Seven Common Small Business Tax Misperceptions
One of the biggest hurdles you’ll face in running your own business is staying on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux and increasingly complicated.
The old legal saying that “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” claim.
On the flip side, 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 a professional accountant handle your taxes.
Tax professionals have years of experience with tax preparation, regularly 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.
1. 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.
You can also elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred. Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred. 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.
2. Overpaying the IRS Makes you “Audit Proof.”
The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. 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 a tax professional.
3. 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.
4. 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.
5. 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.
6. Requesting an Extension on your Taxes is an Extension to Pay Taxes.
Wrong. Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.
7. 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.
Whether it’s a missed estimated tax payment or filing deadline, an improperly claimed deduction, or incomplete records, understanding how the tax system works is beneficial to any business owner. 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 call the office for assistance.
Five Ways to Improve Your Financial Situation
If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble, then here are some steps to take to avoid financial ruin in the future.
If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action–before the bill collectors start calling.
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 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.
Tip: 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 and itemize necessary expenses (such as housing and healthcare) and optional expenses (such as entertainment and vacation travel). Stick to the plan.
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 and consolidate your debts. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense. In addition, 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.
Tip: Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.
Caution: Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.
Caution: Second mortgages greatly increase the risk that you may lose your home.
You can regain financial health if you act responsibly. But don’t wait until bankruptcy court is your only option. If you’re having financial troubles, don’t hesitate to call.
The Home-Based Business: Basics to Consider
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 rising 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 any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:
- Can you describe in detail the business you plan on establishing?
- What will be your product or service?
- Is there a demand for your product or service?
- Can you identify the target market for your product or service?
- Do you have the talent and expertise needed to compete successfully?
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, and involves an honest assessment of your own personality, an understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead and 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:
- Are you a self-starter?
- Can you stick to business if you’re working at home?
- Do you have the necessary self-discipline to maintain schedules?
- Can you deal with the isolation of working from home?
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. For more information see the article, Do You Qualify for the Home Office Deduction? below.
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.
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:
- Work certificate or a license from the state (your business’s name may also need to be registered with the state)
- Sales tax number
- Separate business telephone
- Separate business bank account
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.
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.
It is essential that you know 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 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.
Tax-Free Savings for College
According to a recent study published by the Federal Reserve Bank of San Francisco, researchers found that over a lifetime, the average U.S. college graduate will earn at least $800,000 more than the average high school graduate–even after taking into consideration the cost of college tuition and the four years of lost wages it entails. Despite this, most people still feel that a college education is worth the investment.
That said, however, the need to set money aside for their child’s education often weighs heavily on parents. Fortunately, there are two savings plans available to help parents save money as well as provide certain tax benefits. Let’s take a closer look.
The two most popular college savings programs are the Qualified Tuition Programs (QTPs) or Coverdell Education Savings Accounts (ESAs). Whichever one you choose, try to start when your child is young. The sooner you begin saving, 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 your son is six years old, you’ll have to save almost double that amount every year for 12 years.
How Much Will College Cost?
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 2.9 percent before adjusting for inflation, rising from $9,145 in 2014-15 to $9,410 in 2015-16.
Average published tuition and fees at private nonprofit four-year institutions increased 3.6 percent before adjusting for inflation, rising from $31,283 in 2014-15 to $32,405 in 2015-16. Undergraduates received an average of $14,210 in financial aid in 2014-15, including $8,170 in grants from all sources, $4,800 in federal loans, $1,170 in education tax credits and deductions, and $70 in Federal Work-Study.
Saving with Qualified Tuition Programs (QTPs)
Qualified Tuition Programs, also known as 529 plans, are often the best choice for many families. Every state now has a program allowing persons to prepay for future higher education, with tax relief. There are two basic plan types, with many variations among them:
- The prepaid education arrangement. With this type of plan, one is essentially buying future education at today’s costs, by buying education credits or certificates. This is the older type of program and tends to limit the student’s choice to schools within the state; however, private colleges and universities often offer this type of arrangement.
