Tag: accounting

Tax Basics for New Business

 

Today, I spoke with my absolute favorite kind of new client – a new business owner who wants to make sure she is covering all her bases when it comes to business taxes. Entrepreneurs who plan and ask for qualified professional advice have a better-than-average chance of meeting their goals.

 

All business owners need to know about taxes. All kinds of taxes: income, employment, sales and use, and property. Plus, if the business has sales or other business activities in more than one state, it has to follow the tax rules for each state. Needless to say, that involves more details than I can fit into this blog.

 

Here are the four basic tax areas that small businesses need to know:

 

  1. Income Tax

Net business income is subject to federal and state income taxes. For sole proprietors, net income is figured on Schedule C, which is part of the IRS Form 1040 for individual tax return. Net income is total business income minus the “reasonable and customary” expenses necessary to operate and sustain the business.

 

  1. Employment Tax

Payroll taxes of 15.3% must be paid on business wages or on net business income from self-employment using Schedule SE on the owner’s return. Non-owner employees must have taxes withheld and remitted to the IRS, state and Social Security Administration. Contractors to whom $600 or more is paid during the year are required to receive IRS Form 1099 to report their earnings.

 

  1. Sales Tax

State taxes are assessed on sales of products and some services, depending on the jurisdiction. Internet and mail order sales are subject to tax depending on the location of the seller and purchaser, and applicable laws. Businesses that operate in more than one jurisdiction, like my new client, must collect, report, and remit taxes in all applicable states.

 

  1. Business Property Tax

Tangible personal property used in a business is subject to property tax, usually collected at the local, or county, level. Taxed property includes furniture, machinery, tools, and all computer and peripheral equipment hardware and all operational software.

 

One business “tax” often overlooked by new businesses is a getting the appropriate business license for each jurisdiction in which it operates. Every business needs to be registered and licensed at the state and local level.

 

I am looking forward to meeting again with my new client next week. Entrepreneurs who plan and get professional advice not only meet their goals – they are fun to help.

 

Don’t Forgot those 2017 Tax Estimates

As you’re rushing to file your 2016 taxes on time, it’s easy to forget some important details.

 

Detail #1 – You get three extra days to file this year. The weekend and holidays push the filing deadline from April 15 to April 18. Great news!

 

Detail #2 – and not-so-great news — The first quarterly estimated tax payments for 2017 are due by the same day. It’s a Double Whammy for some, but that’s the way it is.

 

The IRS and state tax agencies both expect their tax payments at least quarterly. Federal estimated payments are due April 15, June 15, September 15, and January 15 of the following year. Unless, like this year, the 15th falls on a weekend or a holiday.

 

Who Needs to Pay Tax Estimates?

If all your income comes from wages, chances are that your withholdings cover your income tax liability. If you are self-employed or receive other income, such as interest, dividends, capital gains, or rent, you probably need to make estimated income tax payments.

 

How Much?

You must pay estimated tax for 2017 if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits. Withholdings or estimates must total the smaller of 90% of your 2017 tax liability, or 100% of your 2016 tax liability.

 

What if You Don’t Pay Enough?

Penalties are assessed if you do not make the required payments throughout the year, as income is received. Also, interest accrues daily on the underpaid amount. That can really add up.

 

Clearly, the IRS and other taxing agencies are serious about getting paid on time. Figure your 2017 federal income tax bill by using the IRS Withholding Calculator at http://1.usa.gov/18lMbRu. States and the District of Columbia also have online information about withholdings, estimates, and underpayment penalties.

 

When in doubt, or if you are not comfortable with DIY tax preparation, consult a qualified tax professional.

Financial Workshop Reflections

Workshops are a great way to share information that organizations can use immediately. Last week, I got an opportunity to speak with a room of entrepreneurs about three essential elements for a financially healthy organization.

 

Financial Essentials for Entrepreneurs covered three elements that must be in place for every organization:

 

  1. Financial Accounts

A separate financial account should be maintained for each business or nonprofit. It’s never too early to open a separate bank account. Each separate and distinct business should also get its own credit card to assist with payments and cash flow. Comingling personal and organizational funds presents a risk of not getting a clear, isolated view of business finances.

