules for traditional IRAs, 401(k) plans and other pre-tax retirement plans. Tax law doesn’t allow your untaxed money to go untouched indefinitely. RMD rules are intended to make sure that Uncle Sam gets his share of at least some of what you saved for retirement. 

Even if you aren’t close to age 70½, it’s good to know these Four RMD Facts:

  • How is the amount of the Required Minimum Distribution (RMD) calculated?

An RMD is calculated separately for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy table published by the IRS. Life expectancy tables vary based on your individual situation, such as “Joint and Last Survivor,” “Uniform Lifetime” and “Single.”

  • When must I receive my RMD from my IRA?

You must take your first RMD for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year. 

  • What happens if a person does not take a RMD by the required deadline?

If an account owner fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The additional tax is reported on IRS Form 5329Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with the federal tax return for the year in which the full amount of the RMD was not taken.

  • Can a person avoid taxes on her or his RMD?

Charitable donations can be made directly from a traditional IRA to save on taxes. People who are age 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. The IRA funds must go directly to a charitable organization. Make sure you get a receipt and an acknowledgement from the charity to substantiate your donation.

All of that information is not easy to absorb. No extra charge for reading the Four RMD Facts again. Still want to know more about RMDs and how to calculate them? Check out the IRS website at https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions#4.

Financial Duties of NonProfit Boards

Last week’s blog post, “Financial Skills for Effective Nonprofit Boards,” described some professions to keep in mind when recruiting finance-savvy Board members. This week, we talk about the financial duties of nonprofit Boards to fulfill the stewardship and oversight role known as “Fiduciary Responsibility.” 

Understanding how to fulfill fiduciary responsibilities is critically important because nonprofits collect and spend other people’s donated money. Plus, the term “Fiduciary Responsibility” is legally defined. Failure to act with due care and loyalty to the organization can have serious consequences, such as loss of public trust. 

Responsible and effective nonprofit Boards engage in these four activities to fulfill fiduciary duties to oversee the organization’s finances:

  • Establish Financial Policies

Documented policies are essential for establishing a common understanding and framework for overseeing the organization’s financial resources. Board-level financial policies define authority, delegation to management, investment objectives, risk tolerances, and risk mitigation activities to protect and preserve assets.

  • Monitor Financial Performance

Board members must receive complete periodic financial statements to oversee financial performance in relation to the budget, financial ratios, and other objectives. Financial oversight responsibilities can be performed by a Finance Committee but results must be reported to the full Board.

  • Ensure Audit or Independent Review is Conducted

The Board must be familiar with financial statement audit and IRS information reporting requirements. If applicable, based on income and asset levels, the Board is responsible for hiring the auditor and receiving the audit results. Nonprofits with income and assets below the audit thresholds should consider an independent financial review.

  • Take Corrective Action on Audit/Review Results

The results of any audit or independent financial review should be received by the Finance Committee and reported to the full Board. Reported issues or risks should be acted upon. The action plan and progress on taking corrective action should be documented and reported to the full Board.

Nonprofit Boards that address these four financial oversight activities are more likely to make appropriate financial decisions, and helps ensure that the nonprofit meets donor expectations to protect and preserve the organization’s assets, and to ensure that regulatory and legal requirements are addressed. 

Want to know more? Check out these resources for Nonprofit Boards at https://boardsource.org/board-support/.

Financial Skills for Effective Nonprofit Boards

Serving on a nonprofit Board is a big responsibility. Among other things, Boards are responsible for financial stewardship and oversight, also called “Fiduciary Responsibility.” Fulfilling financial oversight responsibilities doesn’t mean that every Board member has to be a financial expert. However, some Board members must have the necessary financial skills and knowledge to make appropriate financial decisions about the nonprofit’s donated funds and assets.

What skills and experience should Board members possess to effectively and appropriately fulfill the organization’s Fiduciary Responsibility? Should any particular financial professional background and experience be included in the Board’s membership? As usual, there isn’t just one “right” answer, but here’s some insight.

Effective nonprofit Boards often look to these four professional backgrounds to recruit some of their members:

Accountant

            Accountants have technical training and experience that help nonprofits ensure that they get clear and reliable financial reports. They are used to helping their clients understand their finances. They can provide that same understanding to their fellow Board members. Also, Board members who work in public accounting or in a corporate setting know how to use financial statements as planning and management tools.

Banker

            Bankers know the actions necessary to achieve financial goals and assess risk. Lenders and other banking professionals help a range of organizations meet their financial needs. That knowledge is hugely valuable to any nonprofit. Bankers’ experience in reading and interpreting financial information is also invaluable for making informed financial decisions. 

Project Manager

            Project management boils down to planning, tracking and controlling a budget, schedule, and resources to achieve a goal. Skills in those areas are an asset for any organization. Project managers have organizational and analytical skills to help nonprofits plan and assess financial decisions, monitor results, and track achievements, including programmatic results.