- Education Savings Account (ESA). With an ESA, contributions are made to an account to be used for future higher education.
Tip: When approaching state programs, one must distinguish between what the federal tax law allows and what an individual state’s program may impose.
You may open a 529 plan in any state, but when buying prepaid tuition credits (less popular than savings accounts), you will want to know what institutions the credits will be applied to.
Unlike certain other tax-favored higher education programs, such as the American Opportunity Credit (formerly the Hope Credit) and Lifetime Learning Credit, federal tax law doesn’t limit the benefit to tuition, but can also extend it to room, board, and books (individual state programs could be narrower).
The two key individual parties to the program are the Designated Beneficiary (the student-to-be) and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program.
There are no income limits on who may be an account owner. There’s only one designated beneficiary per account. Thus, a parent with three college-bound children might set up three accounts. Some state programs don’t allow the same person to be both beneficiary and account owner.
Tax Rules Relating to Qualified Tuition Programs
Income Tax. Contributions made by an account owner or other contributor are not tax deductible for federal income tax purposes, but earnings on contributions do grow tax-free while in the program.
Distributions from the fund are tax-free to the extent used for qualified higher education expenses. Distributions used otherwise are taxable to the extent of the portion which represents earnings.
A distribution may be tax-free even though the student is claiming an American Opportunity Credit (formerly the Hope Credit) or Lifetime Learning Credit, or tax-free treatment for a Coverdell ESA distribution, provided the programs aren’t covering the same specific expenses.
Distribution for a purpose other than qualified education is taxable to the one getting the distribution. In addition, a 10 percent penalty must be imposed on the taxable portion of the distribution, which is comparable to the 10 percent penalty in Coverdell ESAs.
The account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.
Tip: In 2009, the American Recovery and Reinvestment Act (ARRA) added expenses for computer technology/equipment or Internet access to the list of qualifying expenses. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature. In general, however, expenses for computer technology are not considered qualified expenses.
Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them. Thus they qualify for the up-to-$14,000 annual gift tax exclusion in 2016 (same as 2015). One contributing more than $14,000 may elect to treat the gift as made in equal installments over the year of the gift and the following four years so that up to $56,000 can be given tax-free in the first year.
However, a rollover from one beneficiary to another in a younger generation is treated as a gift from the first beneficiary, an odd result for an act the “giver” may have had nothing to do with.
Estate Tax. Funds in the account at the designated beneficiary’s death are included in the beneficiary’s estate, another odd result, since those funds may not be available to pay the tax.
Funds in the account at the account owner’s death are not included in the owner’s estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $14,000. For example, if the account owner made the election for a gift of $56,000 in 2016, a part of that gift is included in the estate if he or she dies within five years.
Tip: A Qualified Tuition Program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $56,000 avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.
State Tax. State tax rules are all over the map. Some reflect the federal rules; some reflect quite different rules. For specifics of each state’s program, see College Savings Plans Network(CSPN). If you need assistance with this, please contact us.
Saving with Coverdell Education Savings Accounts (ESAs)
You can contribute up to $2,000 in 2016 to a Coverdell Education Savings account (a Section 530 program formerly known as an Education IRA) for a child under 18. These contributions are not tax deductible but grow tax-free until withdrawn. Contributions for any year, for example, 2016 can be made through the (unextended) due date for the return for that year (April 17, 2017). There is no adjustment for inflation; therefore the $2,000 contribution limit is expected to remain at $2,000.
Only cash can be contributed to a Coverdell ESA, and you cannot contribute to the account after the child reaches his or her 18th birthday.
The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.
Anyone can establish and contribute to a Coverdell ESA, including the child. An account may be established for as many children as you wish; however, the amount contributed during the year to each account cannot exceed $2,000. The child need not be a dependent, and in fact, does not even need to be related to you. The maximum contribution amount in 2016 for each child is subject to a phase-out limitation with a modified AGI between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers.