 

  1. Accounting Records

Accounting records should be kept for each organization to substantiate income and expenses. Keep those records up-to-date. You never know when something unexpected will come up. How would you know if you can afford it? Capture the date, amount, business purpose, and income/expense type using a method to that you can keep up with – or hire a professional to do it for you.

 

  1. Tax Compliance

Organizations must be properly registered the with the state, county, and local level, as applicable. Many counties and local jurisdictions have business property tax requirements. Employees? Got to pay employment taxes. Sales tax could also apply. Then, of course, is tax on net income for federal and state (depending on where you live or operate).

 

Up-to-date, clear financial information helps organizations stay ready to make an investment or decision. Bottom line, addressing the three essential elements described above are as good as “an apple a day” to keep your organization in good financial health.

Confused about Your Tax Filing Status?

Frequent readers know that my blog posts are often inspired by real events. A very real event right now is the 2017 Tax Filing Season Filing. Several recent conversations alerted me to the amount of confusion out there about tax filing status.

 

There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. Filing status is based on a person’s marital status and other circumstances.

 

Seven facts determine a taxpayer’s filing status:

 

  1. Marital status on the last day of the year determines marital status for the entire year.

 

  1. If more than one filing status applies, choose the one that results in the lower tax bill.

 

  1. Single filing status generally applies to anyone who is unmarried according to state law.

 

  1. Married couples can select from two filing status options: Married Filing Jointly or Married Filing Separately, whichever results in a lower combined tax liability. Some deductions and credits are limited using the Married Filing Separately filing status.

 

  1. Surviving spouses who do not remarry in the year of death can usually file a joint return with their spouse for that year.

 

  1. Head of Household generally applies to unmarried taxpayers who paid more than half the cost of maintaining a home that includes at least one qualifying person.

 

  1. Qualifying Widow(er) with Dependent Child can be filed if a spouse died during one of the last two tax years and there is a dependent child, plus some other circumstances.

 

This is just a glimpse of the rules determining tax filing status. Those “other circumstances” really matter. Talking to a qualified tax professional about filing options can help avoid expensive mistakes. To learn more on your own, the IRS has some pretty good tips at http://bit.ly/2ndwBqc.

 

Itemize or Standard Deduction – Which One is Better?

This time of year, there’s a lot of tax talk at home, at work, and on TV. Some of that talk centers on whether taxpayers should “itemize” or take the “standard deduction.”  Knowing the difference and which is better is important for keeping that tax bill as low as possible.

 

Taxpayers can itemize or take the standard deduction. Not both. Knowing how to choose comes down to these three points:

 

  1. Filing Status and Age

The standard deduction amount varies based on filing status and age. Amounts are indexed annually for inflation. For 2016, the standard deduction for a person who is single or married filing separately, and is under age 65 is $6,300. Single taxpayers age 65 and over get a $7,850 standard deduction. For married couples filing jointly, it’s $12,600.

 

  1. Getting the Most Tax Savings

Itemize deductions when the total exceeds the standard deduction. Itemized deductions include amounts paid during the year for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, gifts to charity, uninsured losses, and, depending on the situation, medical and dental expenses.

 

  1. Qualifying for the Standard Deduction

Some situations prevent taxpayers from using the standard deduction. For example, a married person filing separately from her spouse who itemizes cannot select the standard deduction, even if it’s higher than itemizing. Nonresident aliens, dual-citizen aliens, estates, trusts, and partnerships also do not qualify to take the standard deduction.

 

As usual, there’s much more to this topic than space allows here. Taxes are complicated. Consult a qualified tax professional for personalized assistance.

 

Need help choosing on your own? The IRS website has “Six Steps to Help You Choose” at: http://bit.ly/2mc4Exr

Year-end Tax Planning for Procrastinators

For real procrastinators, the end of 2016 is a long way off. December 31 is the last day to take action on this year’s income tax liability. It’s not the last minute yet, but it’s coming up! Soon, it will be too late to act and lower that tax bill.

 

Four potential tax-saving actions to take before the year ends are:

 

  1. Maximize Retirement Savings

Most retirement savings plans must be funded by December 31. A SEP IRA or a defined benefits plan must be established before year-end and funded before the returns are filed for that tax year. Contribution limits vary by plan type. Deductible amounts depend on taxpayer circumstances. Taxpayers over 50 can make higher “catch-up” contributions.

