barklee-financial

How to Check Y our Tax Payment

Mon, 20 Apr 2026 17:19:33 GMT

How to Check on Your Tax Payment

To check you Tax Payment, go to: https://www.irs.gov/payments/pay-personal-taxes-from-your-bank-account

If your tax liability was paid directly with the filing of your return using the Barklee efile system:

Fastest Way to Confirm a Payment:

Access your personal IRS.gov account at IRS.gov > Sign in > Individual.
Check the "Payments < Payment Activity" tab
Be sure and click on the "pending and scheduled payments" section, as well as the "processed Payments.
If you do not see your payment here, check the "canceled payments" and the "returned payments" sections.
If your payment was canceled, returned, or does not appear at all, you will need to confirm your payment was not w/d from your bank account or CC, and then resubmit the payment.

If you made your tax or extension payment using IRS.gov or EFTPS:

Fastest Way to Confirm a Payment:

Access your personal IRS.gov account at IRS.gov > Sign in > Individual.
Check the "Payments < Payment Activity" tab
Be sure and click on the "pending and scheduled payments" section, as well as the "processed Payments.
If you do not see your payment here, check the "canceled payments" and the "returned payments" sections.
If your payment was canceled, returned, or does not appear at all, you will need to confirm your payment was not w/d from your bank account or CC, and then resubmit the payment.

Use the "Look Up a Payment"

Did you make the payment yourself? Then you received an email with a confirmation number.
Click on the "Look Up a Payment" button
Enter your SS# and the Confirmation #.
Follow the directions provided in the next window.

If the payment is not available in your personal IRS.gov account, and your confirmation number does not show that your payment was received, and your bank account or CC was not debited, you will simply need to make the payment again and follow the steps at irs.gov/payments.

If all else has failed, you may contact Barklee by phone or email, and we will be happy to help review your situation.

Please note that we are going to ask you to repeat the steps above so that we can verify the payment is not available, and then we will have you resubmit your payment.

How to Make a Tax Payment

Tue, 14 Apr 2026 17:52:55 GMT

How to Make Tax Payments Directly in the IRS Tool

If you owe taxes, the IRS offers several simple ways to make a payment. Whether you’re paying a balance due or making estimated payments, the process can be completed online in just a few steps.

Keep in mind: penalties and interest continue to accrue until your balance is paid in full , so paying sooner can help reduce additional costs.

To make tax payments to the IRS directly, go to: https://www.irs.gov/payments

Ways to Pay

Pay From Your Bank Account

Make a direct payment from your bank account through the IRS website. You can pay immediately or schedule payments in advance. This is typically the most efficient option and does not include processing fees.

Debit Card, Credit Card, or Digital Wallet

Payments can also be made by card or digital wallet. Processing fees apply, and this option is not available for payroll taxes.

IRS Online Accounts

You can make payments directly through your IRS account:

Individual Online Account – pay balances, estimated taxes, or payments on a plan
Business Tax Account – make deposits and balance payments

EFTPS (Electronic Federal Tax Payment System)

A payment system used by many businesses that allows you to schedule and manage payments from your bank account. Enrollment is required.

Other Payment Options

The IRS also accepts:

Same-day wire transfers
Check or money order by mail
Cash payments through approved locations
Electronic withdrawal when filing your return

You can review the screens below from the IRS website .

You can also watch this video from the IRS.gov website for a walk-through of hos to pay your taxes.

Energy Tax Credits in 2025: What Your Accountant Needs Before You File

Wed, 01 Apr 2026 12:52:49 GMT

What Your Accountant Needs Before You File

As energy efficiency incentives continue to gain attention, many homeowners are asking about claiming the Energy Efficient Home Improvement Credit on their tax return.

However, one issue we are seeing more frequently this tax season is this:

Clients are requesting the credit but don’t have the required documentation to support it.

Before this credit can be claimed, the IRS has very specific requirements—and without proper support, the credit cannot be included on your return.

What You Must Provide to Your Accountant

If you plan to claim this credit, your accountant will need more than just a receipt. At a minimum, you should be prepared to provide:

Proof the Equipment Meets Efficiency Standards

The equipment must meet the highest efficiency tier established by the Consortium for Energy Efficiency (CEE) for the applicable tax year.

Installation Details

The improvement must:

Be installed in your primary residence
Be placed in service between January 1, 2023 and December 31, 2025
Apply to an existing home (not new construction)

Manufacturer Documentation

You will need:

A Manufacturer Certification Statement
The Qualified Manufacturer Identification Number (QMID)

This information is required to complete IRS Form 5695.

Why This Matters

The IRS requires more than proof of purchase for this credit. The equipment must meet defined efficiency standards and be supported by proper documentation. Without this information, your accountant cannot include the credit on your return.

What to Do If You Don’t Have the Information

If you’re unsure whether your equipment qualifies:

Contact your contractor or installer
Ask for the Manufacturer Certification Statement and QMID
Confirm that your specific model meets CEE requirements for the year installed

Final Thought

Energy credits can provide valuable tax savings—but only when properly documented. If you’re considering claiming this credit, gathering the right information upfront will make the process much smoother.

If you’d like us to review your documentation or confirm eligibility, the Barklee Financial Group team is happy to help.

Should You Switch to an S Corporation in 2026?

Mon, 30 Mar 2026 14:06:38 GMT

What Business Owners Need to Know

As tax season approaches, many business owners begin asking the same question: Should I elect S Corporation status for my business?

With ongoing tax law updates and rising self-employment taxes, 2025 may be an especially important year to review your entity structure. For the right business, an S Corp election can provide meaningful tax savings. For others, it may add complexity without real benefit.

Here’s what you need to know before making the switch.

What Is an S Corporation?

An S Corporation (S Corp) is not a separate type of business entity. It is a tax election made with the IRS.

An LLC can elect to be taxed as an S Corp
A corporation can elect S Corp tax treatment

The primary difference lies in how income is taxed, particularly regarding payroll taxes.

The Main Reason Business Owners Consider an S Corp: Tax Savings

The biggest potential advantage of electing S Corp status is reducing self-employment taxes.

How It Works

If you operate as:

A sole proprietor, or
An LLC taxed as a sole proprietor

You pay self-employment tax (Social Security and Medicare) on 100% of your net business income.

With an S Corp:

You must pay yourself a reasonable salary, which is subject to payroll taxes.

Additional profits can be distributed as owner distributions, which are not subject to self-employment tax.

For profitable businesses, this structure can reduce overall tax liability.

Example: Potential Tax Impact

If your business nets $150,000:

As a sole proprietor: You pay self-employment tax on the full $150,000.
As an S Corp: You might pay yourself a $75,000 salary (subject to payroll tax).

The remaining $75,000 may be taken as distributions (not subject to self-employment tax).

This difference can create significant savings — but only if structured properly.

When an S Corporation Makes Sense in 2026

An S Corp election may be worth considering if:

Your business consistently nets $75,000+ in profit
You are already paying high self-employment taxes
You are comfortable running payroll for yourself
Your bookkeeping is clean and organized
You want a more structured compensation strategy

The savings must outweigh the additional compliance requirements.

When an S Corporation May Not Be the Right Fit

Switching to an S Corp adds administrative responsibilities:

Payroll processing and payroll tax filings
Additional tax forms (Form 1120-S and K-1s)
Stricter compliance requirements
State-specific considerations
If your profits are modest or inconsistent, the additional administrative costs may offset the tax benefit.

IRS Updates Payment Methods Under Executive Order 14247

Fri, 30 Jan 2026 13:25:55 GMT

Reminder for Taxpayers

T he IRS has released new guidance and FAQs related to Executive Order 14247, which focuses on modernizing how payments are made to and from America’s bank accounts. While the executive order itself is broad, the IRS guidance helps clarify what this means for taxpayers, businesses, and anyone receiving refunds or making payments to the IRS.

At its core, this update is about how payments are made—not how much you owe or how you file.

What Taxpayers Should Do Now

No immediate action is required for most taxpayers, but this is a good time to review how you receive refunds and make payments. The IRS is continuing to move away from paper checks and toward electronic options, which are faster and more secure.

We recommend the following:

Confirm your direct deposit information is accurate and up to date
Consider using IRS Direct Pay, EFTPS, or other approved electronic payment options rather than mailing checks
Expect fewer paper-based options over time as electronic payments become the default
Be cautious of scams—IRS payment changes often trigger fraudulent emails, texts, or calls claiming to be “official updates”

If you currently rely on paper checks, you may want to plan ahead as electronic methods continue to expand.

What’s Changing—and What Isn’t

The IRS guidance reinforces an ongoing shift toward electronic transactions, including:

Increased use of direct deposit for refunds
Greater reliance on electronic payment systems for tax payments
Reduced use of mailed checks

This update does not:

Change tax rates
Create a new tax
Alter filing deadlines or payment obligations

It strictly addresses payment delivery and processing methods.

What This Means for Barklee Clients

For Barklee clients, this guidance aligns with best practices we already encourage. Electronic payments and refunds are typically faster, more reliable, and easier to track. As the IRS continues modernizing its systems, we’ll help ensure your payment and refund methods are set up correctly and remain compliant.

The IRS has published a detailed FAQ and fact sheet explaining these updates in more depth.

Click Here to download the IRS Fact Sheet and FAQs

Click Here to review the IRS instructions for online payments.

What is a Trump Account?

Wed, 14 Jan 2026 17:12:09 GMT

Trump Accounts Explained: What Parents and Families Need to Know

What is it:

A Trump account is a type of traditional individual retirement account (IRA), established by an authorized individual, for the exclusive benefit of a child who is under the age of 18. The accounts were established as part of the One Big Beautiful Bill Act, passed in July 2025, but will not be available to open until mid-2026. An authorized individual may elect to establish an initial Trump account for a child by first completing Form 4547.

Who is an Authorized Individual?

An authorized individual is a legal guardian, parent, adult sibling, or grandparent of the child, in that order of priority. If more than one person meets the conditions to be an authorized individual, subject to the order of priority, and no prior Trump account election has been made for the child, then any of the authorized individuals can make the election. For example, if the child doesn’t have a legal guardian, then either parent of the child can make the election regardless of filing status. The authorized individual who is making the election must enter their information in Form 4547.

What is Form 4547?

Form 4547 is used/required to make the election to establish an initial Trump account for the exclusive benefit of a child who is eligible (ie: Born in calendar year 2025). Also, use Form 4547 to make an election for a $1,000 pilot program contribution from the U.S. Treasury to a child’s Trump account if they are eligible for the contribution.

What is the Pilot Program Contribution?

The Pilot Program Contribution is a one time $1,000 contribution from the US Treasury directly into the child’s Trump Account. This $1000 Contribution is only available for children born between January 1st, 2025, and December 31st, 2028. The Treasury Department will make the pilot program contribution as soon as practicable after the election is made, and the Treasury Department can confirm with the initial Trump account trustee that the initial Trump account has been opened. However, no pilot program contribution will be deposited in the Trump account of a child earlier than July 2026.

Your Responsibility:

The physical opening of the Trump Account with a fiduciary agency is the responsibility of the authorized individual. The authorized individual can only open the account by filing Form 4547 at this time. Additionally, the website, www.trumpaccounts.gov , will provide information on how to access the Trump Account via the online portal after the Form 4547 is filed. Please refer to this website for more information when determining if the Trump account is right for your children.

How to File Form 4547

At this time, the IRS has released instructions allowing for the form to be filed with your 2025 tax return, or separately as a mailed paper return. If you would like for Barklee to file this form on your behalf, please let us know in your organizer. You can also contact Donna by email and ask for the Form 4547 to be included in your return; cpa@thebarkleegroup.com .

IRA Deduction Phase-Out Ranges for 2026

Wed, 19 Nov 2025 19:56:02 GMT

IRA Deduction Phase-Out Ranges for 2026

If you or your spouse are covered by a workplace retirement plan, the ability to deduct traditional IRA contributions phases out at the following income levels:

Single filers: $81,000–$91,000
Married filing jointly (contributing spouse covered): $129,000–$149,000
Married filing jointly (contributor not covered but spouse is): $242,000–$252,000
Married filing separately: remains $0–$10,000

Roth IRA Income Phase-Out Ranges

For 2026, the new limits are:

Single / Head of Household: $153,000–$168,000
Married filing jointly: $242,000–$252,000
Married filing separately: $0–$10,000 (unchanged)

Saver’s Credit Income Limits

The credit for moderate-income savers now phases out at:

$80,500 for married filing jointly
$60,375 for heads of household
$40,250 for single filers and married filing separately

SIMPLE Plan Contribution Limits for 2026

SIMPLE IRA regular limit: $17,000 (up from $16,500)
Enhanced SIMPLE IRA limit (certain employers): $18,100
Catch-up (age 50+): $4,000 or $3,850, depending on plan type
Enhanced catch-up (ages 60–63): $5,250

What You Should Do Before January 1

To stay ahead of the changes, Barklee Financial Group recommends:

Update your workplace retirement plan deferrals
Log into your employer’s retirement portal to adjust your 2026 contribution percentage to match the new limits.

2026 Retirement Contribution Limits

Wed, 19 Nov 2025 18:02:58 GMT

What You Need To Know

The IRS has released the 2026 cost-of-living adjustments for retirement plans, and this year brings meaningful increases across 401(k)s, IRAs, SIMPLE plans, and catch-up contributions. These changes give savers more room to build long-term wealth—but they also require a few action steps to ensure you're taking full advantage.

Below is a clear breakdown of the new limits and what they mean for your 2026 planning.

Higher Contribution Limits for Workplace Plans

For 2026, employees participating in a 401(k), 403(b), governmental 457 plan, or the federal Thrift Savings Plan can now contribute:

$24,500 (up from $23,500 in 2025).

If you want to maximize your contributions, be sure to update your payroll deferral percentage with your employer before the new year. Most plans do not automatically increase your contribution rate—even when the IRS raises the limit—so this is an important step.

IRA Contribution Increases

For 2026:

Traditional and Roth IRA contribution limit: $7,500 (up from $7,000).
IRA catch-up (age 50+): $1,100 (up from $1,000), now adjusted annually for inflation.

Catch-Up Contributions: Bigger Limits—And a Big Rule Change

For savers age 50 and over, the catch-up contribution for most 401(k), 403(b), and 457 plans increases to:

$8,000 (up from $7,500).
This means individuals age 50+ can contribute up to $32,500 total in 2026.

For workers ages 60–63, the enhanced SECURE 2.0 catch-up remains:

$11,250 in 2026.

Catch-Up Contributions Must Now Go to Roth

Under SECURE 2.0, if you earned $145,000+ in the prior year, your catch-up contributions must be made to a Roth (after-tax) account.
This rule is in effect now and will impact how you plan for taxes and retirement income.
If your employer hasn't enabled Roth catch-up functionality yet, you’ll need to confirm their timeline—plans are required to support it.

How Much Can You Earn and Still Pay $0 in Capital Gains Tax in 2026?

Tue, 21 Oct 2025 15:13:52 GMT

IRS Announcement on Capital Gains Tax in 2026

The IRS recently announced adjustments to capital gains tax brackets for 2026, and there’s good news for investors and retirees alike: you may be able to earn more — and still pay zero federal tax on your long-term capital gains.

At Barklee Financial Group, we keep a close eye on changes like this so our clients can plan ahead, minimize tax exposure, and make informed decisions that support their long-term financial goals.

What are Capital Gains Taxes?

When you sell an investment — such as stocks, real estate, or other appreciated assets — the profit is called a capital gain. If you held the asset for more than a year, it’s classified as a long-term capital gain, which is typically taxed at a lower rate than ordinary income.

The IRS uses a tiered system for these gains — 0%, 15%, and 20% — depending on your taxable income. The lowest bracket allows certain taxpayers to pay no federal tax at all on their long-term gains. For 2026, that bracket is expanding.

2026 Capital Gains Brackets: What’s Changing

Inflation adjustments and phaseouts from prior tax legislation mean the 0% capital gains bracket will rise in 2026. Based on current IRS projections:

Single filers: Up to $49,450 in taxable income
Married filing jointly: Up to $98,900
Head of household: Around $66,200

If individual filers earn $545,500 or less, they qualify for the 15% rate. If married joint filers earn less than $613,700, then they qualify for the 15% rate. If individual or joint filers exceed those amounts, they will owe 20% on gains.

The new rates apply for investments you sell in the next calendar year (2026). If your taxable income — including wages, interest, and gains — stays below these thresholds, your long-term capital gains could be entirely tax-free at the federal level. Remember that taxable income is what’s left after deductions, credits, and adjustments — not your total earnings.

At Barklee Financial Group, we help clients navigate evolving tax laws with confidence. Our team monitors annual IRS updates, reviews your total financial picture, and helps you build a proactive plan — one that keeps more of your money working for your future.

IRS Operations During the Government Shutdown: What You Need to Know

Thu, 02 Oct 2025 21:01:43 GMT

What You Need to Know

The federal government entered a shutdown on October 1, 2025, after Congress missed its funding deadline. The IRS has announced that all employees will remain on the job for the first five business days (through October 7) thanks to carryover funding from the Inflation Reduction Act. This means that services like return processing, taxpayer support, and system access should continue without disruption in the short term.

If you have not yet filed, we need your documents NOW.

What Could Change After Day Five

If the shutdown extends beyond the first week, the IRS will reduce activity to essential functions only.

That may result in:

Delays in refunds
Longer wait times on phone and written inquiries
Slower release of new guidance
Suspension of some audit and appeals activity

It’s also important to note: if you filed an extension earlier this year, your tax return is still due by October 15 .

Shutdown or not, the deadline does not move. While refunds may be delayed if the shutdown continues, taxpayers are still required to file on time to avoid penalties.

Steps to Take Right Away

Even with a short-term buffer, it’s smart to handle urgent items now:

File returns, extensions, and elections promptly
Stay current on all required payments (these deadlines don’t change)
Pull transcripts and process POAs while IRS systems are fully staffed

If the Shutdown Continues

For shutdowns lasting beyond five days, plan for slower turnaround times and keep careful records:

Document IRS-related delays that affect filings or responses—this may support penalty relief later
Track key deadlines like refund claims or collection statutes and act conservatively to protect your position
Communicate regularly with clients or stakeholders about expected delays in refunds, notices, or audits

Bottom Line

The IRS’s five-day funding cushion offers temporary stability, but disruptions are likely if the shutdown continues.