A 6 percent excise tax (to be paid by the beneficiary) applies to excess contributions. These are amounts in excess of the applicable contribution limit ($2,000 or phase out amount) and contributions for a year that amounts are contributed to a Qualified Tuition Program for the same child. The 6 percent tax continues for each year the excess contribution stays in the Coverdell ESA.
Exceptions. The excise tax does not apply if excess contributions made during 2016 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2017, for a calendar year taxpayer). However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. The excise tax does not apply to any rollover contribution.
The child must be named (designated as beneficiary) in the Coverdell document, but the beneficiary can be changed to another family member–to a sibling for example when the first beneficiary gets a scholarship or drops out. Funds can also be rolled over tax-free from one child’s account to another child’s account. Funds must be distributed not later than 30 days after the beneficiary’s 30th birthday (or 20 days after the beneficiary’s death if earlier). For “special needs” beneficiaries the age limits (no contributions after age 18, distribution by age 30) don’t apply.
Withdrawals are taxable to the person who gets the money, with these major exceptions: Only the earnings portion is taxable (the contributions come back tax-free). Also, even that part isn’t taxable income, as long as the amount withdrawn does not exceed a child’s “qualified higher education expenses” for that year.
The definition of “qualified higher education expenses” includes room and board and books, as well as tuition. In figuring whether withdrawals exceed qualified expenses, expenses are reduced by certain scholarships and by amounts for which tax credits are allowed. If the amount withdrawn for the year exceeds the education expenses for the year, the excess is partly taxable under a complex formula. A different formula is used if the sum of withdrawals from a Coverdell ESA and from the Qualified Tuition Program exceeds education expenses.
As the person who sets up the Coverdell ESA, you may change the beneficiary (the child who will get the funds) or roll the funds over to the account of a new beneficiary, tax-free, if the new beneficiary is a member of your family. But funds you take back (for example, withdrawal in a year when there are no qualified higher education expenses, because the child is not enrolled in higher education) are taxable to you, to the extent of earnings on your contributions, and you will generally have to pay an additional 10 percent tax on the taxable amount. However, you won’t owe tax on earnings on amounts contributed that are returned to you by June 1 of the year following contribution.
Considering the wide differences among state plans, federal and state tax issues, and the dollar amounts at stake, please call the office before getting started with any type of college savings plan.
Charitable Contributions of Property
If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. However, if the property fits into one of the categories discussed here, the amount of your deduction must be decreased. As with many aspects of tax law, the rules are quite complex. If you’re considering a charitable contribution of property, here’s what you need to know:
After discussing how to determine the fair market value of something you donate, we’ll discuss the following categories of charitable gifts of property:
- Contributions subject to special rules
- Property that has decreased in value;
- Property that has increased in value;
- Food Inventory.
- Bargain Sales.
Determining Fair Market Value
Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all of the relevant facts.
Used Clothing and Household Items.
The fair market value of used clothing and used household goods, such as furniture and furnishings, electronics, appliances, linens, and other similar items is typically the price that buyers of used items actually pay clothing stores, such as consignment or thrift shops. Be prepared to support your valuation of other household items, which must be in good used condition unless valued at more than $500 by a qualified appraisal, with photographs, canceled checks, receipts from your purchase of the items, or other evidence.
Cars, Boats, and Aircraft
The FMV of a donated car, boat, or airplane is generally the amount listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. The FMV may be less than that, however, if the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear.
Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because the physical condition is so critical to the value.
If you donate a qualified vehicle to a qualified organization, and you claim a deduction of more than $500, you can deduct the smaller of the gross proceeds from the sale of the vehicle by the organization or the vehicle’s fair market value on the date of the contribution. If the vehicle’s fair market value was more than your cost or other basis, you may have to reduce the fair market value to figure the deductible amount.
Paintings, Antiques, and Other Objects of Art.
Deductions for contributions of paintings, antiques, and other objects of art should be supported by a written appraisal from a qualified and reputable source unless the deduction is $5,000 or less.