 

More details about plans and contribution limits are on the IRS website at: http://bit.ly/1UBjXJf

 

  1. Manage Gains and Losses

Overall, financial markets performed well in 2016. The gain on sales of appreciated stocks, mutual funds, or other assets are taxable. Selling assets for a lower price than the purchase price results in a tax loss. Losses can be used to offset taxable gains. Losses in excess of gains are deductible up to $3,000 ($1,500 for married filing separately).

 

  1. Charitable Contributions

Cash and non-cash contributions made to a qualified charitable organization are deductible for taxpayers who itemize their deductions. To be deductible, contributions must be made to organizations designated as tax-exempt by the IRS. Amounts of $250 or more are required to be acknowledged in writing using language specified by the IRS.

 

More details about qualified charities and deduction rules are on the IRS website at:     http://bit.ly/2g9VDPl

 

  1. “Use or Lose” Benefits

Changes in tax laws that impact tax-preferred benefits and other items occur regularly. Those changes often impact taxpayer liability. Examples include Health Savings Accounts and Residential Energy Credits. The IRS website is a great resource to learn about the impact of tax law changes by performing a word search at www.irs.gov.

 

With only a few weeks left in 2016, it’s almost time for Real Procrastinators to take action on that income tax bill. Don’t wait – 2017 is almost here.

What is a Fiduciary?

A certain presidential candidate recently used the term “fiduciary” when referring to his personal income taxes. I was confused. Fiduciary responsibility is not about personal taxes or finances. It’s about the legal obligation to act in the best interest of another party or organization. It’s about keeping a promise to use funds for a specific purpose.

 

Other listeners were probably as confused as I was when hearing “fiduciary” in a personal finance context. Three facts about fiduciary responsibility should clear up that confusion:

 

  1. Obligation to Act on Others’ Behalf

A fiduciary relationship is based on mutual faith and confidence between the individual(s) placing and accepting legal responsibility to serve the best interests of others. That includes the interests of individuals or an organization. The duties of a fiduciary include loyalty and reasonable care of assets in custody.

 

  1. Relationship Extends to All Actions

A fiduciary relationship extends to every possible case in which one party places confidence in the other party and such confidence is accepted. Placing and accepting confidence creates dependence by one party and influence by the other. The fiduciary is trusted by the dependent party to act in its best interest at all times.

 

  1. Scrutiny of Fiduciary Actions

Financial transactions between parties involved in a fiduciary relationship are subject to higher scrutiny. The spotlight on these transactions is due to the fiduciary’s dominant role that provides the capacity to profit or otherwise gain from financial decisions at the expense of the party under her or his influence.

 

It’s no wonder that these three facts will never be included in any political speech. They’re pretty dry stuff. Regardless, understanding these facts is important, whether you are accepting or placing confidence as part of a fiduciary relationship.

 

Is the Home Office Deduction for You?

Do you use part of your home for your business? Questions about home office deductions come up all the time with new tax clients. The topic also came up at last month’s IRS Tax Forum in Washington, DC.

 

A home office deduction is a potential IRS “red flag” because of how often it is abused. IRS audits find some taxpayers who inflate home expenses or take a deduction that isn’t allowed. Home office audits were described at the IRS Tax Forum, and it didn’t sound like fun. IRS auditors come to your home and use a tape measure on your home office. For real!

 

So how do you follow the tax rules and avoid the tape measure? A home office deduction can be taken for:

 

  1. Regular and Exclusive Use

You must regularly use part of your home exclusively for conducting business. Generally, deductions for a home office are based on the percentage of your home devoted to business use. Keep in mind that the IRS is strict about exclusive use. That means no personal items in the home office. No shared spaces like hallways or bathrooms, either.

 

  1. Principal Place of Business

You must show that you use your home as your principal place of business. Your home office must be used to substantially and regularly conduct business, such as in-person meetings with patients, clients, or customers in the normal course of your business. It’s okay if you also carry on business at another location.

 

If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. In addition to the tests discussed above, you must:

 

  1. Use the home office for the convenience of your employer, such as teleworking to reduce the employer’s real estate footprint. If you work at home to perform tasks around your personal schedule, a home office deduction is not allowed.

 

  1. Not rent any part of your home to your employer and use the rented portion to perform employee services for that employer.

 

If you qualify, the home office deduction can reduce your tax liability. Follow the rules and the IRS tape measure won’t stress you out.