Chief Operating Officer/Administrator

            Board members with experience running a business, agency, or department provide an opportunity to increase your Board’s financial IQ. Chief Operating Officers and Administrators are familiar with the inputs and considerations needed to make informed and appropriate financial decisions. They are also accustomed to making difficult decisions under stress, handy to have in any organization. 

Getting the right mix of Board members with a financial background is crucial for nonprofits to fulfill their Fiduciary Responsibility. Effective Boards make sure that some of their members possess the necessary financial skills and knowledge to make appropriate financial decisions about the nonprofit’s donated funds and assets.

So, now you have some Board members with financial knowledge. How do they fulfill help the entire Board fulfill its Fiduciary Responsibility? Find out by coming back to read next week’s blog post, “Financial Duties of Nonprofit Boards.”

Taxes and LLCs

Regular readers of my blog posts know I’ve addressed LLCs and taxes before. Questions about how to file taxes for an LLC still come up all the time, including last week at my Start-Up with Financial Success workshop at BizLaunch/Arlington Economic Development. So I decided to pull up a blog from “the Archives” and update it to share again.

Piece of paper that says "TAX" with hand holding pen

The first question I ask new tax clients who own a business is, “What type of business do you have?” The response I often get is “I have an LLC.” That answer isn’t enough information for me to know how and when to file their business taxes. I need to ask more questions at that point, like “and how do you operate for tax purposes?” Answering that one can be tough. 

An LLC is a state-defined limited liability legal business structure. Business owners often form an LLC to protect their personal assets in case their business is sued. An LLC can file business income taxes in one of three different ways, depending on the circumstances:

  1. Sole Proprietorship

Individual business owners that have not incorporated are, by default, a Sole Proprietor. Sole Proprietors report income and expenses on a separate form filed with the owner’s individual income tax return, IRS Schedule C, “Profit or Loss from Business.” A separate Schedule C must be filed for each business that the owner operates. Net business profits are subject to income tax and the employer and employee portions of Medicare and Social Security taxes (i.e., 15.3% in 2019).

  1. Partnership

Two or more individuals in business together without incorporating are, by default, a Partnership. Partnerships are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1065, “U.S. Return of Partnership Income.” Partners receive an IRS Form K-1 for each one’s pro-rata share of non-wage income and expenses, based on the operating agreement (a MUST). Partners are responsible for tracking the basis of their shares to determine how distributions are taxed.

  1. Subchapter S Corporation

Qualifying businesses can take the Subchapter-S election and avoid the double taxation of a C Corp. A number of rules apply to see if a business owner(s) qualifies. Sub-S Corps are also considered a separate tax entity and are required to file a separate income tax return, IRS Form 1120S, “U.S. Income Tax Return for an S corporation.” Shareholders receive an IRS Form K-1 for their share of non-wage income and expenses, based on the operating agreement (again, a MUST). Owner/employees earn wages and get a W-2.

Determining how your LLC operates for tax purposes is not easy. It depends on the circumstances and many rules apply. Need more information? The IRS has you covered, as usual. Check out their tax information, tools and resources for business and self-employed individuals at https://www.irs.gov/businesses.

The Earned Income Tax Credit Still Exists!

Many of the tax rule changes under the 2017 Tax Cuts and Jobs Act eliminated or reduced tax benefits that we were used to. For example, miscellaneous itemized deductions and personal exemptions are gone and deductible state and local taxes are capped at $10,000. Isn’t there any good news about taxes? Yes! The Earned Income Tax Credit, or EITC, still exists! 

Don’t leave money on the table!

EITC is a valuable tax benefit for working people with low-to-moderate income. Eligibility and the credit amount depend on your earned income and number of eligible children in your household. For example, in 2019, a married couple that earns up to $52,493 with two eligible children could get a $5,828 federal tax credit. For 2018, the average EITC credit was $2,445. 

Five things that you should know about EITC:

  1. A tax credit is even better than a tax deduction because it’s a dollar-for-dollar tax liability reduction, not just a reduction of taxable income.
  2. EITC is a refundable credit and could reduce your tax liability to a “negative” amount. Your refund could be even bigger than the amount of federal taxes that were withheld from your paycheck. 
  3. Taxpayers qualify based on their income, the number of children they have, and the filing status they use on their tax return. For a child to qualify, they must live with the taxpayer for more than six months of the year.
  4. To qualify for EITC, you must have earned income (e.g., wages or self-employment income) that cannot exceed an IRS-specified amount that is adjusted annually. Taxpayers may move in and out of EITC eligibility, especially after major life events.
  5. To get the credit, you must file an income tax return, even if you do not owe any tax or are not otherwise required to file. 

Some people don’t know about EITC or they do not know that they qualify. Each year, 30% of the EITC-eligible population is new to this valuable tax credit, many of whom don’t know about it. Not taking a credit that you qualify is just like giving away money! Who wants to do that? Don’t miss out on your EITC refund. Don’t let your friends and family miss out on their EITC refunds. 

Need help? Get details about income limits, credit amounts and eligibility at https://www.irs.gov/newsroom/the-earned-income-tax-credit-can-put-money-in-taxpayers-pockets.