- Art valued at $20,000 or more. If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal to your return. For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8 x 10-inch color photograph or a color transparency no smaller than 4 x 5 inches, must be provided upon request.
- Art valued at $50,000 or more. If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for that item from the IRS. You must request the statement before filing the tax return that reports the donation.
Contributions Subject to Special Rules
Special rules apply if you contribute:
- Clothing or household items,
- A car, boat, or airplane,
- Taxidermy property,
- Property subject to a debt,
- A partial interest in property,
- A fractional interest in tangible personal property,
- A qualified conservation contribution,
- A future interest in tangible personal property,
- Inventory from your business, or
- A patent or other intellectual property.
Donating Property That Has Decreased in Value
If you contribute property with a fair market value that is less than your basis in it (generally, less than what you paid for it), your deduction is limited to its fair market value. You cannot claim a deduction for the difference between the property’s basis and its fair market value. Common examples of property that decreases in value include clothing, furniture, appliances, and cars.
Donating Property That Has Increased in Value
If you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction. Again, your basis in the property is generally what you paid for it. Different rules apply to figuring your deduction, depending on whether the property is Ordinary income property, Capital gain property, or Ordinary Income Property.
Ordinary Income Property
Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets held 1 year or less.
Equipment or other property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income under the tax law, had the property been sold at its fair market value at the time of contribution.
Capital Gain Property
Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in a long-term capital gain. Capital gain property includes capital assets held more than 1 year.
Capital assets. Capital assets include most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes. For purposes of figuring your charitable contribution, capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than 1 year.
Real property. Real property is land and generally, anything that is built on, growing on, or attached to land.
Depreciable property. Depreciable property is property used in business or held for the production of income and for which a depreciation deduction is allowed.
Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization.
Special rules apply to certain donations of food inventory to a qualified organization. Please call if you would like information about donations of food inventory.
A bargain sale of property to a qualified organization (a sale or exchange for less than the property’s fair market value) is partly a charitable contribution and partly a sale or exchange. The part of the bargain sale that is a sale or exchange may result in a taxable gain.
Seek advice from a tax professional.
Stiff penalties may be assessed by the IRS if you overstate the value or adjusted basis of donated property. If you’re considering a charitable contribution of property, don’t hesitate to call the office to speak with a qualified tax professional.
Deducting Moving Expenses
If you’ve moved–or are planning to move–this year to start a new job you may be able to deduct certain moving-related expenses on your tax return. You may also be able to deduct these expenses even if you kept the same job but moved to a different location.
1. Expenses must be close to the time you start work. Generally, you can consider moving expenses that you incurred within one year of the date you first report to work at a new job location.
2. Distance Test. Your move meets the distance test if your new main job location is at least 50 miles farther from your former home than your previous main job location was from your former home. For example, if your old main job location was three miles from your former home, your new main job location must be at least 53 miles from that former home.
3. Time Test. Upon arriving in the general area of your new job location, you must work full-time for at least 39 weeks during the first year at your new job location. Self-employed individuals must meet this test, and they must also work full time for a total of at least 78 weeks during the first 24 months upon arriving in the general area of their new job location. 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. There are some special rules and exceptions to these general rules. Please call if you’d like more information.
4. Travel. You can deduct lodging expenses (but not meals) for yourself and household members while moving from your former home to your new home. You can also deduct transportation expenses, including airfare, vehicle mileage, parking fees and tolls you pay, but you can only deduct one trip per person.
5. Household goods. You can deduct the cost of packing, crating and transporting your household goods and personal property, including the cost of shipping household pets. You may be able to include the cost of storing and insuring these items while in transit.
6. Utilities. You can deduct the costs of connecting or disconnecting utilities.
7. Nondeductible expenses. You cannot deduct the following moving-related expenses: any part of the purchase price of your new home, car tags, a driver’s license renewal, costs of buying or selling a home, expenses of entering into or breaking a lease, or security deposits and storage charges, except those incurred in transit and for foreign moves.
8. Form. You can deduct only those expenses that are reasonable for the circumstances of your move.
9. Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, the reimbursement may have to be included as income on your tax return.