Filing and payment deadlines remain in effect—including the October 15 deadline for taxpayers who filed extensions.

Even if refunds are delayed, timely filing is required.

What This Means for You

If you have not yet filed, we need your documents NOW.

We will continue to monitor the situation closely and are here to help you stay compliant and minimize stress during this period of uncertainty.

OBBBA Final Regulations: What High Earners Need to Know About Catch-Up Contributions

Fri, 26 Sep 2025 13:26:57 GMT

Biggest change to retirement plans in decades

The IRS has finalized new rules that significantly change how retirement plan catch-up contributions will work for higher-income earners. These regulations, which stem from the SECURE 2.0 Act, go into effect in 2026 and represent one of the most important updates to retirement plans in decades.

What’s Changing in 2026

Beginning January 1, 2026, if your prior-year wages reported for Social Security (Box 3 on your W-2) exceed $145,000 (adjusted annually for inflation), all of your catch-up contributions must be made on a Roth basis. Pre-tax catch-up contributions will no longer be permitted for these individuals.

In addition, retirement plans may allow higher catch-up contribution limits for participants ages 60–63, giving those closest to retirement a chance to save more.

Why It Matters

For high earners, this is a major shift in retirement planning. If you’re age 50+ and making catch-up contributions, you’ll need to prepare for Roth-only rules starting in 2026. Employers sponsoring retirement plans should begin working with advisors now to update plan documents, payroll systems, and employee communications.

Plan Requirements and Compliance

To comply with the new rules, retirement plans will need to include “deemed Roth election” language. This ensures that catch-up contributions for impacted employees are automatically treated as Roth contributions, unless the participant makes a valid election otherwise.

Plans that do not currently allow Roth contributions will face a choice:

Add Roth contributions in order to offer catch-up contributions to high earners, or
Eliminate catch-up contributions altogether for those employees.

The final regulations also outline acceptable correction methods if a plan fails to properly apply the Roth catch-up requirement, along with a few limited exceptions where corrections are not required.

Additional Clarifications in the Final Regulations

Wage Basis – Catch-up eligibility is determined by the prior year’s Box 3 Social Security wages, not Medicare wages (Box 5). Good faith reliance on Box 5 is permitted through 2026.
Self-employment Income – Earnings subject to SECA taxes do not count toward the $145,000 threshold.
Employer Aggregation – Wages do not need to be aggregated between unrelated employers, though common control groups may choose to aggregate.
Election Timing – Plans with payroll-based catch-up elections are not required to recharacterize contributions that later turn out to be ineligible.

Effective Dates

The Roth catch-up requirement applies January 1, 2026, with a good faith compliance standard in place through the end of that year.
The final regulations themselves generally take effect January 1, 2027. Later deadlines may apply for collectively bargained and governmental plans.

New 1099 Filing Rules with OBBBA

Mon, 22 Sep 2025 16:12:25 GMT

What do the New 1099 Filing Rules Mean for You?

The One Big Beautiful Bill Act (OBBBA) brings some of the most notable changes in years to how businesses and third-party platforms handle 1099 reporting. In practical terms, here’s what businesses and contractors need to know:

For payments made in 2025, the $600 reporting threshold for Form 1099-NEC still applies. Starting in 2026, however, that threshold rises to $2,000, with annual adjustments for inflation.
Payments made through third-party platforms like PayPal, Venmo, Uber, or Etsy will only trigger a Form 1099-K if the payee earns over $20,000 and completes more than 200 transactions in a year. This reverts to the old standard and is retroactive to 2022.
Some states have lower thresholds than federal law, meaning businesses operating in multiple jurisdictions will need to keep an eye on state-level requirements.

The rest of this article walks through the details behind these changes—and what they could mean for your compliance responsibilities.

New $2,000 1099-NEC Filing Threshold

Starting in 2026, OBBBA raises the Form 1099-NEC filing threshold to $2,000, with annual inflation adjustments in $100 increments. Backup withholding rules will also align with this higher threshold.

Until then, businesses must still file a 1099-NEC if they pay an unincorporated contractor—or certain incorporated professionals like lawyers or physicians—$600 or more in a year by cash, check, or direct deposit. Penalties start at $310 per form and climb higher for intentional disregard, with even harsher consequences if workers are misclassified as employees.

Exception: Payments Through Third-Party Platforms

A business never has to file Form 1099-NEC for payments made through:

PayPal, Venmo, or other third-party settlement organizations (TPSOs)
Credit or debit cards

In these cases, the TPSO is responsible for issuing a 1099-K—if thresholds are met.

Form 1099-K Filing Thresholds

Under OBBBA, reporting requirements for third-party platforms like PayPal, Venmo, Uber, Etsy, and others revert to the original $20,000/200 transaction threshold. This applies retroactively to 2022 and eliminates the lower $600 and $2,500 thresholds that were scheduled to take effect.

Until then, businesses should note that TPSOs (third-party settlement organizations) are only required to issue a 1099-K if both conditions are met: the recipient earns more than $20,000 and has more than 200 transactions in a year. However, ten states plus D.C. have lower thresholds than the federal standard. These states are: Arkansas, Illinois, Maryland, Massachusetts, Montana, New Jersey, North Carolina, Rhode Island, Vermont and Virginia. All require 1099-K filing at much lower thresholds. It remains unclear whether any of these states will update their laws to align with OBBBA.

Form 1099-MISC

Beginning in 2026, OBBBA sets the Form 1099-MISC reporting threshold at $2,000, with future adjustments tied to inflation, mirroring the rules for 1099-NEC.

Until then, Form 1099-MISC remains in use for reporting non-wage income not covered by other 1099 forms—such as rent, prizes, or legal settlements—without a formalized higher threshold.

Summary

These 1099 updates represent a major shift for small businesses, contractors, and online sellers. Understanding the new thresholds—and following the current ones until they take effect—will be essential to staying compliant and avoiding penalties.

At Barklee Financial Group, we work alongside our clients to make sure they understand what these changes mean and how to stay on track. If you’d like a second set of eyes on your 1099 reporting or a plan for the years ahead, we’re here to help.

OBBBA Expands 529 Plans and Education Savings Options

Tue, 09 Sep 2025 18:41:21 GMT

OBBA Update - 529 Plans & Education

As part of our series on the One Big Beautiful Bill Act (OBBBA), we’re highlighting important updates to 529 plans , ABLE accounts , and the introduction of new Trump Accounts . These changes significantly expand flexibility for families, students, and adult learners planning for education or long-term financial needs.

Expanded Uses for 529 Plans

Traditionally, 529 accounts were focused on college tuition and certain K–12 costs. With the passage of OBBBA, their flexibility expands in meaningful ways—helping families with tutoring services, supplies and test fees as well as giving lifelong learners options to invest in their education.

Broader K–12 Expenses

Families can now use 529 savings to cover:
Curriculum and learning materials (books, workbooks, digital tools)
Tutoring services (that meet qualifying requirements)
Online education platforms or subscriptions
Educational therapies for students with disabilities
Standardized test fees (SAT, ACT, AP exams)
Dual-enrollment tuition for college courses taken during high school

Higher K–12 Annual Limit

Starting in 2026, the annual distribution cap for K–12 expenses doubles from $10,000 to $20,000 per child, offering families greater flexibility to fund tuition and related educational costs.

Career Credentials and Licensing Programs

529 funds may now be used for a wide range of professional and trade credentials, such as CPA or bar exam fees, continuing education courses, or certifications in fields like welding, CDL training, HVAC, aviation mechanics, plumbing, or cosmetology.
To qualify, programs must generally be recognized under the Workforce Innovation and Opportunity Act (WIOA) , approved apprenticeship programs, or similar federal/state listings such as WEAMS.

Updates to ABLE Accounts

For individuals with disabilities and their families, OBBBA strengthens ABLE accounts by making several provisions permanent. These provisions apply beginning in tax year 2026 . To learn more about ABLE Accounts, Click HERE

Introduction of Trump Accounts

OBBBA also creates a new savings vehicle known as a Trump Account —a type of starter IRA for children. Key features include:

Federal Seed Contribution – Eligible children born between 2025 and 2028 receive a one-time $1,000 deposit.
Contribution Limit – Families can contribute up to $5,000 annually (indexed for inflation). Employers, states, and nonprofits may also contribute.
Investment Rules – Funds must be invested in low-cost U.S. equity index funds until the beneficiary turns 18.
Withdrawal Rules – No withdrawals before age 18, except rollovers to ABLE accounts. After 18, standard IRA withdrawal rules apply.

Please note: Trump Accounts are designed for long-term savings, not short-term education expenses. Withdrawals for education before age 59½ may trigger taxes and penalties.

Many of these provisions take effect beginning in 2025 or 2026 , so now is the time to evaluate how they fit into your broader financial strategy. The Barklee Financial Group team can help you assess which options align best with your goals and ensure you’re maximizing tax benefits under the new rules.

Understanding Key Expiration Dates for Energy and Commercial Tax Credits

Mon, 18 Aug 2025 15:42:06 GMT

Energy Credits Are Expiring

As part of ongoing changes under the One Big Beautiful Bill Act (OBBBA), several energy-related and commercial tax credits now have revised timelines. We are tracking these updates to help homeowners and businesses understand opportunities to maximize their tax incentives before deadlines pass.

Energy Efficient Home Improvement Credit

Originally scheduled to run through 2032.
Under the OBBBA, the credit now expires on December 31, 2025.
Provides a 30% credit on qualifying energy-efficient improvements, including exterior windows, skylights, doors, and home energy audits.

Residential Clean Energy Credit

Originally scheduled to run through 2034.
Now set to expire on December 31, 2025.
Offers a 30% tax credit for installing solar panels, wind systems, geothermal heat pumps, or biomass energy equipment.

Alternative Fuel Vehicle Refueling Property Credit

Originally set to expire in 2032.
Qualifying property must now be placed in service by June 30, 2026 .
Provides up to $100,000 per charging port, fuel dispenser, or storage unit for clean-burning fuel infrastructure. READ MORE ON THIS

Energy Efficient Commercial Buildings Deduction

Deduction will no longer be available for buildings where construction begins after June 30, 2026 .
Deduction amounts and eligibility were expanded under the Inflation Reduction Act.

Clean Electricity Investment & Clean Electricity Production Credit

Eliminated for facilities placed in service after 2027 , unless construction begins on or before July 4, 2026 .
Projects that begin construction after July 4, 2026, must be placed in service by December 31, 2027 .

Advanced Manufacturing Production Credit

Wind energy components won’t qualify after 2027 .
Credits for other critical materials will phase out between 2031 and 2033 .
Metallurgical coal suitable for steel production has been added to the list of critical minerals, with credits expiring after 2029 .

Staying informed about these deadlines is critical for both homeowners and businesses looking to take advantage of available tax credits. Planning ahead ensures that energy-efficient improvements, renewable energy projects, and commercial building investments are completed in time to qualify.

At Barklee Financial Group , we monitor these updates closely to help clients navigate changing tax laws and make strategic decisions that optimize savings and compliance.

Will You Be Itemizing Your 2025 Taxes?

Thu, 14 Aug 2025 12:37:45 GMT

Key Changes Under the OBBBA

The One Big Beautiful Bill Act (OBBBA) makes several changes that could impact whether you itemize deductions or take the standard deduction for upcoming tax years.

Here’s what you need to know.

What Counts as Itemized Deductions

If you choose to itemize, the following are the primary categories:

Home Mortgage Interest – Interest on up to $750,000 of qualified home indebtedness.
SALT – State and local taxes, including real estate, sales, and/or state income tax.
Charitable Contributions – Donations to qualifying organizations.

OBBBA Changes to Itemized Deductions

Home Mortgage Interest – Permanently limits the deduction to interest on the first $750,000 of indebtedness.
Home Equity / HELOC Interest – Permanently excludes interest on home equity loans and lines of credit from being deductible.
SALT Deduction – Increases the limit to $40,000 for taxpayers with adjusted gross income (AGI) under $500,000. The deduction phases down, returning to $10,000 once AGI exceeds $600,000. For additional information on SALT, Click Here
Charitable Contributions – No changes if you itemize; rules remain the same.
Vehicle Loan Interest – Allows up to $10,000 per year in deductible interest on qualifying new vehicles. The vehicle must be assembled in the United States.

Other Changes Affecting Deductions

Senior Deduction – Adds $6,000 to either the standard or itemized deduction for each taxpayer age 65 or older, if income is below $75,000 (single) or $150,000 (married filing jointly). Phases out above these income levels. (Available for four years) For additional information on the Senior Deduction, Click Here
Charitable Contributions Without Itemizing – Even if you take the standard deduction, you may deduct up to $1,000 (single) or $2,000 (married filing jointly) in cash charitable contributions, with proper documentation.
Gambling Losses – Beginning in 2026, gambling losses can only offset up to 90% of gambling winnings (down from 100%).
Personal Casualty Losses – Now only deductible if the loss results from a federally declared disaster.
Vehicle Loan Deduction – As noted above, applies for only four years and is limited to qualifying new vehicles.

What This Means for You

With the OBBBA changes, the decision to itemize or take the standard deduction may shift for many taxpayers. Factors such as mortgage interest, charitable giving, and the expanded SALT limit could make itemizing more valuable—while new rules like the senior deduction and above-the-line charitable contributions may benefit those taking the standard deduction.

We've created a chart outlining these deductions for you, Click Here.

The Barklee Financial Group team can also help you run the numbers, evaluate your options, and develop a strategy that maximizes deductions under current law.

OBBBA Temporarily Expands SALT Deduction Limits

Wed, 13 Aug 2025 13:26:29 GMT

SALT Deductions Temporarily Expanded

If you’ve been constrained by the $10,000 cap on state and local tax (SALT) deductions, the One Big Beautiful Bill Act (OBBBA) brings a significant—though temporary—change starting in tax year 2025.

From 2025 through 2029, the maximum deduction increases to:

$40,000 if married filing jointly
$20,000 if married filing separately

Beginning in 2026, these limits will adjust annually for inflation. Unless Congress acts to extend the change, the cap will return to $10,000 ($5,000 if married filing separately) in 2030.

Income Limits and Phaseout

The higher SALT deduction begins to phase out when your modified adjusted gross income (MAGI) exceeds:

$500,000 for joint filers
$250,000 for married filing separately

Once over the threshold, your allowable deduction is reduced by 30% of the excess MAGI, with a minimum deduction of $10,000 ($5,000 if married filing separately).

For example - a joint filer with a MAGI of $550,000 would see their deduction limited to $25,000, rather than the full $40,000.

Other Considerations

You can still choose to deduct sales taxes instead of income taxes, which may benefit taxpayers with lower income taxes but higher sales or property taxes.

State-level SALT deduction workarounds for pass-through entities—such as S corporations, partnerships, and LLCs—remain in effect, allowing businesses to pay SALT at the entity level and pass the deduction through to owners.

Planning Opportunities

To take full advantage of the expanded deduction during the 2025–2029 window, consider strategies to manage your MAGI, such as:

Spreading capital gains over multiple years
Staging Roth IRA conversions
Leveraging your state’s SALT workaround, if available

The Barklee team can help you evaluate how this change fits into your broader tax strategy and ensure you’re making the most of the temporary increase.

Planning to Purchase an Electric Vehicle? Get it Before September 30, 2025

Wed, 06 Aug 2025 14:20:23 GMT

Tax Credit Changes for EV Vehicles & Charging Stations

Considering an electric vehicle for personal use or business? We suggest you buy before September 30, 2025. A new federal tax law— the One Big Beautiful Bill Act, signed on July 4, 2025— makes significant changes to the current clean energy tax incentives. If you already have one, it also is making a change to the EV Charger Tax Credit.

For vehicles placed in service after September 30, 2025, the following three electric vehicle (EV) tax credits are being eliminated:

Section 45W – Commercial Clean Vehicle Credit

Offers up to $7,500 for light commercial EVs and up to $40,000 for larger vehicles, depending on how they compare to gas-powered alternatives.

Section 30D – New Clean Vehicle Credit

Provides up to $7,500 for qualifying new EV purchases, subject to requirements like U.S. sourcing for critical minerals and battery components.

Section 25E – Previously Owned Clean Vehicle Credit

Provides a credit of up to $4,000 (or 30% of the sale price) for eligible used electric vehicles.

What does this mean for you?

The new law sets a hard cutoff date: vehicles must be placed in service by September 30, 2025 to qualify for these credits. After that, the credits will no longer be available.

Important Update on EV Charger Tax Credit

In addition to the changes affecting electric vehicle tax credits, the One Big Beautiful Bill Act also shortens the timeline for the Alternative Fuel Vehicle Refueling Property Credit —the tax credit for installing EV charging equipment at your home or business. This tax credit was set to expire on December 31, 2032, but will now sunset on June 30, 2026 .

This means individuals and businesses planning to install electric vehicle chargers should do so well before mid-2026 to take advantage of the available tax benefit.

Please note that while it's possible that future legislation could introduce new incentives, our firm cannot predict what changes may occur—or when. For now, the current law sets a clear deadline, and delaying action could mean missing out on valuable tax savings.

Big Change Ahead: Federal Government to Eliminate Paper Checks by September 2025

Thu, 10 Jul 2025 16:59:46 GMT

What You Can Do to Prepare

A major shift is on the horizon for how the federal government handles payments. Beginning September 30, 2025 , the U.S. Treasury will stop issuing or accepting paper checks for nearly all federal payments and collections. This includes IRS refunds and tax payments .

This change affects individuals, businesses, nonprofits, and corporations alike — anyone interacting with a federal agency.

What’s Changing?

Under a March 2025 Executive Order, the federal government is moving to an all-electronic system for payments and collections. That means:

No more paper refund checks
No more mailing in checks for tax payments
All transactions must go through electronic channels

This applies to income tax refunds, quarterly estimated payments, payroll deposits, Social Security, and more.

Why This Matters

While the move aims to reduce fraud, improve processing times, and cut administrative costs, it also means taxpayers and business owners need to be prepared — especially those who still rely on mailing checks or receiving paper refunds.

What You Should Do Now

If you're not already set up for electronic payments and deposits, now is the time to make that switch.

Here are the key steps:

1. Enroll in Direct Deposit (Individuals & Businesses)
Make sure the IRS and other federal agencies have your correct banking info. This ensures faster refunds, smoother transactions, and fewer errors.

Individuals: Set up direct deposit via IRS.gov
Click Here: https://www.irs.gov/your-account
Businesses: Use IRS Form 8050 to request direct deposit for refunds

2. Start Paying Taxes Electronically
Paper payments will no longer be accepted. Use one of these secure systems:

IRS Direct Pay – for individuals (add Link)
EFTPS (Electronic Federal Tax Payment System) – for businesses and individuals

3. Double-Check Your Bank Info
Before the fall deadline, confirm that your account and routing numbers are accurate on all IRS forms and payment platforms. A mismatch can cause delays or rejected payments.

Are There Any Exceptions?

Yes —some exceptions may apply in cases such as:

No access to banking services
Emergency payments where electronic methods create a hardship
National security or law enforcement needs

These will be reviewed and approved by the Treasury Department on a case-by-case basis.

Have questions? Reach out your tax manager — we’ll walk you through it.

New Tax Relief for Seniors: What the Social Security Announcement Really Means

Tue, 08 Jul 2025 15:24:38 GMT

Are you affected by the new Tax Relief for Seniors?

You may have seen the recent announcement from the Social Security Administration celebrating the passage of new tax legislation. While the email and headlines sound promising — even historic — it’s important to cut through the confusion and understand what’s really changing for retirees.

What the New Law Actually Does

This new provision, part of the broader One Big Beautiful Bill Act, does NOT eliminate taxes on Social Security income. Instead, what’s been passed is a single new deduction — and it comes with important conditions:

Up to $6,000 extra deduction for taxpayers age 65 and older
Younger than 65? You don’t qualify — even if you receive Social Security retirement benefits or SSDI.
You don’t need to be receiving Social Security to claim the deduction — it’s based on your age , not your benefit status.
It’s a deduction, not an exclusion , meaning you still report your Social Security income on your tax return.
Available whether you itemize or take the standard deduction .
It’s not refundable — it can lower your taxable income but won’t generate a refund if your income is already low.
Temporary — the deduction is currently set to expire in 2028 .
Income limits apply — the deduction starts to phase out at:
$150,000 for joint filers
$75,000 for single or other filers
It disappears completely at $350,000 (joint) and $175,000 (others).

What Does This Mean for You?

This legislation offers meaningful tax relief for some seniors — especially those living on fixed incomes who haven’t previously benefited from existing tax credits or deductions.

However, the SSA’s public messaging and emails have created some confusion, leading many to believe that all taxes on Social Security are going away. That is simply not true.

According to the White House, before this law was passed, 64% of Social Security beneficiaries already did not owe tax on their benefits. With this deduction, that number is expected to increase to 88%.

That’s a positive shift — but not a complete elimination of taxes on Social Security.

What’s Next?

We’re just beginning to unpack the details of how this new deduction will work in practice. As with most tax legislation, there will be caveats, phaseouts, and exceptions — and we expect additional IRS guidance in the coming months.

As we prepare for the 2025 tax filing season, we’ll continue to monitor updates and provide clarity so you can make informed decisions about your taxes.

In the meantime, if you have questions about how this new deduction might affect your personal situation, feel free to reach out to your tax advisor.

How to Contact Barklee Financial Group

jeremy@thebarkleegroup.com (Jeremy Knight) — Mon, 29 Jul 2024 15:57:42 GMT

How to Contact Us

At Barklee Financial Group, we understand that clear and efficient communication is key to providing excellent service.

That’s why we offer multiple ways for you to get in touch with us. Whether you need to upload documents, ask questions, or set up an appointment , here are the 5 best ways to contact our team:

Email

Feel free to email us anytime, and we will respond within 2 business days. This is the fastest and most efficient form of communicating details to our team.

Email is great for:

Asking for advice and explaining detailed information
Quick questions
Checking a status of a project
Prepping for an appointment
Requesting an appointment time

Please note that to keep your data secure, we do not click on links or attachments provided in emails. All documents must be uploaded through the SmartVault Portal.

Phone

We are always available by phone. This is the best method for:

Setting up an appointment
Considering other services and want to speak with a CPA
Getting general information about Barklee or non-CPA advice
Handling technical issues
Relaying quick messages

While calling might not provide immediate access to your accounting or tax professional, we are happy to schedule an appointment for you.

Text

Texting is only suitable for appointment requests. We cannot provide advice through text and will always reply via email to request more information.

Comment in Your Barklee Checklist Emails

When you need to communicate about a specific service such as accounting or taxes, using the comments section in your checklist email is the fastest way to get in touch.

Look for the comments button in your Barklee Checklist emails.
This method is ideal for communicating specific details related to your ongoing work.

Upload Documents Through SmartVault

SmartVault is our secure document management system, designed to make uploading and sharing documents easy and safe.

You can find the SmartVault link on our front page at any time. Additionally, it is available throughout our workflow process sent by email, ensuring you always have access when needed.

Schedule an Appointment with Jeremy

This is the best and only way to communicate directly with your CPA through a phone of video meeting.

When to use this method:

Tax projections
Specific tax situations and questions
Considering a new service
Major updates to your monthly services
Reviewing your tax return before approval
Monthly financial meetings to review financials

Schedule an appointment here!

By offering these various communication channels, we aim to make it easy for you to connect with us in the way that best suits your needs. If you have any questions or need assistance, don't hesitate to reach out through any of these methods.

Thank you for choosing Barklee Financial Group!

cpa@thebarkleegroup.com

(432) 219-3408

Mastering Efficiency: Exploring the World of Virtual Tax Preparation Services

jeremy@thebarkleegroup.com (Jeremy Knight) — Tue, 06 Feb 2024 15:55:48 GMT

Mastering Efficiency:

Exploring the World of Virtual Tax Preparation Services

In today's ever-changing financial landscape, the traditional methods of tax preparation are making way for more efficient and accessible solutions. Virtual tax preparation services have become a cornerstone in managing financial responsibilities for both individuals and businesses .

This means that your CPA can deliver your tax returns directly to you, on your schedule, to your inbox, and with the peace of mind that your documents are secure. This blog will be your guide to understanding the ins and outs of virtual tax preparation by focusing on practical benefits, strategies, and essential considerations.

Let's explore how virtual tax preparation is making a monumental impact on businesses and individuals. We'll highlight the straightforward advantages and technology-driven solutions that are making this approach increasingly popular. Whether you're a hard-working individual, self-employed, a business owner, or just someone looking for efficient ways to handle tax responsibilities, this page is here to help you understand and embrace the transformative influence of virtual tax preparation services.

Join us as we break down the steps of virtual tax preparation, emphasizing the tangible advantages that redefine how we approach tax compliance in today's tax landscape.

What is Tax Preparation and Why Does it Matter?
Methods for Preparing a Tax Return Virtually
How Does Barklee Financial Group Prepare Tax Returns Virtually?
Tax Prep Checklist
Our Guide on How to Vet and Hire a Virtual Tax Preparer
Considerations for Choosing a Virtual Tax Preparer
What Are the Pros and Cons of Virtual Tax Preparation?
Tips and Tricks for Working with a Virtual Tax Preparer
Is it Safe to File Taxes Online?
More Resources for Virtual Tax Preparation + How to Schedule a Conversation

Now, let's dive in!

What is Tax Preparation and Why Does it Matter?

So, here's the thing: in the past, tax preparation used to be all about collecting stacks of paperwork , spending endless hours on tax forms, and making trips to actual tax preparation offices.

Virtual tax preparation is a modern and user-friendly way of getting your taxes done without the need for face-to-face interactions. Instead of physically visiting a tax professional's office, you can use online platforms and software to gather, organize, and submit your financial information. This process allows you to upload documents, answer questions, and receive guidance—all from the comfort of your own home, or while you are busy running your company meetings.

Methods for Preparing a Tax Return Virtually

Virtual tax preparation services leverage technology to streamline the entire tax filing procedure, making it more convenient for individuals and businesses alike. Whether you're a freelancer with diverse income sources or a small business owner navigating various deductions, virtual tax preparation offers an accessible and efficient solution to meet your tax obligations without the need for extensive paperwork or in-person appointments.

Virtual tax preparation uses various methods and tools to make filing taxes easier and more efficient. Let's take a look at a couple of notable methods:

Virtual Tax Organizer

Many virtual tax preparation services provide clients with a virtual tax organizer.

This online questionnaire or checklist serves as a valuable tool for individuals and businesses to gather and streamline their financial information for tax purposes. Through a secure online portal, users can input details about their income, expenses, deductions, and other pertinent financial data.

This efficient and organized approach ensures accuracy and ease in tax preparation. As well as, the virtual tax organizer ensures that important information is systematically collected, making the tax preparation process smoother and more organized.

In addition, virtual tax organizers should automatically create digital records that can be stored by the tax preparer for future reference by both the client and the preparer’s team.

Electronic Document Signing (e.g., DocuSign)

Every tax return must possess the taxpayer’s signature in wet or digital form. Electronic signature platforms like DocuSign play a crucial role in virtual tax preparation.

Instead of dealing with physical paperwork and manual signatures, individuals and tax professionals can use secure electronic signatures to sign and submit important tax documents. This not only expedites the process but also enhances the security of sensitive information.

DocuSign , among other similar platforms, enables users to electronically sign and exchange tax-related documents, reducing the need for printing, scanning, and mailing physical papers.

Electronic Tax Filing (E-Filing)

Electronic tax filing, or e-filing, is a fundamental method in virtual tax preparation. This process allows individuals and businesses to electronically submit their tax returns to government tax authorities, such as the Internal Revenue Service (IRS) in the United States.

Virtual tax preparation software often incorporates e-filing, allowing users to securely and efficiently transmit their completed tax forms. E-filing not only speeds up the submission process, but also minimizes the chances of errors as the software performs necessary calculations and checks prior to submitting the return.

Cloud-Based Accounting Software

Utilizing cloud-based accounting software is another method in virtual tax preparation. Platforms like QuickBooks, Xero, or FreshBooks allow users to manage their financial records, track expenses, and generate financial reports throughout the year.

During tax season, sharing this data with tax professionals becomes a breeze, ensuring an effortless yet precise preparation process. Imagine this: no more printing or emailing your statements!

By adding your tax professional to your online accounting software, they can effortlessly fetch your financial statements like balance sheets and profit and loss statements. Say goodbye to manual delivery and hello to a more streamlined tax return experience for small businesses + individuals.

Virtual Meetings and Consultations

Face-to-face meetings are still vital when dealing with taxes and financials. Virtual tax preparation solves this priority with the use of video conferencing tools for meetings and consultations between taxpayers and tax professionals.

Through platforms like Zoom and Teams , individuals can discuss their financial situation, ask questions, and receive personalized advice from tax experts—all without the need for in-person appointments.

This means that you get to meet and interact with your tax professional on your time and in your way.

These methods collectively create a comprehensive and streamlined virtual tax preparation experience. They provide individuals and businesses with the flexibility and convenience to effectively manage their tax obligations in an ever-evolving digital world.

How Does Barklee Financial Group Prepare Tax Returns Virtually?

Increasing your net worth and decreasing your tax liability does not have to come with the sacrifice of your time and data security. Therefore, Barklee Financial Group has put together a suite of industry-leading cloud-based tools that help every player achieve their goals during tax time.

Let’s discuss the methods and processes that we use to manage your tax documents and prepare your tax return virtually.

Secure, cloud-based document delivery

You will be provided with a secure client portal that allows you to upload your documents straight to our office without using email which is not secure and hacker-prone.

Your portal will be assigned to your email address of choice and provide you with a secure online vault. We will exchange documents back and forth through this vault. In addition, we will store all prior year documents in this vault so that you can access them at any time.

Finally, we will provide your tax return for approval via the portal and our email-based task list. This means that a PDF copy of your return is securely retrievable by you where you need it to be and when you need it to be.

Checklist-based email reminders and document requests

You need reminders and alerts on your time and in your inbox, and our cloud-based project management system will do just that.

When we send you a tax organizer, you'll receive a checklist-based task list right in your inbox. This handy list shows you what you've provided and what's still needed. You can simply check off the items you've completed. Easy peasy!

Comments and questions can be added directly to each task item and document request. In addition, you can open your secure portal for direct email uploading right inside of the checklist. Once your list is complete, the system will alert our team that you are ready for us to prepare your tax return.

Stay ahead of the tax season stress and ensure you're fully prepared with Barklee's Tax Preparation Checklist - your essential guide to navigating the tax preparation process with confidence and ease .

Electronic filing authorization signed by DocuSign

In the old days, a trip to the tax office was required in order to receive your tax return, sign it, and mail it to the IRS.

Those days have been replaced by virtual e-signature and approval methods. Barklee employs the leading secure e-signature collection service, Docusign , to securely collect your signature through Knowledge Based Authentication methods via email.

Then, you'll review your tax return and approve the submission to the IRS by digitally signing your Form 8879, or other. The system generates a copy of the signature for our files and allows us to eFile your return straight to the IRS from our software.

Electronic Filing of your Tax Return to the IRS

Gone are the days of needlessly and inefficiently filing paper tax returns. The IRS now mandates that most tax returns, for both individuals and businesses, be submitted electronically through eFile. This secure system, established by the IRS, is readily accessible through our tax preparation software.

Once we receive your signed Form 8879, approving your tax return, we promptly eFile it on your behalf.

Direct Deposit of your refunds and liabilities

Although we never want to sacrifice security , we all know that financial payments and money transfers are going completely digital.

At Barklee, we secure your authorization to request a direct deposit of your refund from the IRS by ACH methods. This means that you do not have to wait for a check to arrive in the mail before utilizing your tax refund.

Still not comfortable with direct deposit and handing out your bank account credentials? Not to worry, we will request the IRS provide all refunds, receive all liability payments by mail, and provide you instructions on how to do so.

Face-to-face tax projections, reviews, and consultations by video chat

Just because you cannot sacrifice the time to travel to your CPA’s office for an hour-long appointment doesn’t mean you have to forfeit the value of a face-to-face conversation about your tax situation.

Our team utilizes a variety of video and voice chat platforms, including Zoom , Teams , and more, to connect with you. Schedule your virtual appointment now and select your preferred method of contact. We look forward to chatting with you!

Our Guide on How to Vet and Hire a Virtual Tax Preparer

Virtual tax preparation is exciting ! By rescuing your time and streamlining the laborious tax preparation process, it brings efficiency to the table. As a result, hiring a virtual tax preparer has become an appealing option for both individuals and businesses.

However, convenience comes with the responsibility of ensuring that the chosen professional possesses the necessary expertise and reliability for accurate and secure tax preparation.

Below, we will explore the essential criteria to evaluate, key questions to ask, and vital considerations to keep in mind when vetting and hiring a virtual tax preparer.

Download Barklee's Comprehensive Guide on How to Vet and Hire a Virtual Tax Preparer , ensuring you entrust your financial future to a reliable and skilled professional who can help maximize your refund and minimize your stress.

Understanding Your Tax Needs

Before diving into the process of hiring a virtual tax preparer, it's crucial to have a clear understanding of your tax needs. Consider the complexity of your financial situation, the type of income you earn, and any specific deductions or credits that may apply. Consider the types of returns you and/or your business are required to file. This includes the schedules inside each return, and the information they possess and require to complete.

You will need this information so that both you and your prospective tax preparer can determine if they have the ability, the skills, and the virtual process established to accurately and efficiently prepare and file your returns.

At Barklee Financial Group , each of our clients start with a 15-30-minute interview through your chosen contact method. This time together allows you to gather information about our character and integrity, our processes, and our fees and requirements. It also allows our firm time to understand exactly what your tax preparation needs are so that we can properly assess our ability to meet your needs.

After this appointment, should we choose to move forward with each other, you will receive a detailed engagement outlining our fees, processes, and commitment to each other.

The first step in determining in considering your personal needs is to ask yourself if you are looking for a CPA who specializes in tax strategies that increase your net worth and reduce your tax liability all while providing services to you virtually. If this is you, let’s talk.

Schedule your virtual appointment here!

Credentials and Qualifications

When vetting virtual tax preparers, always prioritize their credentials and qualifications. Look for professionals who are Certified Public Accountants ( CPAs ), Enrolled Agents ( EAs ), or tax attorneys.

These designations indicate a high level of expertise and adherence to ethical standards. Additionally, check if the preparer stays updated with tax laws and regulations through continuous education and professional memberships.

Barklee is a team of CPAs, educated accountants, and tax professionals. We regularly engage in continuing education provided by the industry’s leading organizations and education companies including the American Institute of Certified Public Accountants, Thomson Reuters Continuing Education, Texas Society for Certified Public Accountants , and many others.

Experience in Your Industry

Consider the virtual tax preparer's experience in handling tax matters specific to your industry. Tax implications vary across professions and sectors, and having a preparer familiar with the intricacies of your field can ensure a more accurate and efficient tax preparation process.

At Barklee, we specialize in serving:

self-employed individuals
service-based franchise companies
and veterinary clinics.

We offer a carefully curated range of services, including cloud-based accounting, modern payroll solutions, financial projections and analysis, as well as tax strategies and preparation. Our goal is to provide tailored support to help you excel in your business endeavors.

Technology Proficiency

When choosing a tax preparer for virtual tax preparation, it is crucial to evaluate their proficiency with tax software, cloud-based accounting tools, and secure document-sharing platforms. A tax professional who is adept in technology can streamline the process and facilitate effective communication throughout the engagement.

However, technology should never get in the way of efficiency, accuracy, and meeting your needs right where you're at. And hey, the firm you choose shouldn't be constantly changing their methods either. I mean, who wants to keep learning new software, creating new login credentials, and always searching for prior year's data, right?