10. Update your address. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS.
Don’t hesitate to call if you have any questions about deducting moving expenses or need help figuring out the amount of your deduction for moving expenses.
Do You Qualify for the Home Office Deduction?
If you use part of your home for business, you may be able to deduct expenses for the business use of your home, provided you meet certain IRS requirements.
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
- as your principal place of business, or
- as a place to meet or deal with patients, clients or customers in the normal course of your business, or
- in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.
2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
If you’re not sure whether you qualify for the home office deduction, please contact the office. Help is only a phone call away.
Tax Tips for Individuals Selling Their Home
If you sell your home and make a profit, do you know that the gain may not be taxable? That’s just one key tax rule that you should know. Here are ten facts to keep in mind if you sell your home this year.
1. If you have a capital gain on the sale of your home, you may be able to exclude your gain from tax. This rule may apply if you owned and used it as your main home for at least two out of the five years before the date of sale.
2. There are exceptions to the ownership and use rules. Some exceptions apply to persons with a disability. Some apply to certain members of the military and certain government and Peace Corps workers. For additional details, please call.
3. The maximum amount of gain you can exclude is $250,000. This limit is $500,000 for joint returns. In addition, the Net Investment Income Tax will not apply to the excluded gain.
4. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
5. You must report the sale on your tax return if you can’t exclude all or part of the gain. And you must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. Keep in mind that if you report the sale you may be subject to the NIIT.
6. Generally, you can exclude the gain from the sale of your main home only once every two years.
7. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
8. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale.
9. If you sell your main home at a loss, you can’t deduct it.
10. After you sell your home and move, be sure to give your new address to the IRS. You can send the IRS a completed Form 8822, Change of Address, to do this.
Important note about the Premium Tax Credit. If you receive advance payment of the Premium Tax Credit in 2016, it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.
If you have any questions, please call.
It’s Time for a Premium Tax Credit Checkup
If you or anyone in your family receive advance payments of the premium tax credit, now is a good time to check on whether you need to adjust your premium assistance.
Because advance payments are paid directly to your insurance company (thereby lowering out-of-pocket cost for your health insurance premiums), changes to your income or family size may affect your credit. Therefore, you should report changes that have occurred since the time that you signed up for your health insurance plan.
Changes in circumstances include any of the following and should be reported to your Marketplace when they happen:
- Increases or decreases in your household income including, lump sum payments; for example, lump sum payment of Social Security benefits
- Birth or adoption of a child
- Other changes affecting the composition of your tax family
- Gaining or losing eligibility for government sponsored or employer-sponsored health care coverage
- Moving to a different address
Reporting the changes when they happen helps you to avoid getting too much or too little advance payment of the premium tax credit. Getting too much may mean that you owe additional money or receive a smaller refund when you file your taxes. Getting too little could mean missing out on premium assistance that reduces your out-of-pocket monthly premiums.
Changes in circumstances also may qualify you for a special enrollment period to change or get insurance through the Marketplace. In most cases, if you qualify for the special enrollment period, you generally have 60 days to enroll following the change in circumstances. Information about special enrollment can be found by visiting HealthCare.gov.
You can use the Premium Tax Credit Change Estimator to help you estimate how your premium tax credit will change if your income or family size changes during the year; however, this estimator tool does not report changes in circumstances to your Marketplace. To report changes and to adjust the amount of your advance payments of the premium tax credit you must contact your Health Insurance Marketplace.
Need more information?
Don’t hesitate to contact the office if you have any questions about the Premium Tax Credit.
Best Filing Status for Married Couples
Summer is wedding season. While tax returns and filing status are probably not high on your to-do list, you should be aware that with marriage, come tax changes–such as choosing the best filing status.
After you say, “I do” you’ll have two filing status options to choose from when filing your 2016 tax returns: married filing jointly, or married filing separately.
Married Filing Jointly
If you’re married as of Dec. 31, that’s your marital status for the whole year for tax purposes. You can choose married, filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return. On a joint return, you report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.