At Barklee, we employ a suite of industry-leading cloud-based solutions provided by Intuit, Bill.com, Microsoft, Adobe, and SmartVault which are well-established and reputable companies that are not going anywhere fast.

Check Out Client Testimonials and Reviews

To effectively assess the competence and dependability of a virtual tax preparer, it is advisable to review client testimonials and online feedback. Platforms such as Yelp, Google Reviews , or the preparer's website can offer valuable insights into the experiences of past clients.

It is important to focus on comments regarding accuracy, responsiveness, and overall satisfaction. By paying attention to these factors, one can make an informed decision when choosing a tax preparer.

Check out what our clients are saying about us!

Verify Professional Liability Insurance

Professional liability insurance is essential for protecting both you and the tax preparer in the event of errors or omissions during the tax preparation process. It is important to ensure that the virtual tax preparer has adequate insurance coverage to mitigate any potential risks.

At Barklee, we firmly believe that such risks should not be entrusted to generic insurance companies that lack specialization in our industry and fail to serve our customers effectively.

That's why we foster relationships with local insurers who understand our company, comprehend our customers' needs, + offer exceptional coverage.

Fee Structure and Transparency

Before engaging a virtual tax preparer, it is crucial to have a clear understanding of the fee structure. Take the time to comprehend how fees are determined, whether they are based on the complexity of the return, hourly rates, or a flat fee.

Additionally, seek transparency regarding any additional charges for specific services. By clarifying the costs upfront, you can avoid any surprises later in the process.

After your initial interaction with Barklee, you will receive an engagement contract via email. This contract will guide you through our process, outline the details of our services and commitment to you and your taxes, and specify our requirements for each client.

Finally, we'll send you a detailed quote of our services, including all the costs and fees. Take your time to carefully consider your decision. When you're ready, just sign our engagement digitally and choose a payment method. It's really that simple!

Availability and Communication

Effective communication is essential for a successful virtual tax preparation experience.

Ensure that the tax preparer is accessible and responsive to inquiries.
Discuss the preferred mode of communication, whether it's email, phone calls, or video conferencing, and confirm their availability during key phases of the tax season.

You get to schedule an appointment with a Barklee tax professional at any time by navigating to our website and using the appointment link, or simply by clicking here!

IT Security

Due to the sensitive nature of tax information, ensuring security is paramount . When selecting a virtual tax preparer, it is vital to inquire about their security measures in place to safeguard your data. Look for professionals who utilize encrypted communication channels, secure file-sharing platforms, and adhere to best practices for data protection.

Ask About the Review Process

Gaining an understanding of the preparer's review processes can offer valuable insights into the level of thoroughness applied to their work. It is important to inquire about the specific steps they undertake to meticulously review your tax return for accuracy and compliance. A comprehensive review process significantly contributes to the overall reliability of the tax preparation.

At Barklee , our team of tax professionals is here to take care of everything related to your tax return. We draft, prepare, review, and evaluate your ending tax return to customize the best tax strategies based on your specific needs.

Yes, you heard it right! While we handle your tax return, we also implement tax strategies that are available to your business or individual return. We believe in r educing your tax liability, even when you may not be aware of it. So, rest assured that we've got you covered!

Discuss Record Retention Policies

Make sure you know how long the virtual tax preparer keeps your records. Confirm their secure storage and ask about accessing records in the future, especially for audits or financial inquiries.

Barklee Financial Group, LLC retains client records indefinitely . Even if you choose to switch to a new tax preparer, we will continue to maintain your records. There may be costs associated with accessing certain types of records, but we will also return any records that you provide to us.

Request an Engagement Letter

An engagement letter is a detailed document that outlines the terms and conditions governing the professional relationship between you and the tax preparer. It's advisable to request a sample engagement letter to review the scope of services, fees, responsibilities, and other important details. This document serves as a crucial point of reference, ensuring clarity and transparency throughout the engagement.

As mentioned in the previous fee discussion, Barklee will promptly provide you with a tailor-made engagement that caters to your specific tax situation, filings, and requirements. This engagement will encompass all known fees associated with the services we discussed during our interview.

Additionally, it will outline the contractual agreements established between you and our firm, as well as our mutual commitments. Once you digitally sign the engagement, you will receive a signed copy for your records.

Evaluate Proactive Tax Planning

A proactive tax preparer goes beyond the current year's tax return and takes into account future tax implications. It is important to inquire about their tax planning approach and whether they offer guidance for optimizing financial decisions to maximize tax efficiency.

We refer to them as tax advisory meetings, while you may know them as tax projection meetings. Regardless of the terminology, our goal is to discuss your upcoming tax situation proactively. To ensure we have ample time, it's important to schedule an appointment well before the year-end and gather your year-to-date income information. During our hour-long conversation, we will delve into your projected tax liability and explore strategies to minimize it not only for this year, but also for the years to come.

Tax advisory meetings are just one of the many ways we go above and beyond to serve individuals and business owners. Our tax strategies services are designed to help you navigate the complex world of taxes with ease.

Check for Red Flags ��

During the vetting process, it's important to stay vigilant for any red flags that may arise. These could range from a lack of transparency regarding fees, evasive answers to your questions, or negative reviews from previous clients. It's crucial to trust your instincts and address any concerns that come up by seeking clarification.

At Barklee , only sign your engagement if you are confident in your decision and what we will provide. Rest assured; we won't deliver an engagement unless we are confident in delivering excellent tax preparation services to you too.

Compare Multiple Candidates

To find the perfect virtual tax preparer, consider exploring multiple options. Request quotes, compare services, and assess each candidate's overall impression. A comprehensive comparison will help you make an informed decision and find the best fit for your needs.

Yes, we definitely encourage it! Just want to assure you that we're fully aware that our services come at a premium. The reason behind this is that you're not just hiring a regular tax professional to simply record your data and e-file your tax return. Instead, you're building a relationship with a Certified Public Accountant who will work on your behalf to boost your net worth and minimize your tax liability.

And the best part? We provide all these services to you virtually. So, you can count on us to deliver top-notch results while working together!

Don't leave your taxes to chance; download Barklee's Comprehensive Guide on How to Vet and Hire a Virtual Tax Preparer, ensuring you entrust your financial future to a reliable and skilled professional who can help maximize your refund and minimize your stress.

When it comes to hiring a virtual tax preparer, taking a diligent and informed approach is crucial. By prioritizing qualifications, experience, communication, and security measures , you can locate a professional who not only meets your immediate tax needs but also contributes to your long-term financial well-being. Keep in mind that a thoroughly vetted virtual tax preparer can serve as a valuable asset in confidently navigating the complexities of tax compliance, providing you with peace of mind.

What Are the Pros and Cons of Virtual Tax Preparation?

In an era where convenience and efficiency are highly prized, virtual tax preparation emerges as a transformative solution for managing your taxes. This digital approach to tax preparation is redefining how individuals and businesses tackle tax season, presenting a new set of advantages and considerations.

Let's delve into the pros and cons of virtual tax preparation to understand how it might serve your financial needs and perhaps redefine your tax filing experience.

PROS

Convenience

Access your tax preparer from anywhere with an internet connection.
No need for in-person meetings, saving time and empowering individuals to connect + collaborate from anywhere in the world.
Flexible scheduling allows you to submit documents and review returns at your convenience.

Cost Effective

Often, virtual tax preparers have competitive fees compared to traditional services.
Avoid travel costs and potential parking fees associated with visiting a physical office.
Time savings translate to increased cost-effectiveness.

Enhanced Security Measures

Secure file-sharing platforms and encryption ensure the protection of sensitive information.
Reduced risk of physical document loss or misplacement.
Real-time updates and notifications enhance security awareness.

CONS

Limited Face-to-Face Interaction

Lack of in-person meetings may be challenging for those who prefer face-to-face communication.
Building a personal connection with your tax preparer might be more challenging.
Potential for miscommunication due to the absence of visual cues.

Tech Literacy Requirements

Some individuals, especially older taxpayers, may find it challenging to adapt to virtual platforms.
Potential learning curve for using online tools and electronic document submission.
Dependency on technology may pose challenges for those less familiar with digital tools.

Complex Tax Situations

Individuals with intricate financial situations may require more personalized, hands-on assistance.
Virtual platforms may not be as effective in handling complex tax scenarios.
Limited personalization in advice compared to in-person consultations.

Tips and Tricks for Working with a Virtual Tax Preparer

Clear Communication is Key

When collaborating with a virtual tax preparer, it is crucial to foster clear and transparent communication. Articulate your financial situation, goals, and any concerns with utmost clarity. Utilize email, messaging platforms, or video calls to maintain a consistent and open line of communication, and promptly respond to any inquiries or requests for additional information.

Organize Your Documents Efficiently

Simplify the virtual tax preparation process by getting your financial documents organized and categorized. Use secure file-sharing platforms to quickly upload and share the necessary files. Keeping a well-organized record of your income, expenses, and receipts will make tax preparation smoother and more accurate.

Leverage Technology for Convenience

Make sure to take advantage of the technological tools provided by your virtual tax preparer. Get familiar with the online portal, electronic document signing, and any other software they use. By embracing these technologies, you'll not only boost efficiency, but also make the most of the convenience that virtual tax preparation has to offer.

Be Proactive in Tax Planning

Apart from just preparing your taxes, make sure to have a conversation with your virtual tax preparer about proactive tax planning. Talk about possible deductions, credits, and strategies to optimize your financial situation for tax efficiency. Being proactive allows you to make informed decisions and could potentially save you money when it comes to your tax liability.

Review Your Return Thoroughly

Before finalizing your tax return, thoroughly review the documents provided by your virtual tax preparer. Ensure that all information is accurate and that you understand the details of your return. If you have any questions or concerns, don't hesitate to seek clarification . A collaborative approach to the final review ensures that your tax return aligns with your financial goals and complies with relevant regulations.

Is it Safe to File Taxes Online?

Filing taxes online has become a widespread practice, offering convenience and efficiency.

However, it's understandable that many people have concerns about the safety of their sensitive financial information.

The good news is that reputable online tax filing platforms prioritize the security of your data. These platforms, often referred to as e-filing services, employ advanced encryption protocols similar to those used by banks. This ensures that your personal and financial details are transmitted securely over the internet.

Furthermore, reputable online tax filing services adhere to strict industry standards and regulations. For instance, the IRS has established a set of security standards that online tax software must meet. When selecting an online tax filing platform, look for certifications from recognized security organizations. These certifications indicate that the platform has undergone rigorous testing to effectively safeguard your data.

Filing taxes online is a safer alternative to traditional paper filing. Say goodbye to worries of lost or stolen documents during transit. With e-filing, you can minimize such risks. Online platforms often offer features like two-factor authentication, providing extra security.

By choosing a trusted online tax filing service and following best practices like creating strong passwords and securing your login information, you can confidently enjoy the benefits of a secure and efficient online tax filing experience. Get ready for peace of mind!

In summary, the world of tax preparation has experienced a significant transformation with the emergence of virtual tax preparation services.

The benefits offered by these services are undeniable , providing individuals and businesses with a convenient, cost-effective, and technologically advanced approach to meeting their tax obligations.

From the flexibility of accessing tax services anytime and anywhere to the streamlined processes facilitated by cutting-edge software, virtual tax preparation has become synonymous with efficiency in the digital era.

More Resources + How to Schedule a Conversation with

Barklee Financial Group

At Barklee , we believe in the power of knowledge and staying informed.

When it comes to choosing a virtual tax preparer, nothing is more important than being vigilant and making the right choice. This page is packed with tips, tricks, and invaluable insights to ensure a seamless and successful collaboration with a virtual tax professional.

If you're eager to dive deeper into Barklee's tax preparation services, look no further!

Just jump right in here.

Plus, if you're seeking guides and blogs tailored to your unique situation, whether it's partnership taxes or financial statements for sole-proprietors at tax time, we've got you covered. Sign up to get them sent straight to your inbox.

Made A Mistake On Your Tax Return - What Happens Now?

Tue, 03 Jan 2023 09:38:27 GMT

Article Highlights:

Tax Return Mistakes are Common
Fixing Tax Return Mistakes
Amended Return
Superseding Return
Don’t Procrastinate in Responding to IRS

Generally speaking, tax return mistakes are a lot more common than you probably realize. Taxes have grown complicated and COVID tax relief has made many changes; the paperwork required to file proper tax returns is often convoluted. This is especially true if you're filing your taxes yourself.

The 2020 tax year certainly does not qualify as a "normal year."

Congress passed numerous tax laws before, during and after 2020 that apply to 2020, making it one of the more complicated tax years in recent memory. Even seasoned tax professionals had a hard time digesting all of the changes that they and their clients are now dealing with, requiring hours of continuing education. All of this is to say that if you've just discovered that you've made a significant mistake on your tax return, the first thing you should do is stop and take a deep breath, and then call this office. It happens. It's understandable. There are steps that you can take to correct the situation quickly — you just have to keep a few key things in mind, including that the mistake could be in your favor.

Fixing Tax Return Mistakes - Here's What You Need to Know:

You have three years from the date that you originally filed your tax return (or two years from the date you paid the tax bill in question) to make any corrections necessary to fix your mistakes or oversights.
There's a good chance that the IRS will catch an income omission, math errors, or an incorrect deduction or tax credit, in which case the IRS will probably send you a letter letting you know what happened and what you need to do to correct it.
If fixing the mistake ultimately results in you owing more taxes, you should pay that difference as quickly as possible. Penalties and interest will keep accruing on that unpaid portion of your bill for as long as it takes for you to pay it, so it's in your best interest to take care of this as soon as you.

Many errors include not claiming tax benefits you are entitled to and cause you to pay more tax than required. You may have overstated or understated your income, received a late tax document or K-1. To correct issues on an already filed return you generally need to file an amended return. An amended return is used to make corrections to previously filed returns. The possible corrections include, but are not limited to:

Overstating or understating income
Changing an incorrect filing status
Adding or deleting dependents
Taking care of discrepancies in terms of deductions or tax credits

If any of the above apply to the error you've just discovered, you can — and absolutely should — file an amended return.

If you catch the error prior to the filing due date of the return, instead of filing an amended return, you can file what’s called a “superseding return” to replace the original return. The difference is that when you file a superseding return you submit a complete new return to take the place of the one originally filed, while with an amended return, you fill out a special form (1040-X) and attach only backup forms or schedules that pertain to the change.

A sudden increase in your tax liability notwithstanding, it's again important to understand that errors on your income taxes aren't really worth stressing out about. The IRS understands that sometimes mistakes happen, and they have a variety of processes in place designed to help make things right.

If you have received a notice from the IRS about an error on your tax return, don’t procrastinate in handling it – address the issue(s) raised by the IRS raised right away. The same applies if you have discovered an error. Either way, you can contact this office for assistance with responding to the IRS, preparing a superseding or an amended return, and requesting penalty abatement.

Congress Introduces Tax-Preparare Regulation Legisation

Tue, 27 Dec 2022 12:18:12 GMT

Article Highlights

PTIN Requirements
CPAs, EAs, and Attorneys
State Regulations
American Families Plan
Taxpayer Protection and Preparer Proficiency Act

Anyone preparing a tax return for compensation must have a PTIN issued by the IRS, but there are no requirements associated with obtaining a PTIN—no advance training, no continuing education, and no ethical standards to abide by. On the other hand, CPAs, enrolled agents (EAs), and attorneys have strict ethical standards, educational or testing requirements, and continuing education requirements that keep them up to date with the latest tax-law changes.

While some states require paid preparers to register and pay a fee, only California and Oregon have comprehensive programs that include annual registration and verified continuing-education requirements. In addition, the IRS has a voluntary program that includes annual continuing-education requirements.

Thus, anyone—except in California and Oregon—who is not a CPA, EA, or attorney can declare themselves to be a tax preparer without needing any tax education.

The IRS has previously attempted, without Congressional authority, to regulate the tax-preparer profession, including registration, testing, and continuing education. But, as the result of a lawsuit Loving v. IRS) filed by a group of unregulated tax preparers, a federal judge invalidated the program in 2013, ruling that the IRS lacked the statutory authority to regulate preparers.

The Biden administration’s American Families Plan calls for Congress to pass bipartisan legislation that will give the IRS the statutory authority to regulate the tax-preparer profession. Currently, tax returns prepared by certain types of preparers have high error rates. These preparers charge taxpayers large fees while exposing them to costly audits by claiming deductions and credits to which taxpayers are not entitled.

Reps. Jimmy Panetta, D-California, and Tom Rice, R-South Carolina, have introduced the bipartisan Taxpayer Protection and Preparer Proficiency Act, which would permit the IRS to regulate paid tax preparers and mandate minimum competency standards.

According to Rep. Panetta, “Mistakes by incompetent tax preparers have led to many taxpayers getting audited or penalized through no fault of their own.” He further commented, “My bipartisan legislation will help prevent such predicaments by allowing the IRS to regulate paid tax preparers and ensure that they are meeting minimum competency standards. Anybody who pays for their taxes to be prepared deserves to know that their tax preparers are professional, proficient, and principled and, if not, will be held accountable by the IRS.”

Rep. Rice also commented, “The Taxpayer Protection and Preparer Proficiency Act will reduce error rates, lower risks for taxpayers, and help put a stop to the use of unqualified tax preparers. Since the federal government dictates our obligation to file taxes, we ought to allow the IRS to ensure that those who taxpayers turn to for assistance are well qualified.”

If you have been using an untrained and unregulated tax preparer and have concerns about whether your return has been prepared correctly, please call this office for a review. Uneducated preparers frequently overlook legitimate deductions and credits, especially with all of the new benefits available during the COVID pandemic.

Checklist: Managing Vacation Requests Post-Lockdown

Tue, 27 Dec 2022 10:48:27 GMT

Vacation gives employees time away from work to recharge, spend time with family and friends, and take care of personal responsibilities so that they can be more productive when they return to work. During the height of the pandemic, though, many employees didn't use as much vacation time because of travel and other restrictions. Now that these restrictions are easing, employers may find that there's pent up demand. While encouraging employees to use their vacation has a number of benefits, you also need to ensure adequate staffing.