If you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses.
Joint Responsibility. Both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse.
Married Filing Separately
If you are married, you can also choose married filing separately as your filing status. This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return.
Call the office if you’re not sure which status to file under. If you and your spouse each have income, your tax will be figured both ways to determine which filing status gives you the lowest combined tax.
Make QuickBooks Your Own: Specify Preferences
QuickBooks was designed to be used by millions of businesses. In fact, it’s possible to install it, answer a few questions about your company and start working right away.
However, we strongly suggest you take the time to specify your Preferences. QuickBooks devotes a whole screen to this customization process. You can find it by opening the Editmenu and selecting Preferences.
Figure 1: This is the screen you’ll see when you go to Edit | Preferences in QuickBooks. You can turn features off and on, and customize the software in numerous other ways.
Let’s look at some examples of what you can do on this page. In the image above, Accounting is highlighted. You can see that QuickBooks makes it easy for you to specify your preferences. You simply click in boxes to check or uncheck them. Sometimes, you’ll click on the desired button in front of a list item. Other times, you’ll be asked to enter numbers and text.
Tip: When you click on a tab in the left navigation pane of the Preferences window, you’ll notice that there are two tabs in the larger pane on the right. If My Preferences is highlighted and there are no options on that screen, click on Company Preferences.
Some of the screens here, like Accounting, contain complex concepts. Do you know, for example, why you would or wouldn’t want to Use account numbers? What Retained Earnings are?
Warning: While the mechanics of this process are simple, there may be times when you don’t understand what’s being asked because you’re either not familiar with the terms or you don’t know which option you should choose. Rather than guessing, please connect with us to set up a time to go over all of the content in the Preferences window.
Some preferences are easier to define. Let’s look at one of these.
Figure 2: The Time & Expenses window in QuickBooks’ Preferences
The image above is a partial snapshot of the screen that opens when you select Time & Expenses from the left vertical tab in the Preferences window.
Tip: If you start making changes and decide you’d like to return to the options selected before you started, click the Default tab in the upper right.
Your options here are very simple:
- Do you want to use the time-tracking features in QuickBooks?
- On what day does your work week start?
- Does all of the employee time worked and recorded get billed back to the appropriate customer? (You can change this manually on each time entry by checking or unchecking the box in front of Billable.)
- When you create an invoice for a customer who has outstanding time charges, do you want to be able to select those from a list?
If you check the box in front of Create invoices from a list of time and expenses, this box will appear when you open the Create Invoices window and select a customer who needs to be billed for time:
Figure 3: If you are creating an invoice for a customer who has received services but who has not been billed for them yet, you can opt to have those charges added to the invoice.
You’ll notice that there’s a box in the lower left corner labeled Save this as a preference. While QuickBooks allows you to specify preferences in countless areas in the Preferenceswindow, you will often have the opportunity to make an exception for a particular action as you’re working on transactions. Also, as shown here, you can sometimes turn on specific preferences once you’ve already started a task.
You’re not required to go through all of the entries in the Preferences window before you start working. You can always go there to see if there’s a setting you can change if an element of QuickBooks isn’t performing the way you expected.
It’s a good idea to learn about all of your options in the QuickBooks software before you get started–and we can help. If you let us go through this process with you, you’ll not only learn about the customization allowed, but you’ll also get a good introduction to all of the things that QuickBooks can do, and learn more about your business and its needs.
Need help? Don’t hesitate to call!
Tax Due Dates for August 2016
Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2016. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.
Employers – Federal unemployment tax. Deposit the tax owed through June if more than $500.
Employers – If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar-year 2015. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.
Certain Small Employers – Deposit any undeposited tax if your tax liability is $2,500 or more for 2016 but less than $2,500 for the second quarter.
Employees Who Work for Tips – If you received $20 or more in tips during July, report them to your employer. You can use Form 4070.
Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2016. This due date applies only if you deposited the tax for the quarter in full and on time.
Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in July.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July.
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