Here is a checklist to help you develop a plan for managing vacation requests this year:

1. Review your vacation policy.

Make sure your policy addresses:

Who is eligible to take vacation.
How much time eligible employees may use and in what increments.
How to request time off and how much advance notice is required.
That vacations may be restricted if necessary based on scheduling needs and guidance on how requests will be granted (such as, seniority, first-come first-served, or a combination).
Any blackout periods during which vacations are off limits, if applicable.
Whether and to what extent employees can carryover unused vacation time to the following year and whether unused vacation will be paid out at the time of separation. Note: Some states prohibit policies that force employees to forfeit unused vacation time (also known as use-it-or-lose-it policies). In these cases, employers must generally allow employees to carry over all accrued but unused vacation time from year to year, or pay employees for the unused time at the end of the year. Check your state law to ensure compliance.

2. Discourage last-minute requests.

Some employers require at least one weeks' notice for vacations of a few days or less and more notice for longer periods. Some employers establish early deadlines for all summer vacation requests.

3. Set reasonable limits.

Employers generally have the right to control how much vacation employees take at any particular time. For example, an employer could limit vacations to five consecutive days or less, or institute blackout periods during which vacations are completely off limits. Assess what impact any restrictions would have on employee morale considering the challenges employees have faced over the past 18 months.

4. Hold supervisors accountable.

Whatever strategy you choose, give supervisors guidance on handling time off requests and hold them accountable for ensuring adequate staffing levels and applying your policy consistently.

5. Understand the latest COVID-19 rules and guidance.

The rules and guidance continue to change rapidly. For example, if employees are fully vaccinated and travel in the United States, they're no longer required by the CDC to get tested before or after travel or to self-quarantine after travel. The rules differ for international travel, and state and local jurisdictions may have their own travel restrictions in place. Advise employees to make sure they understand and follow applicable travel rules and guidance and ensure your post-travel screening and return-to-work protocols comply. Generally, employers may ask employees about geographic areas where they have traveled or intend to travel, absent a claim that an employee has a recognized privacy interest in their travel activities. Under federal law, employers may also ask employees whether they're fully vaccinated for COVID-19, but check state and local laws to determine whether they allow such inquiries. Employers will also need to determine to what extent (if any) they're allowed to use vaccination status to determine return-to-work protocols following travel.

6. Remind employees of your policy.

Prior to peak vacation times, such as the summer and holiday season, it's a good idea to remind employees of your vacation policy and highlight any changes made in the prior year.

Conclusion:

Providing paid vacation and developing a culture that encourages employees to use their time can help attract and retain employees as well as improve productivity, particularly in these unprecedented times. However, you should consider measures that ensure adequate staffing and make sure that the policy is applied fairly, consistently, and in compliance with applicable laws.

This story originally published on HR Tip of the Week – a blog providing practical information on hiring, benefits, pay, and more – by ADP®. Learn more about how ADP’s small business expertise and easy-to-use tools can simplify payroll & HR at adp.com .

Video Tips: Tax Forms Coming to Your Mailbox for This Tax Season

Thu, 15 Dec 2022 09:50:49 GMT

The tax season is coming and documents reporting income, sales and other items needed for your 2021 tax return should be arriving soon. Here are some of the common tax forms you need to be on the lookout for depending upon your particular circumstances.

Twists And Turns Of The Education Tax Credits

Tue, 13 Dec 2022 15:50:54 GMT

Article Highlights:

American Opportunity Tax Credit
Lifetime Learning Credit
Refundable Credit
Which Credit to Take
Post-secondary Education
3-month Rule
Maximizing the Credit
Qualified Expenses
Who Claims the Credit
Qualified Educational Institutions
Gift Tax Issues

If you have a child or children in college, or perhaps you or your spouse is a student, it can be confusing to figure out which of two potential education tax credits (1) you are eligible for and (2) gives you the greater tax benefit. This article looks at some of the twists and turns of these credits.

There are two higher-education tax credits: the American Opportunity Tax Credit (AOTC) provides up to $2,500 worth of credit for each student, 40% of which may be refundable. The credit is equal to 100% of the first $2,000 of college tuition and qualified expenses and 25% of the next $2,000. The AOTC only applies to the first 4 years of post-secondary education.

The other credit is the Lifetime Learning Credit (LLC), which only provides a maximum $2,000 of credit (20% of up to $10,000 of eligible expenses) per family per year. None of it is refundable, meaning it can only be used to offset your tax liability, and any additional credit amount is lost.

Here are some of the issues that arise with these two credits:

1. Many students attend local colleges for the first two years and then transfer to a university for the remainder of their education. Knowing the university tuition will be higher, some parents take the LLC and wait on the AOTC, thinking they can use it in years with higher tuition and get a larger credit. This isn’t a good plan because the AOTC credit is only good for the first four years of post-secondary education. Thus, it is always better to claim the AOTC in the first four years.

2. A special rule allows the tuition for an academic period that begins in the first three months of the next year to be paid in advance and thus increase the amount of tuition qualifying for the credit in the year the tuition is paid. This allows for planning when to make tuition payments to maximize credits, especially in the first partial calendar year.

Example: Jill graduated from high school in June and will start college in September. Her tuition and credit-qualifying expenses for the semester covering the last four months of the year and January of the next year are $1,500. Her mother, Cindy, is aware of the 3-month rule, and in December she prepays Jill’s $1,700 tuition for the semester beginning February 1 of the next year, bringing the qualifying expenses to a total of $3,200. The AOTC is equal to 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000. Thus the AOTC for Jill is $2,300 ($2,000 + 25% of $1,200). Cindy could increase the credit for the year to the full $2,500 maximum by purchasing $800 worth of course materials needed for “meaningful attendance or enrollment” in Jill’s course of study.

3. Qualifying expenses other than tuition are often overlooked. Taxpayers can take advantage of a tax regulation that specifies for the AOTC that qualifying expenses include course materials needed for “meaningful attendance or enrollment” whether purchased from the school or an outside vendor. However, for the Lifetime Learning Credit only course material purchased from the school qualifies.

4. Taxpayers also often overlook another very important fact: Whoever claims the student as a dependent gets to claim the education credit even if someone else paid for the tuition and qualified expenses.

Example: Suppose Jill’s Uncle Lee pays her tuition but Cindy, her mother, claims Jill on her tax return. Cindy is the one who qualifies for and receives the credit.

5. What many also overlook is the fact that the AOTC and LLC are phased out for higher-income taxpayers based on their adjusted gross income (AGI). The phaseout kicks in for AGIs between $160,000 and $180,000 for married taxpayers filing jointly, and between $80,000 and $90,000 for others. As an exception, married taxpayers filing separately aren’t eligible to claim either credit. In past years the phaseout ranges were different for the AOTC and LLC, but in a simplification move, Congress made them the same starting with 2021 returns.

So, if the parent claiming the student has an AGI above the phaseout range, regardless of who paid the tuition and qualified expenses, no one will be able to claim the credit. Thus, it is important to consider the income of the individual who is claiming the student as a tax dependent when there is an option of who claims the child, such as in cases of some divorced parents.

6. Because of gift tax issues, a person other than the one qualifying for the credit, such as a grandparent, may hesitate to volunteer to pay a tuition expense. Where payments are made directly to the educational institution, they are excluded from gift tax rules. However, depending on the amounts involved, there may be a gift tax reporting requirement if a monetary gift is given to the student or the individual who is claiming the credit and then the gift money is used to pay tuition.

7. A question that often comes up is whether tuition payments to a trade school or foreign university will count toward the education credit. To qualify for the credit, the tuition must be paid to any accredited public, nonprofit or proprietary post-secondary institution eligible to participate in the student aid programs administered by the Department of Education. This would rule out foreign educational institutions because they don’t qualify for the student aid program administered by the Department of Education, but it would generally include most accredited public nonprofit or privately owned, profit-making post-secondary educational institutions in the U.S.

As you can see, there are several aspects of the education credits that must be considered. If you need assistance with education planning or have questions about the education tax credits as they apply to your particular circumstances, please call this office.

Hobby Or For-Profit Activity? The Answer Makes A Big Difference For Tax Purposes

Tue, 13 Dec 2022 15:39:30 GMT

Article Highlights:

Hobby Versus For-Profit Endeavor
Factors Used to Determine For-Profit
Three out of Five Rule
Hobby Deductions
Sales from Collections

If you are engaged in an activity that produces income, the big tax question is whether the activity is a hobby or a business. The tax treatment of your income or loss from this endeavor hinges on the answer. The tax code (Section 183 – the so-called “hobby loss rule”) limits deductions when an activity is not engaged in for profit, resulting in no loss being deductible for a hobby.

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from operating a business with the intention of making a profit.

That being said, it isn’t always clear-cut whether the activity is a hobby or undertaken to make a profit. The IRS has guidelines for determining whether an activity is carried on for profit, such as a business or investment activity, or if it is a hobby.

This article provides information that is helpful in determining if an activity qualifies as an activity engaged in for-profit and what limitations apply if the activity is considered a not-for-profit hobby.

Is your hobby really an activity engaged in for-profit? In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of taxable income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all inclusive, may help you determine the status of your activity– is it for profit or a hobby?

Does the time and effort you put into the activity indicate an intention to make a profit?
Do you depend on the income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the normal start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be engaged in for-profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

An activity produces a loss when related expenses exceed income. If an activity is not for profit, losses from that activity cannot be used to offset other income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Hobby deductions - Prior to 2018, deductions for hobby activities, up to the amount of hobby income, could be claimed as miscellaneous itemized deductions on Schedule A, subject to a 2% of AGI (adjusted gross income) reduction. But the law was changed as part of the Tax Cuts and Jobs Act that was passed in 2017. That change, for years 2018 through 2025, prohibits any deduction for the types of miscellaneous deductions that were subject to the 2% of AGI haircut. So, if your activity is a hobby, this means that none of your hobby-related expenses can be deducted. But income you receive from the activity is still taxable and must be reported on your Form 1040, Schedule 1, line 8, for the year in which the income is received.

Sales from collections – If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain, reportable on Form 8949 for Schedule D. However, if you sell items from your collection at a loss, you can’t deduct the loss.

If you have questions related to your specific business or hobby circumstances, please give this office a call.

S Corporations Reasonable Compensation Requirement

Fri, 02 Dec 2022 12:58:29 GMT

Article Highlights:

Payroll Taxes
Corporate Officers
Employees of a Corporation
Reasonable Salaries
Factors
Flow-Through Deductions
Wage Limitations

Unlike a C corporation, which itself pays the tax on its taxable income, an S corporation does not directly pay taxes on its income; instead, its income, losses, deductions, and credits flow through to its shareholders’ individual tax returns on a pro rata basis. These distributions are not subject to self-employment (Social Security and Medicare) taxes. As a result, many S corporations ignore the requirement that each shareholder-employee must take reasonable compensation in the form of W-2 wages in exchange for services performed for the corporation. These wages are subject to Social Security and Medicare taxes (which the corporation and the employee generally split equally); the corporation is also responsible for paying the Federal Unemployment Tax (as well as any state unemployment taxes).

The Internal Revenue Code establishes that an officer of an S corporation is an employee of that corporation for Federal Unemployment Tax purposes. S corporations should not attempt to avoid paying this tax by treating their officers’ compensation as distributions rather than as wages.

This has been an issue for decades; in 1974, the IRS issued a ruling stating that, when a shareholder-employee fails to take a salary, or if that salary is unreasonable, an auditor should assert that the salary is unreasonable. The officer’s distributions will then be shifted to account for reasonable compensation, and he or she will be assessed the related employment taxes and penalties. At stake here are the employee’s 6.2% Social Security and 1.45% Medicare payroll taxes, the S corporation’s matching amounts, the Federal Unemployment Tax, and whatever state taxes happen to apply.

Who Is an Employee of the Corporation? – Generally, an officer of a corporation is considered an employee of that corporation. The fact that an officer is also a shareholder does not change the requirement that any payments made to that officer must be treated as wages. Courts have consistently held that S corporation shareholders who provide more than minor services to their corporation (and receive payment in return) are employees whose compensation is subject to federal taxes.

Tax regulations do provide an exception for officers who do not perform services or who perform only minor services. These officers are not considered employees.

What’s a Reasonable Salary? – The instructions for Form 1120S (“U.S. Income Tax Return for an S Corporation”) state: “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” There are no specific guidelines in the tax code regarding the definition of reasonable compensation. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of the individual cases. These are some factors that courts have considered when determining reasonable compensation:

The officer’s training and experience
The officer’s duties and responsibilities
The time and effort that the officer devotes to the business
The corporation’s dividend history
The corporation’s payments to non-shareholder employees
The timing and manner of the bonuses paid to key people at the corporation
The payments that comparable businesses have made for similar services
The corporation’s compensation agreements
The formulas that similar corporations have used to determine compensation

The problem here, of course, is that it is easy for the IRS to simply list contributing factors that courts have used when determining reasonable compensation and leave it to each corporation to quantify these factors and determine a reasonable salary—all while retaining the ability to challenge the selected amount later if an auditor decides that the compensation is not reasonable. The IRS has a long history of examining S corporations’ tax returns to ensure that reasonable compensation is being paid, particularly when a corporation pays no compensation to employee-stockholders.

199A Deduction Issue - A few years back Congress added a flow-through deduction (also referred to as the “199A deduction” after the section of the tax code that describes it). This deduction applies to S corporations (among many other business entities) and added another level of complexity to the determination of reasonable compensation.

The wages of an S corporation’s employee-stockholder are NOT treated as qualified business income (QBI) that is eligible for the individual’s 199A deduction. However, the corporation deducts these wages as a business expense when it calculates the profit that passes through to the shareholder as QBI on Schedule K-1. Thus, larger wages mean less K-1 flow-through income (QBI) and thus a smaller 199A deduction (as that is equal to 20% of QBI). In these situations, S corporations tend to minimize stockholders’ salaries to maximize flow-through income; this strategy increases the employee-stockholder’s 199A deduction and lowers the payroll taxes for both the corporation and the employee-stockholder.
If married taxpayers who are filing a joint return in 2022 have 1040 taxable income that exceeds $340,100 (or $170,050 for those with other filing statuses), the 199A deduction begins to be subject to a wage limitation. Once the 1040 taxable income for married taxpayers filing jointly exceeds $440,100 (or $220,050 for those with other filing statuses), the wage limitation is fully phased in. In that event, the 199A deduction becomes the lesser of the wage limitation or 20% of the QBI; if the wage limitation is zero, there is no 199A deduction. These phasing amounts are inflation adjusted annually.

The wage limitation comprises the wages that the corporation paid, including those paid to stockholders, plus the unadjusted cost of the qualified property that the corporation owned and used during the year. To be more specific, the wage limitation is the larger of
50% of the wages that the corporation paid to all its employees or
25% of the corporation’s paid wages plus 2.5% of the unadjusted cost of its qualified property.

Thus, for those high-income shareholders for whom the wage limitation applies, if the corporation pays no wages and has no qualified property, the shareholder will not have a 199A deduction.

If an S corporation is a specified service trade or business, the 199A deduction phases out; for married taxpayers who are filing a joint return, it phases out at taxable incomes between $340,100 and $440,100 (for those with other filing statuses, it phases out between $170,050 and $220,050). The IRS describes specified service trades or businesses as those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, financial services, and brokerage services, as well as those for which reputation and/or skill are contributing factors (for more details on what constitutes a specified service trade or business, please give this office a call).

Thus, if married taxpayers who are filing jointly for 2022 have taxable income more than $440,100 (or $220,050 for those with other filing statuses), they receive no benefit from the wage limitation; therefore, they also tend to minimize their reasonable compensation in order to minimize their FICA taxes.

Of course, taxpayers cannot pick and choose a particular level of reasonable compensation to minimize their taxes or maximize their deductions; therein lies a trap. Taxpayers instead should consider all the factors related to reasonable compensation. However, pulling all the data together to support such a determination can be difficult and time-consuming. Some commercial firms have the necessary data and resources to properly apply the various factors mentioned in this article to determine the proper level of reasonable compensation; this can provide backup in the case of an IRS challenge.

Please give this office a call if you have questions related to reasonable compensation for S corporation shareholders or how it impacts your specific tax situation.

Writing Off Your Business Start-Up Expenses

Fri, 02 Dec 2022 11:31:03 GMT

Article Highlights:

$5,000 First-year Start-up and Organizational Expense Write-off
Timely Filing Requirements
Qualifying Start-up Expenses
Trade or Business Purchase
Qualifying Organizational Expenses
Expense Write-off Limitations
How to Make the Election
Other Considerations

Unfortunately, as a result of the COVID pandemic many small firms have gone out of business. However, with the help of vaccines and the waning lethality of the latest versions of the virus, new businesses will be opening as the economy returns to near normal. New business owners, especially those operating small businesses, may be helped by a tax provision allowing them to deduct up to $5,000 of the start-up expenses and $5,000 of organizational costs in the first year of the business’s operation. These types of expenses not deductible in the first year of the business must be amortized (deducted) over 15 years. If a taxpayer who incurred start-up expenses does not make the election, the start-up costs must be capitalized, meaning that the expenses can only be recovered upon the termination or disposition of the business.

Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs. Examples of qualified start-up costs include:

o Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;

o Wages paid to employees and their instructors while they are being trained;

o Advertisements related to opening the business;

o Fees and salaries paid to consultants or others for professional services; and

o Travel and other related costs to secure prospective customers, distributors, and suppliers.

For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for, or preliminary investigation of, the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

Qualifying Organizational Cost - include fees for legal services, such as for drafting LLC documents, partnership agreements, corporate charter and by-laws; incorporation fees; temporary directors' fees; and organizational meeting costs.

Phaseout - As with most tax benefits, there is always a catch. Congress put a cap on the amount of expenses that can be claimed as a deduction under this special election. Here’s how to determine the deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months.

Example: Eligible start-up expenses are $6,000 and the business began on July 1, 2022. On the business’s 2022 tax return, the deduction for start-up expenses will be $5,033 ($5,000 + ($1,000/180 x 6 months)).

If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceeds $50,000.

For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)), plus the remaining $53,000 of costs would be amortizable over 180 months. These limits are applied separately for the start-up and organizational costs.

The election to deduct start-up and organizational costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.

The decision to write off these expenses should take into consideration other tax benefits available in the first of year of the business, including bonus deprecation and Sec 179 expensing, the Sec 199A deduction, and the overall result in the first year of the business.

If you are starting a business, it may be appropriate to formulate a business plan in advance. If you have questions or would like an appointment to discuss how to establish your business and the types of business structures that are available, please give this office a call.

Will You Benefit From Biden’S Student Loan Relief?

Mon, 21 Nov 2022 09:30:52 GMT

Article Highlights:

Relief Amounts
Income Limitations
Dependents of Another
Pell Grant Recipients
Repayment Pause
Monthly Payment Reduction
Cancellation of Debt Income

On August 24, President Biden announced a three-part plan to deal with student loan debt which includes, among other things, $20,000 in loan relief to borrowers with loans held by the Department of Education whose individual income is less than $125,000 ($250,000 for married couples) and who received a Pell Grant. Borrowers who meet those income standards but did not receive a Pell Grant in college can receive up to $10,000 in loan relief. Current students with loans are eligible for this debt relief.

Dependents of Another - Borrowers who are dependent students will be eligible for relief based on parental income, rather than their own income.

Who Will Benefit? – Since the forgiveness is targeted to lower income families, per a White House Fact Sheet, nearly every Pell Grant recipient comes from a family that made less than $60,000 a year. Based on that at least 93% of Pell Grant recipients have income less than $60,000 and would qualify for the $20,000 forgiveness.

The Department of Education estimates that, among borrowers who are no longer in college, nearly 90% of relief dollars will go to those earning less than $75,000 a year.

Repayment Pause – Repayments were previously paused as part of the COVID relief. That pause has been extended one last time until December 31, 2022. Borrowers should plan to resume payments in January 2023.

Monthly Payments Cuts - The program would also cut monthly payments in half for under-graduate loans. The Department of Education is proposing a new income-driven repayment plan that protects more low-income borrowers from making any payments and caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income—half of the rate that borrowers must pay now under most existing plans. This means that the average annual student loan payment will be lowered by more than $1,000 for both current and future bor-rowers.

It is estimated that nearly 8 million borrowers will be eligible to receive automatic relief because income data is already available to the U.S. Department of Education. If not, a borrower will be able to provide that information when the department makes a simple application available in the coming weeks. Watch for additional details.

Normally, per the tax code, when debt is forgiven the amount relived is treated as taxable income. That issue is not addressed in the Fact Sheet from the White House.

If you have questions, please give this office a call.

Home Energy Improvement Credit Is Enhanced

Thu, 17 Nov 2022 15:07:22 GMT

Article Highlights:

Credit History
New Law Enhancements
Extensions
Credit Limits
Home Energy Audit
Identification Number Requirement
Other Credit Issues

Going all the way back to 2006, except for 2008, the federal tax code has offered a tax credit for making energy-saving improvements to a taxpayer’s home. This credit had expired after 2021 but has been given renewed life and substantially enhanced by the Inflation Reduction Act of 2022.

Under the old law the credit had a lifetime cap of $500, which many taxpayers had taken advantage of in the previous 16 years, while others could not remember if they had used the entire lifetime credit during those years. As a result, with a lifetime cap of only $500, and a small credit rate of only 10%, the credit had become less of an incentive for taxpayers to make energy saving improvements to their homes and was frequently disregarded.

Now with the passage of the Inflation Reduction Act of 2022, this credit once again becomes a meaningful incentive for taxpayers to make energy-saving improvements to their homes. The new legislation not only did away with the minimal $500 lifetime limit by replacing it with a $1,200 annual limit, but it also increased the credit rate from 10% to 30%.

The legislation also made the changes retroactive to include home energy-saving improvements for 2022 and extending the credit through 2032.

As before, under prior law, there are certain credit limits that apply to the various types of energy-saving improvements. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements under the new law:

$600 for credits with respect to residential energy property expenditures, windows, and skylights.
$250 for any exterior door ($500 total for all exterior doors).
$300 for residential qualified energy property expenses
Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
The $1,200 credit amount is increased by up to $150 for the cost of a home energy audit.
The new law adds Air Sealing Insulation as a creditable expense.
However, the new law eliminates treatments of roofs as creditable after 2022.

Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.

Home Energy Audit - A home energy audit is an inspection and written report for a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer's principal residence which:

Identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and
Is conducted and prepared by a home energy auditor that meets the certification or other requirements specified by IRS. The amount of the credit allowed with respect to a home energy audit can't exceed $150.

Identification Number Requirement - The Act added a new provision that bars the credit unless the energy-saving item is produced by a qualified manufacturer, and the taxpayer includes the qualified product identification number of the item on their tax return for the tax year the credit is claimed. However that requirement does not take effect until after December 31, 2024, giving qualified manufacturers time to comply.

Other Credit Issues:

It is a nonrefundable personal tax credit and allowed against the alternative minimum tax (AMT) if the taxpayer is subject to the AMT.
There are no credit carryover provisions if the credit is not fully utilized in the year of the home energy improvements.
Unlike the solar credit , this credit doesn't have any specific prohibitions against swimming pools or hot tubs.

If you have questions related to how you might benefit from the enhanced and extended tax credit for making energy-saving improvements to your home, please give this office a call.

Solar Tax Credit Gets New Life

Thu, 17 Nov 2022 09:49:25 GMT

Article Highlights:

Effective Years
Credit Percentage
Batteries
Worth the Cost?
Non-Refundable Credit
Maximum Credit
Qualifying Property
Who Gets the Credit?
When is the Credit Available?
Multiple Installations
Installation Costs
Basis Adjustment
Association or Cooperative Costs
Mixed-Use Property
Newly Constructed Homes
Utility Subsidy
Leased Installations

The Inflation Reduction Act signed into law by President Biden on August 16, 2022, gives new life to the federal tax credit for the purchase and installation costs of residential solar-power systems and provides guidelines allowing batteries to also qualify for the credit.

The solar credit is a percentage of the cost of a solar electric system installed on a taxpayer’s first or second residence located in the U.S. Before the passage of the Inflation Reduction Act the solar credit was being phased out by slowly reducing the credit percentage from 30% to 22% over several years, and the credit was scheduled to end after 2023. The Inflation Reduction Act extends the credit through 2032 at 30% before phasing it out in years 2033 and 2034.

Those who qualify for the credit in 2022 will receive a bonus, as the credit for 2022 was 26% under the prior law phase out, but the legislation has returned the credit to 30% for 2022. The following table summarizes the credit for the past and the future years under this the new legislation.

Batteries – Emergency power outages imposed by utilities in fire prone areas during periods of high winds and low humidity, as well as in other disaster areas, can be a major inconvenience, especially for those that work from home, resulting in many taxpayers asking if storage batteries added to a solar installation would qualify for the credit.

Before this law change the tax code was silent on whether storage batteries were eligible for the credit, although the IRS had issued a private ruling indicating that they would be allowed. The Inflation Reduction Act of 2022 amended the code by adding and defining the term “qualified battery storage technology expenditure.” Thus clarifying that for expenditures made after December 31, 2022, battery storage technology which meets the following requirements will qualify for the credit:

(A) It is installed in connection with a dwelling unit in the United States that is used as a residence by the taxpayer, and
(B) It has a capacity of not less than 3 kilowatt hours.

Homeowners who already have a solar installation can add a storage battery and qualify for the solar credit for the cost of the battery.

Is a Solar System Appropriate For Your Circumstances? - Those TV adds tout how little your electric bill will be after you have a solar system installed. But they fail to consider the cost of the system itself and subsequent system maintenance. When you are making the decision whether to acquire a home solar system, you need to factor in the cost of the system (and the interest you will be paying if you are financing it) as compared to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system worth the cost? Electricity costs can vary significantly according to locale.

Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages; you may simply want to go green or go off the grid where electric service is not reliable.

If you plan to go ahead with a solar installation, here are some of the issues you need to be aware of.

Non-Refundable Credit - The credit is nonrefundable, meaning it can only reduce your tax liability to zero. However, the portion of credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year.
Maximum Credit – There is no specific maximum, however, and since it is not a refundable credit, the benefit may be spread over several years, and if not utilized by the time the credit is phased out, you may not get the benefit of the entire credit.

Example: Suppose in 2022, your solar installation costs $25,000 and the installation was completed in 2022. That would qualify you for a solar tax credit of $7,500 ($25,000 x 30%). But suppose the income tax liability on your 2022 tax return is only $3,000. Then, the credit would reduce your tax liability to zero, and the other $4,500 ($7,500–$3,000) of the credit is carried over to your 2023 tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or the credit expires. So if you are expecting the credit to offset your outlay for the cost in the first year you may be in for a surprise.
Qualifying Property – Both a taxpayer’s main and secondary residence qualify for this credit.
Who Gets the Credit? – It may come as a surprise, but you need not own the residence where the solar property is installed to qualify for the credit; you need only be a “resident” of the home. The tax code does not specify that an individual must own the home, only that it is their residence.

Example: A son lives with his mother, who owns the home. The son pays to have the solar system installed; the son is the one who qualifies for the credit.
When is the Credit Available? – The credit may be claimed on the tax return of the year during which the installation is completed.

Example: If you purchase and pay for a system installation that is completed in 2022, the credit will be claimed on your 2022 return. However if you pay for the installation in 2022 and the installation is not completed until 2023, then the credit is claimed on your 2023 return.
Multiple Installations – The credit is available for multiple installations. For instance, after the initial installation, if you add additional solar panels to increase capacity, these would be treated as original installations and qualify for credit at the credit rate applicable for the year the additional installation was completed. On the other hand, if you had to replace damaged panels or perform other maintenance on the system, these costs would not be for an original system and would not qualify for the credit.
Installation Costs – Amounts paid for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit—or for piping or wiring connecting the property to the residence—are expenditures that qualify for the credit. This includes expenditures relating to a solar system installed on a roof or ground-mounted installations.
Basis Adjustment – With respect to a home, the term “basis“ generally refers to the cost of the home plus improvements and is the amount subtracted from the sales price to determine the gain or loss when the home is sold. The cost of a solar system adds to a home’s basis, but because the solar credit is a tax benefit, the credit reduces the basis. This will generally create a different basis for federal and state purposes where a state does not provide a solar credit, or it differs from the federal solar credit amount.
Association or Cooperative Costs – If you are a member of a condominium association for a condominium you own or are a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any qualifying solar system costs incurred by the condo, cooperative association, or corporation.
Mixed-Use Property – In cases in which you use a portion of your residence for deductible business or rent part of your home to others, the expenses must be prorated, and only your personal portion of the qualified solar costs can be used to compute the credit. There is an exception if 20% or less of the property is used for business purposes, in which case the full amount of the expenditure is eligible for the credit.
Newly Constructed Homes – If you are planning on purchasing a newly constructed home that includes a solar system, you may be entitled to claim the solar credit. However, to do so, the costs of the solar system must be stated separately from the home construction costs and the appropriate certification documents must be available.
Utility Subsidy – Some public utilities provide a nontaxable subsidy (rebate) for the purchase or installation of energy-conservation property. In that case, the cost of the solar system eligible for the credit must be reduced by the amount of the nontaxable subsidy that was received, so only your net cost is eligible for the credit.
Leased Installations – When a solar installation is leased, the lessor gets the credit, not the home resident.

As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right financial move for you? Please call for a consultation before signing any contract to make sure a solar system is appropriate for you tax wise.

IRS Unveils Retirement Plans Inflation Adjustments For 2023

Tue, 01 Nov 2022 10:23:52 GMT

Article Highlights:

Planning for the Future
Inflation-adjusted Contribution Amounts
o IRAs
o Employer 401(k)s
o HSAs
o TSAs
o SE Retirement Plans
o SEPs

Are you ignoring your future retirement needs? That tends to happen when you are younger, retirement is far in the future, and you believe you have plenty of time to save for it. Some people ignore the issue until late in life and then have to scramble at the last minute to fund their retirement. Others may think that the Social Security benefits they’ll receive in retirement will be enough, but may have an expectation that their benefits will be higher than they’ll actually be and also fail to consider how the future viability of the Social Security program may impact their monthly payments.

The IRS just released the inflation adjusted retirement plans maximum contribution amounts for 2023, and the increases are dramatic. So, this may be the time to start considering funding a retirement plan if you don’t currently have one. If you are already contributing to a tax-favored retirement plan and are looking for ways to increase your annual contribution, these inflation increases will be good news.

Here's a rundown on the various tax-favored retirement plans available and the inflation adjustments pertaining to each.

Traditional IRA – This plan allows individuals to make tax-deductible contributions each year to the extent they earned taxable income (basically income from working). There is no age restriction, but the deductibility phases out for some higher income taxpayers. For 2023 the maximum an individual can contribute is $6,500 (up from $6,000 in 2022). For individuals aged 50 and over the maximum increases to $7,500 (up from $7,000 in 2022). The amount that can be deducted phases out for taxpayers who participate in a workplace retirement arrangement such as a 401(k) and have an adjusted gross income (AGI) between $73,000 and $83,000 (up from $68,000 and $78,000 in 2022). For married couples, the AGI phaseout range is $116,000 to $136,000, up from $109,000 and $129,000 in 2022.

Roth IRA – Unlike a traditional IRA where generally contributions to the plan are tax deductible but withdrawals from the plan are taxable, contributions to a Roth IRA aren’t currently deductible but payouts in the future are tax free. As with a traditional IRA, you must have taxable earned income in order to contribute to a Roth IRA. This plan also allows a contribution in 2023 of up to $6,500 (up from $6,000 in 2022). For individuals aged 50 and over the maximum increases to $7,500 (up from $7,000 in 2022). An individual’s ability to contribute to a Roth IRA in 2023 phases out for AGIs between $138,000 and $153,000, up from $129,000 and $144,000 in 2022. For married couples, the phaseout applies when AGI is $218,000 to $228,000, up from $204,000 and $214,000 in 2022. If you have more than one IRA, the limits apply to the total contributions made for the year to traditional and Roth IRAs, not to each one.

Employer 401(k) Plans – An employer 401(k) plan generally enables employees to contribute up to $22,500 for 2023 (that’s $2,000 more than in 2022), before taxes. In addition, taxpayers who are age 50 and over can contribute an extra $7,500 annually (up from $6,500 in 2022), for a total of $30,000. Many employers also match a percentage of the employee’s contribution, and this can amount to a significant sum for those who stay in the plan for many years.

Health Savings Accounts – Although established to help individuals with high-deductible health insurance plans pay medical expenses, these accounts can also be used as supplemental retirement plans if an individual has already maxed out his or her contributions to other types of plans. Annual contributions for these plans can be as much as $3,850 for individuals and $7,750 for families in 2023.

Tax Sheltered Annuities – These retirement accounts are for employees of public schools and certain tax-exempt organizations; they enable employees to make 2023 annual tax-deferred contributions of up to $22,500, up from $20,500 in 2022. Those aged 50 and over can contribute $30,000, up from $27,000 in 2022.

Self-Employed Retirement Plans – These plans, also referred to as Keogh plans, allow self-employed individuals to contribute 25% of their net business profits to their retirement plans. The contributions are pre-tax (which means that they reduce the individual’s taxable net profits), so the actual amount that can be contributed is 20% of the net profits up to a maximum of $66,000.New Paragraph

Simplified Employee Pension (SEP) – This type of plan allows contributions in the same amounts as allowed for self-employed retirement plans, except that the retirement contributions are held in an IRA account under the control of the employee or self-employed individual. These accounts can be established after the end of the year, and contributions can be made for the prior year.

Each individual’s financial resources, family obligations, health, life expectancy, and retirement expectations will vary greatly, and there is no one-size-fits-all retirement savings strategy for everyone. Purchasing a home and putting children through college are examples of events that can limit an individual’s or family’s ability to make retirement contributions; these events must be accounted for in any retirement planning.

If you have questions about any of the retirement vehicles discussed above, please give this office a call.

Video Tips: The IRS Is Sending Out Reminder Letters

Sun, 30 Oct 2022 13:12:18 GMT

More than 9 million individuals and families who appear to qualify for a variety of key tax benefits but did not claim them by filing an income tax return are being contacted by the Internal Revenue Service. Do not panic if you receive such letters from the IRS. Contact this office if you have any questions.

Inflation Reduces Income Tax

Thu, 27 Oct 2022 09:18:04 GMT

Article Highlights:

IRS Inflation Adjustments
Impact of 2023 Adjustments Will Be Felt in 2024 Tax Season
Standard Deduction
Tax Brackets
Other Tax Attributes

As the country emerges from the COVID pandemic and supply chain issues, along with the fallout from the war in Ukraine, the country has been experiencing high inflation rates that negatively impact the cost of everyday living, including food, gas for your vehicle, utilities and more.

But there is one shining light: tax-related inflation adjustments that will benefit most taxpayers. However, many media outlets have been touting the IRS’ recently released inflation adjustments for 2023 as if taxpayers will see the benefits this coming spring when they file their tax returns. What much of the hype fails to mention is that the 2023 increases will show up on your 2023 tax return which will be filed in 2024. So most people will have to wait until 2024 to see the approximately 7% inflation adjustment to tax benefits.

But there was an approximately 3% inflation adjustment for 2022 from which you will benefit when you file your 2022 tax return in early 2023.

If you are an employee, you may notice some reduction in the amount of income tax withheld from your wages starting in January, as the 2023 tax withholding calculation will take into account some of the items affected by the inflation adjustments, such as the increased standard deduction and widened tax rates.

Basic Standard Deduction

Standard Deduction : The table illustrates the increases in the standard deduction for 2022 and 2023. As shown in the table, for taxpayers filing married joint returns the increase was $800 from 2021 to 2022 and $1,800 between 2022 and 2023. For a married couple filing jointly these amounts are not subject to income tax. Taking this a step further, if that married couple were in the 22% tax bracket their tax savings would be $176 (0.22 x $800) in 2022 and $396 (0.22 x $1,800) in 2023.

Tax Brackets: Tax brackets are also affected by the inflation adjustments as illustrated in the tables below. For example, you will note that for an unmarried taxpayer using the single filing status for 2022 the table shows that when the individual’s taxable income reaches $89,076 the marginal tax rate increases from 22% to 24%. However, that transition between 22% and 24% occurs at $95,376 for 2023, or a difference of $6,300 that is taxed at 2% less than in 2022. Inflation adjustments are made annually for all the marginal rate brackets.

Individual Taxpayers (Single) Tax Rates

Heads of Household Tax Rates

Married Individuals Filing Joint Returns and Surviving Spouses (Joint) Tax Rates ax Rates

Married Filing Separately Tax Rates

Besides the standard deduction and tax brackets there are a large number of other tax attributes that are subject to inflation adjustment as well. Here are some examples.

As of this writing, the IRS has not yet released the 2023 maximum contributions to IRAs, 401(k)s and other retirement plans. It is anticipated that these amounts will also increase substantially due to the adjustment for inflation.

Please contact this office if you have any questions.

Inflation Reduces Income Tax

Thu, 27 Oct 2022 08:44:08 GMT

Article Highlights:

IRS Inflation Adjustments
Impact of 2023 Adjustments Will Be Felt in 2024 Tax Season
Standard Deduction
Tax Brackets
Other Tax Attributes

But there was an approximately 3% inflation adjustment for 2022 from which you will benefit when you file your 2022 tax return in early 2023.

Besides the standard deduction and tax brackets there are a large number of other tax attributes that are subject to inflation adjustment as well. Here are some examples.

Please contact this office if you have any questions.

2023 Social Security Cost-Of-Living Increase Highest In 40 Years

Tue, 25 Oct 2022 12:52:18 GMT

Article Highlights:

2023 Social Security COLA Increase
Historical COLA Increases
Keeping Inflation At Bay
Medicare Premium Decrease
Medicare Income Adjusted Tables for 2023
Modified Adjusted Gross Income
How Gambling Can Affect Medicare Premiums
Social Security Trust Fund

The Social Security Administration recently announced that Social Security beneficiaries will get an 8.7% increase to their benefits in 2023. Thanks to the current high inflation this is the highest increase in 40 years, and the second year in a row that there’s been a substantial increase, 5.9% in 2022 and now 8.7% for 2023. The table below reflects the COLA benefits going back to 1976. As you will note, the COLA increases have been relatively stable in recent years except for 2008.

HISTORICAL SS COLA RATES (Percent)

Rate for a particular year is effective for the following year’s benefit payments

The Social Security Administration will mail notices to Social Security beneficiaries during the month of December letting them know what their 2023 benefit will be. The COLA adjustment will boost retirees’ monthly payments by an average of $146 to an estimated average of$1,827 per month for 2023.

The COLA increases are about keeping the roughly 70 million Social Security recipients up with inflation and not really providing any increase in buying power. The 8.7% increase will be included in the January 2023 benefits.

Medicare Premiums – The Centers for Medicare and Medicaid Services also recently announced the 2023 Medicare premiums. Seniors will also see a rare but small drop in the Medicare premium rates. Both Medicare B (Medicare premiums) and Medicare D (Medicare prescription drug coverage) are treated as medical insurance premiums that may be tax deductible by a taxpayer who itemizes their deductions and for some self-employed individuals. Medicare premiums are not a fixed amount for all retirees. The amounts paid or withheld from the individual’s Social Security income is based on the taxpayer’s modified adjusted gross income (MAGI) from the two years previous. The following tables reflect the 2023 Medicare Part B monthly premiums and the Medicare Part D monthly supplement based upon a taxpayer’s 2021 MAGI. To determine the amount that will be withheld from your monthly Social Security benefit add together the Part B and D amounts.

Medicare Part B Monthly Premium

Medicare Part D Supplement*

*These amounts are in addition to any drug plan premiums.

1 Premium amount is for each spouse enrolled in Medicare B

2 Supplemental amount is for each spouse enrolled in Medicare D

The modified AGI used when determining amounts from the tables is the Federal AGI plus:

Tax-exempt interest income;
United States savings bonds interest used to pay higher education tuition and fees if the interest was excluded from income on Form 8815;
Excluded foreign earned income and housing costs;
Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands; and
Income from sources within Puerto Rico.

There is a tax quirk that can unknowingly increase the MAGI. Gambling winnings, even if there’s a net loss for the year, can increase the cost of health insurance premiums for individuals enrolled in Medicare coverage.

The reason for that is gambling losses are an itemized deduction and not netted against gambling winning. Thus, even though a taxpayer itemizes deductions and deducts their gambling losses, the full amount of the gambling winnings is included in their AGI, and as discussed above, their MAGI is used to determine the cost of the Medicare insurance. An example: an individual who recreationally gambles and makes $80,000 in bets during the year and has $75,000 of losses will an see an $80,000 increase in their MAGI even though they only netted $5,000 in winnings.

The Future of Social Security - There is also some concerning news that goes along with the Social Security benefits increase. The increase will have an adverse impact on Social Security’s already shaky finances. The funds that pay the benefits to retirees, survivors and the disabled will be exhausted by 2035 and only Medicare taxes collected from workers will be available to pay Social Security benefits. Thus there will not be enough funds to pay the full benefits going forward unless Congress intervenes and tackles the long-term funding shortfall.

If you have tax questions related to Social Security benefits, deducting your Medicare premiums or how you can save for retirement with tax beneficial retirement plans, please give this office a call.

Video Tips: The IRS Warns Taxpayers Of Increasing IRS Scams

Sun, 23 Oct 2022 13:31:12 GMT

The Internal Revenue Service on Sept. 28, 2022, warned taxpayers of a recent increase in IRS-themed texting scams aimed at stealing personal and financial information. This video will give a brief description of what to watch out for and how you can possibly identify a scam.

Use Quickbooks Online Effectively: 7 Best Practices

Fri, 21 Oct 2022 14:49:43 GMT

“Best practices” is a phrase that human resources professionals have been using for decades. But every type of profession has its own best practices, whether they call it that or not. These guidelines are not enforceable rules, though some managers may build them into their official policies. They just describe the way work should be done to achieve optimal outcomes and keep data organized and secure.

You may have heard of Generally Accepted Accounting Principals (GAAP) . Public companies are required to adhere to them, and many other businesses large and small follow these rules and procedures.

We’re not going to discuss GAAP in this month’s column. Rather, we’re going to talk about more general best practices for accounting, actions you can build into your QuickBooks Online work to make that time more productive and in line with what other successful businesses do.

How Do They Help?

Accounting best practices have numerous benefits. For example, they:

Help maintain the integrity of your QuickBooks Online data files.
Improve the accuracy of your accounting work.
Save time.
Provide insight on the financial health of your business.

When you incorporate best practices into your work, you may even find that your relationships with customers and vendors get better because you’re handling their businesses ? conscientiously.

7 Suggestions For You

Here are seven guidelines that we try to follow. We hope you will, too.

Track your 1099 vendors

Changes in the economy over the last few years have led some people to take on part-time (or even full-time) contract work. You should be creating vendor records for these individuals. Click Expenses in the tool bar and then select the Vendors tab. As you’re completing a record, you’ll see a section labeled Additional info . Check the box in front of Track payments for 1099 . You can create and deliver your 1099s using QuickBooks Online when the time comes.

If your business employs contractors, make sure that you indicate their 1099 status in their vendor records.

Reconcile, reconcile, reconcile

Once you’ve downloaded cleared transactions from your financial accounts, it’s important that you reconcile them. This is probably one of your least favorite tasks to undertake, but QuickBooks Online simplifies it for you some, walking you through the process. Reconciling accounts regularly can help you:

Discover errors and missing transactions.
Get a more accurate picture of your cash flow.
Make your reports more precise

Keep your lists up to date

Your QuickBooks Online company file can grow substantially over the years. Though the site has great search capabilities, you may still be scrolling to find the entries you want. This isn’t as big a problem for lists like Payment Methods or Terms , but overly lengthy lists of Products and Services , Customers , and Vendors can become unwieldy over time. Try to keep them current. If you don’t want to delete them completely, you can make individual records inactive by clicking an Action link in the listing table for each.

If your QuickBooks Online Lists are getting too lengthy, you may be able to make some of the records Inactive .

Categorize and classify everything that you can

Your QuickBooks Online company file consists of hundreds or thousands of individual records and transactions. Though each is a separate entity, there will be many times when you want to be able to assemble groups of related ones. For example, you might want a list of all of your customers in a specific ZIP code or all services that go into the creation of a marketing program.

There’s more than one way to get this information quickly. You can customize reports. Assign Classes , Categories , and Tags . View a Project . Whatever method(s) you choose, do use them consistently. They can provide insight in a wide variety of ways that will help you make better business decisions.

Warning: Before you start making lists of these classification tools and assigning them, think carefully about what they should be. You can always add to and edit the lists, but you’ll want to make them as focused and flexible as you can. Let us know if you need help with this.

Assign user permissions carefully

QuickBooks Online makes it possible to restrict users to specific areas and functions on the site. Use these tools. You can find them by clicking the gear icon in the upper right and then Manage users . You trust your employees or you wouldn’t have hired them, but you need to put controls in place to protect your sensitive company data.

Use QuickBooks Online’s reports

Are you taking advantage of QuickBooks Online’s report templates? It’s absolutely essential that you keep up with reports in areas like Who owes you and What you owe . We can help with this. We can also generate and analyze the standard financial reports that you occasionally need, like Statement of Cash Flows and Profit and Loss .

Don’t leave QuickBooks Online running and walk away

This should go without saying if you’re in a multi-person office. Also, don’t use the QuickBooks Online mobile app on a public Wi-Fi network when you’re out and about. Your company file contains information about your customers, vendors, and employees that should never be compromised.

More Than Common Sense

These best practices may seem like common sense to you if you’ve been using QuickBooks Online for a while. But when you first start using web-based financial applications, they might not be second nature to you. That’s why we’re sharing them with you, to remind you that conscientious use of QuickBooks Online is critical to the safety, accuracy, and usefulness of your company data. As always, we’re here to answer any question you have.

November 2022 Individual Due Dates

Thu, 20 Oct 2022 14:40:47 GMT

November 10

- Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during October, you are required to report them to your employer on IRS Form 4070 no later than November 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

Entrepreneurs: Five Low-Cost And High-Profit Business Ideas

Thu, 20 Oct 2022 14:35:11 GMT

Perhaps you’re a business owner who is ready to downsize, or a long-time employee ready to set off on your own and leverage your knowledge and experience to start your own small business. If you have a particular area of expertise then you’re probably in good shape: people with real know-how have started highly profitable consultancies in everything from tech support to investing, experienced marketing professionals have re-imagined themselves as social media managers and public relations gurus, and administrative professionals have offered virtual assistance service for everything from data entry to market research to scheduling appointments from home.

If you’re not as clear-eyed on how best to direct your own talents, it may be helpful to know which small business ventures have proven to be most profitable for those who have already taken the plunge. The list below runs the gamut from having a physical presence to running an entirely online business, from relying on the existing background to trying something entirely new. If there’s nothing here that you find appealing, we hope that it will help you by serving as a springboard for other ideas.

Small Businesses with Big Potential

Food trucks – Depending upon where you live it may feel like there’s a food truck on every corner and at every farmer’s market or festival. Food trucks are having more than a moment, with remarkable growth over the last few years that’s expected to continue. Though the business can be competitive and some cities are already saturated, the potential for growth in smaller towns remains. Operating your own food truck generally requires an investment of less than $30,000 and allows you the ability to be creative with your product as well as your marketing efforts. You can go where your customers are and make your own hours, all for a relatively low investment.
Vehicle services – The automobile market has changed dramatically in the last few years. Where car owners previously traded in their cars every few years, Kelly Blue Book reports that better quality has led to consumers holding on to their cars far longer, and that has driven the need for vehicle services from cleaning to repair. The longer a vehicle owner plans to hold on to their car, the more they are likely to invest in services to keep it running well and looking good, and that has made car wash services, mobile auto detailing services, and auto repair shops an increasingly profitable business.
Health and fitness businesses – The more we know about health, the more we want to improve our own, and that’s been demonstrated by the rise in popularity of personal trainers and home-based fitness classes . Whether you’re already a trainer, yoga instructor, ornutrition expert or it’s something you’re interested in pursuing, you’re likely to find that there are plenty of people willing to pay for your expertise, whether you’relive streaming classes from your home, at clients’ homes, or holding class sessions on a beach or local park. The more creative you are and the more skilled at using social media, the more successful you are likely to be – think yoga with goats or alpaca, orpre-or post-workday strength classes.
Maternity and child-related services – There’s nothing new or trendy about having and raising children, but what is a recent development is the investment that people are willing to make to support them as they do it. From hiring doulas and lactation consultants to providing enrichment activities and entertainment for children, affluent Americans are spending increasing amounts on their kids from pre-birth through college age. If you’re a health care professional or are interested in pursuing the education and certification required to assist women through the birth process, the sky is the limit on business potential, and the same is true for those who can lead art classes, gymnastic classes, music classes, or create apps and books that kids can use to entertain themselves.
The Sharing Economy – Borrowing rather than buying is one of the most notable stories in the way that people are spending money. Whether it is sharing clothes via businesses like Rent the Runway, renting out properties on Vrbo or AirBnB, or offering a vehicle on Touro, there’s money to be made from items that have already been purchased. If you have a large inventory of in-demand items or assets that you’re willing to make available, there’s money to be made – especially if what you’re offering is unique.

The list provided here barely scratches the surface of all of the possibilities for starting your own successful (and profitable) small business. If you’re considering setting out or have recently done so and you need guidance on topics related to taxes, setting up your business, or need an accounting professional, contact us today to set up a time for us to talk.

Justice Department Indicts Brooklyn Dietician For Tax Refund Scheme

Thu, 20 Oct 2022 14:23:50 GMT

The U.S. Justice Department has announced the indictment and arrest of Ehrenfriede Kauapirura, a Brooklyn, New York dietician. She is charged with multiple counts of filing false tax returns, obstructing the Internal Revenue Service, and willful failure to file a tax return.

Charges Include Fraudulent Refund Claims, Obstruction, and Failure to File Tax Multiple Returns

According to a press release issued by the United States Department of Justice, in 2015 Kauapirura filed a false amended tax return on which she reported roughly hundreds of thousands of dollars in fictitious tax withholdings that she claimed entitled her to roughly a quarter million dollars in tax refunds. She successfully pursued the same strategy the following year on her official 2016 return.

Following the dispersal of approximately $500,000 in refunds, the IRS reviewed her claims and, upon determining that they were fraudulent, attempted to have her return the funds that she had wrongfully received. According to the Department of Justice, her initial response to their collections effort was to transfer the funds from her personal bank account into a trust over which she had control. She also wrote and submitted a check for $1 million to the agency in payment for her tax debt: the check later proved to have been written from an account from a non-existent bank.

Non-Payment of Taxes Added to Tax Refund Fraud Charges

In addition to her fraudulent tax refund scheme and her actions to evade justice, Kauapirura also failed to file any tax returns at all for tax years 2017 through 2020. According to TaxBuzz, the charges against her could easily add up to multiple years in jail, as the charge for failure to file a tax return is one year for each of the returns she did not file, plus an additional three years for the obstruction charge and three years for each of the false tax returns that she filed. No trial date has been set at this time. Multiple agencies are involved in the tax evasion case, which was revealed by acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division, U.S. Attorney Breon Peace for the Eastern District of New York, and Special Agent in Charge Tammy Tomlins Sarah of IRS-Criminal Investigation.

Taxes can be challenging. If you need assistance with preparing your tax returns, preparing an amended tax return, or with any other tax-related questions, contact us today to set up a time for us to talk.

November 2022 Business Due Dates

Thu, 20 Oct 2022 14:03:58 GMT

November 10

- Social Security, Medicare and Withheld Income Tax

File Form 941 for the third quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.

November 15

- Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in October.

November 15

- Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in October.

Are You Missing Out On The Increased Child Tax Credit?

Thu, 20 Oct 2022 08:14:14 GMT

Article Highlights:

American Rescue Plan Act
2021 Enhanced Child Tax Credit
Credit Phaseout
Advance Payments
TIGTA Report
Millions Entitled to But Did Not Receive the Credit
Credit Still Available to Those That Qualify

The American Rescue Plan Act of 2021, also referred to as the COVID-19 Stimulus Package or ARPA, was a $1.9 trillion bill passed by Congress to stimulate the U.S. economy as the country emerges from the pandemic.

Included in that legislation was a one-year groundbreaking enhancement of the child tax credit for 2021 only. Though it made no changes to the rules about dependency, the law boosted the existing credit from $2,000 to $3,000 for parents of a child aged 6 to 17 (this is a one-year increase from the normal age 16 cutoff).

The credit is intended for lower income families and includes a phaseout that reduces the credit by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified gross income exceeds the thresholds illustrated in this table.

2021 MAGI PHASEOUT - CHILD TAX

Not only did the bill increase the credit, it also required the IRS to provide monthly payments to parents of up to half of the amount of the credit from July through December of 2021, with the balance credited to them when they filed their 2021 tax return.

This is where implementing the credit got complicated for the IRS. They needed to determine, based on prior tax filings, who was entitled to pre-payments. As you might imagine this is where things could go awry, and they did. Many individuals not entitled to the advance payments received them and many who should have received them did not.

A recent report from the Treasury Inspector General for Tax Administration (TIGTA) shows the IRS, between July and November of 2021, made payments to approximately 1.5 million taxpayers who were not entitled to the payments totaling more than $1.1 billion. The report also found that there were 4.1 million eligible taxpayers who did not receive payments totaling nearly $3.7 billion.

If you were entitled to but did not receive advance payments, it may be because your income in prior years was below the filing requirement and the IRS did not have the data needed to determine if you qualified for an advance payment. It may also be the case if you were required to file and simply didn’t do so. You may also be missing out on the credit, which is refundable even if you have no tax liability, if you have not filed for 2021 because your 2021 income is below the filing requirement. Or, you may have had a new child in 2021 and have not filed yet.

This credit is still available. So, whatever the reason, if you think you might qualify and didn’t receive the full amount of the credit by pre-payments or on your 2021 return if you’ve already filed it, give this office a call so your circumstance can be reviewed to make sure you are not leaving a substantial tax refund on the table.

When To Hire A Fractional CFO

Wed, 19 Oct 2022 09:23:41 GMT

Every entrepreneur starts their company with their own vision of what the future holds. Maybe you thought you’d just work from a home office, managing every function and loving every minute of it. Maybe you always knew you were going to make it big and would need a suite of executives, a team of sales and marketing professionals, and a whole bunch of support staff to help the whole thing run like a clock. Whatever you anticipated, if you’ve gotten to the point where your books and your financial planning have gotten beyond your ability, it’s time to think about bringing on someone with more time and experience. While you may be tempted to hire a full-time CFO, there are many benefits to using the fractional CFO services offered by a bookkeeping or accounting firm.

Every growing business needs accurate and timely record-keeping and reporting. But if your needs have grown beyond basic bookkeeping and you need financial insights, accounting management, KPI tracking, and analysis, it’s time to hire a professional. In the past, businesses in your position have had little choice but to bring on a Chief Financial Officer. Today, an increasing number of successful entrepreneurs are recognizing that hiring a virtual CFO — also known as a fractional CFO — makes a great deal of sense. And you can easily access this service by contacting your professional.

A virtual CFO provides outsourced financial services at a fraction of the cost of a full-time employee’s salary. While every business is different and compensation can shift based on years of experience, geographic location, and the scope of the actual work, there’s no getting around the fact that the median salary paid to a Chief Financial Officer in the United States is $417,857. That’s a pretty big hit to take as a new expense, and that doesn’t count the outlay for benefits, bonuses, and associated costs starting with office space and equipment and going on from there.

While the services afforded by a full-time Chief Financial Officer would undoubtedly be valuable, most businesses have legitimate questions about whether the outlay of cash is worth the price. Now consider instead the option of using your CPA firm’s virtual CFO service. They have invested in bringing on professionals who possess all of the same knowledge and experience, but a fractional CFO service participates on a customized schedule to suit the needs of your company — and charges according to a much more reasonable contracted monthly fee, without the need to pay benefits, bonuses, or other expenses.

The difference between the two costs speaks for itself. But do you really get the same level of service? And how do you know that you’re ready or have a need for these services?

Most virtual CFOs were either previously employed as Chief Financial Officers but have chosen to step away from full-time work in favor of a more flexible schedule, or they were qualified to be Chief Financial Officers but opted for a different path. Whatever their specific background, your accounting firm has hired them because they have the exact qualifications needed to help small to mid-sized businesses valued between $1 million and $50 million that have needs beyond their management’s time or abilities and the interest in helping your business succeed.

To get a sense of whether your business needs a virtual CFO, consider these services that they offer and determine whether having them would help you achieve your goals:

A virtual CFO will provide you with financial strategies and projections to improve your operational performance

A virtual CFO will prepare in-depth monthly reports that incorporate all of the pertinent data about your organization and use them to identify what is either driving your growth or preventing it. Beyond simple preparation, they understand what information is important and has meaning and help you make good use of it.

A virtual CFO will manage your assets and monitor your cash flow to improve your overall standing, minimize risk, and optimize your profitability and ability to grow.

A virtual CFO will help you create a financial plan that you can follow. They will also track and measure whether you are sticking to the plan and whether it is helping or needs to be revised.

A virtual CFO will help you create a financial plan that you can follow. They will also track and measure whether you are sticking to the plan and whether it is helping or needs to be revised.

If you would like more information on the virtual CFO services offered by our accounting firm, or any of the other ways that we can help, please contact our office today.

What Is An Offer In Compromise?

Tue, 18 Oct 2022 11:58:40 GMT

Carrying long-term debt is a challenge, but when the money is owed to the government and you see no way to pay what you owe, it can bepsychologicallyand emotionally debilitating. Some people think they can turn to bankruptcy, but that is not the case – bankruptcy specifically will not discharge tax debts. One of the few options available for settling tax debt is an IRS program called an Offer in Compromise, or OIC.

An OIC is not something that the IRS agrees to lightly. Roughly one in three applications for the program are approved. Still, it may be worth your time and effort to determine whether you qualify.

The Three Steps to Applying for an Offer in Compromise

Fill out IRS form 433-A and IRS form 656. If you plan to appeal the debt itself, you will also need to fill out IRS form 656-L.

Pay the nonrefundable application fee of $205. If your income is below the IRS low-income guidelines, the fee may be waived.

Propose paying an alternative amount to the IRS

This is a simple summary of a complex process that requires providing a significant amount of detail about your income and expenses. Though the form asks for a lot of information, the more diligent you are in demonstrating your inability to pay both your bills and your tax debt, the better your chances of being approved. It is also notable that 20% of the amount that you are offering to pay within your application must be included with your application in order for it to be considered. If your Offer in Compromise is rejected, the money will be applied toward your debt.

Eligibility for Applying for an OIC

Qualifying for an OIC is difficult in large part because the IRS has such strict rules about who is eligible to apply, as well as regarding what is needed to qualify.

Let’s look at the question of whether you can apply first. In order for your application to be accepted, you must make sure that you meet the following criteria:

The Three Steps to Applying for an Offer in Compromise

You have answered all questions on the forms

You are current in having filed your tax returns

You must have submitted the $205 application fee or successfully had it waived

There must be at least one tax debt in your Offer in Compromise for which you have not received a bill

You must have submitted all of your estimated tax payments for the current year

You must not be in the midst of a bankruptcy proceeding

You must continue paying taxes and filing your tax returns while the IRS response to your offer is pending

Your case cannot have been sent to the Justice Department by the IRS

If any of these items are not in evidence, the IRS will send your application back for correction and resubmission.

Qualifying for an Offer in Compromise

The decision-making process that the IRS uses when considering taxpayers’ Offers in Compromise is an objective calculation, based on the financial information that’s been submitted to them, about whether and how much payment they are likely to be able to recover – a number referred to as “Reasonable Collection Potential.” That financial information considered includes all of your assets, your income, and your earnings potential as well as your cost of living and your debts. The IRS is extremely granular in their analysis, working to determine whether the amount of payment that you have suggested in your Offer in Compromise is less than, equal to, or greater than the Reasonable Collection Potential.

When the IRS accepts an Offer in Compromise, it is generally because they agree that your circumstances make it a hardship for you to pay, because there is a question about the actual amount that you owe, or because they believe that they’re never going to be able to collect the amount that you owe in full.

What the IRS Offer May Look Like

If the IRS decides to grant your request for an Offer in Compromise, they will do so in one of two ways. You will either be able to pay your debt off within five months or under a 24-month payment plan.

It is important to remember that under either of these plans, the IRS will already have received 20% of your offer amount and it will be considered the first payment under either of these payment options.

What Happens While You’re Waiting for the IRS to Respond

Upon receipt of your Offer in Compromise and all supporting documentation, all IRS collection activities will cease. If there are tax liens in place they will remain in place pending a decision and until you have made all payments if your offer is accepted. You will continue receiving any tax refunds that you are owed unless it is received via an amended return after an Offer in Compromise has been activated.

If your tax refund has been garnished and you are waiting for an IRS response to your Offer in Compromise proposal, you can request an offset bypass refund based on economic hardship that you will have to prove.

Rejection of your Offer in Compromise is appealable, and there are other options available — including installment plans or a “currently not collectible” status that can help you relieve extreme financial stress.

If you are struggling with tax debt that you believe you will simply be unable to pay, an Offer in Compromise may be the answer. For help identifying the best option available for your specific circumstances, contact us today to set up a time to meet.

Is This An Opportune Time To Convert Your Traditional IRA To A Roth IRA?

Tue, 18 Oct 2022 09:53:42 GMT

Article Highlights:

Stock Markets Downward Slide
Traditional IRA to a Roth IRA Conversions
Younger Individuals
Here Is How It Works
Marginal Tax Rates
Example When Using the Marginal Table
Conversions Cannot Be Undone.
Non-deductible Traditional IRA Contributions

If your traditional IRA is invested in stocks and/or mutual funds, the recent substantial downward slide by the stock markets may provide a unique opportunity to convert your traditional IRA to a Roth IRA at a low cost, and then benefit when the markets recover.

Why would you want to do that? Because Roth IRA distributions provide tax free retirement benefits while payouts from Traditional IRAs are taxable.

Of course there is no assurance that the markets will not continue to decline, and this may not be the most opportune time to make a conversion in your specific circumstances but is something you may want to consider. Conversions provide the most benefit to younger individuals who can look forward to many years of the tax-free growth provided by a Roth IRA.

You don’t have to convert all of your traditional IRA in one year. You can convert what you can afford to pay the tax on each year.

Here Is How It Works – The tax code allows individuals to convert any portion of their traditional IRA to a Roth IRA by paying tax on the conversion as though taking a distribution from the traditional account. Thus, if you make a conversion you are taxed on the conversion based upon the tax rates that apply to your normal income plus the traditional IRA amount being converted.

Of course, if in 2022 you have abnormally lower income, that could make the conversion tax even less. The following table includes the marginal tax rates for 2022.

Marginal Tax Rates for 2022

Filing Status

Other Issues :

There is no income limitation on making a conversion, thus anyone can do a conversion.

Higher income taxpayers can use the conversion to circumvent the AGI limits for contributing to a Roth IRA.

Once a conversion is made it cannot be undone.

Some individuals for various reasons have made non-deductible contributions to their traditional IRAs. For distribution or conversion purposes, all an individual’s IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable.

Give this office a call if you would like to explore the possible benefits of a traditional to Roth IRA conversion.

November 2021 Business Due Dates

Tue, 18 Oct 2022 08:41:40 GMT

November 1 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the third quarter of 2021. Deposit or pay any undeposited tax under the accuracy of deposit rules. 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 November 10 to file the return.

November 1 - Certain Small Employers

Deposit any undeposited tax if your tax liability is $2,500 or more for 2021 but less than $2,500 for the third quarter

November 1 - Federal Unemployment Tax

Deposit the tax owed through September if more than $500.

November 10 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the third quarter of 2021. This due date applies only if you deposited the tax for the quarter in full and on time.

November 15 - Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in October.

November 15 - Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in October.

Four Popular Platforms For Finding Gig Work

Fri, 14 Oct 2022 12:52:29 GMT

There was once a time when the only people who used the word “gig” were musicians chatting about a booking. Today, virtually every newspaper and magazine features the booming gig economy — or how to make the most of it — on a regular basis. Though the term generally refers to people who have taken leave of their full-time jobs, choosing instead to work as independent contractors, there are many who are participating on freelance platforms as a way to supplement their income.

No matter whether you’re considering entering this flexible, unpredictable world, you won’t be alone. Businesswire has reported that more than one in three professionals turned to freelancing during the COVID-19 pandemic, and even as businesses have reopened and people have returned to work, a recent Pew Research study found that 9% of Americans were involved in gig work and that 31% of those — roughly 3 percent of U.S. adults — did gig work as their main job.

Gig work has plenty of benefits, but it has its drawbacks too. The most obvious advantage is the flexibility of making your own hours and being your own boss. Drawbacks include the unpredictability of work, the lack of paid benefits, and having to pay self-employment taxes.

If you’re wondering whether gig work is right for you, you have plenty of options available. Platforms exist for people with specialized skills as well as for unskilled workers, drivers, and grocery pickers. To give you an idea of the opportunities available, we’ve assembled a list of some of the top platforms for finding gig work.

Freelancer – This site offers the opportunity to post a personal profile that highlights your skills and then to bid on jobs in over 1,800 categories. Employers post their job descriptions and review the profile posted by each worker whose skills match their needs. Payments are made in milestones. The site has a membership fee after the first month, with a variety of membership options available.

Instacart – Signing up to be a contractor for this delivery service means you become a personal shopper, picking out items based on clients’ orders and then delivering them, Instacart’s gig workers do most of their shopping for clients at specific big brand stores. Must have constant access to a smartphone and a vehicle and must be able to lift 50 pounds without accommodation. In addition to being paid based on the job itself, you also have the opportunity to earn tips.

TaskRabbit – TaskRabbit matches those who need help with odd jobs and errands with people with the skill to do them. Jobs can range from driving to a physician’s office to helping somebody move or assemble furniture. This last task was posted so frequently on the platform that it attracted the attention of furniture giant IKEA, which purchased the site in 2017 and now offers a TaskRabbit service option with their furniture purchases. Gig workers download the site’s app and are then notified when somebody in their area posts a job they may want to complete.

Care.com – This platform matches pet sitters, babysitters, tutors, housekeepers, and senior caretakers with those in need of their services. Signing up as a contractor on this site requires submitting to a background check in order to ensure the safety of those being cared for. Skills such as CPR or first aid certification are particularly valuable. This site does not take a percentage of earnings but does charge a membership fee.

The gig economy offers limitless options for earnings, regardless of what your skill levels are. If you choose to get involved, make sure that you understand all the financial ramifications: payments are made through third-party platforms and reported to the IRS, so it is important that you are including all freelance income on your tax return and paying quarterly estimated income tax on all earnings.

If you need assistance in calculating your taxes or advice on whether jumping into the gig economy is right for you, contact our office today.

Hurricane Ian SBA Disaster Assistance

Thu, 13 Oct 2022 14:22:14 GMT

Article Highlights:

Counties that Qualify For Loans
Application Deadlines
Types of Disaster Loans
Interest Rates
Hurricane Ian Disaster Fact Sheet
Application Assistance

The Small Business Administration (SBA) provides disaster assistance for homeowners, renters, nonprofits, and businesses of all sizes affected by Hurricane Ian.

Caution: The following list of qualifying counties is preliminary and can change as damage assessments are concluded.

Florida Areas Eligible for SBA Disaster Loans - In the Florida counties of: Charlotte, Collier, DeSoto, Hardee, Hillsborough, Lee, Manatee, Pinellas, and Sarasota.

For Economic Injury Only Loans : in the contiguous Florida counties of: Broward, Glades, Hendry, Highlands, Miami-Dade, Monroe, Pasco, and Polk.

Application Filing Deadlines:

Physical damage: November 28, 2022
Economic injury: June 29, 2023

Types of available disaster loans:

Home Disaster Loans – Loans to homeowners or renters to repair or replace disaster-damaged real estate and personal property, including automobiles.

Business Physical Disaster Loans – Loans to businesses to repair or replace disaster-damaged property owned by the business, including real estate, inventories, supplies, machinery and equipment. Businesses of any size are eligible. Private, non-profit organizations such as charities, churches, private universities, etc., are also eligible.

Economic Injury Disaster Loans (EIDL) – Working capital loans to help small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, non-profit organizations of all sizes meet their ordinary and necessary financial obligations that cannot be met as a direct result of the disaster. These loans are intended to assist through the disaster recovery period.

Interest Rates:

LOAN INTEREST RATES

Physical Damage Loans

Economic Injury Loans

More detailed information can be found in the Hurricane Ian disaster fact sheet .

Get help with your application

Applicants are encouraged to apply online for a disaster loan . Please call the SBA at 800‐659‐2955 if you have any loan questions.

For any disaster related tax issues please give this office.

Video Reminder: Don't Miss The October 17 Deadline

Tue, 11 Oct 2022 09:23:53 GMT

This is a reminder that if you requested an extension to file your 2021 tax return, it is due on Monday, October 17.

The Success Of Palmer Luckey And Oculus: Luck Had Nothing To Do With It

Tue, 11 Oct 2022 09:10:22 GMT

Born in 1992, Palmer Luckey is an entrepreneur who was born and raised in Long Beach, California. He came from a family of hard workers: his father was employed by a local car dealership, while his mother homeschooled Palmer and his three younger sisters.

From an early age, Palmer showed a passionate interest in both electronics and engineering. Additionally, his hobbies included something that most 1990s kids loved - video games and technology in general. He would go on to take classes at two local community colleges - Golden West College and Long Beach City College - between the ages of 14 and 15. Later, he attended California State University, Long Beach where he was also the Online Editor for the institution's student-operated newspaper .

At this point, it's understandable to think that the story of Palmer Luckey sounds pretty familiar. He's a 30-year-old entrepreneur with a fairly typical upbringing who showed interest in electronics like countless other kids born at a turning point for personal computers, technology, and the Internet.

But what makes Palmer story's unique is that when he was just 16 years old, he started building VR (virtual reality) headsets that he would design from scratch. He would then go on to develop a device called the Oculus Rift, which is typically considered to be the device that revived the virtual reality industry. The parent company - Oculus VR - was then almost instantly swallowed up by Facebook.

You may also think that Palmer Luckey is just another tech entrepreneur who "got lucky" and then "got rich." But in this particular case, luck had absolutely nothing to do with it.

Kevork Djansezian/ Getty Images News via Getty Images

The Journey of Palmer Luckey: The Story So Far

Generally speaking, when an entrepreneur is considered to have "gotten lucky," they're someone who found themselves in the right place at the right time. For Palmer Luckey, such a scenario was largely impossible because, by the early 2010s, virtual reality was considered a dead industry - a novelty of the past, similar to the 3D movies of the 1950s.

Instead, he had to build "the right place and the right time" with his own two hands - both literally and figuratively in this case.

Palmer was so passionate about electronics in general but specifically about virtual reality that he began to design and build many, many of his own displays. Early models had a plethora of issues that detracted from the experience like low contrast or a low field of view. But still, he persisted.

As he began to tackle these issues, he was plagued by new ones like headsets that weighed too much or that were far too expensive to ever be commercially viable. But still, he persisted.

Over the next few years, it has been estimated that he built no less than 50 different versions of what would become the Oculus Rift - all in his parents' garage.

In an effort to raise money for what was quickly becoming an expensive hobby, Palmer was able to earn approximately $36,000 by refurbishing and selling damaged iPhones. He also held down a variety of part-time jobs, including but not limited to a sailing coach, a computer repair representative and more.

When Palmer finally built a model he was satisfied with - the sixth generation now known as the Oculus Rift - he realized he wasn't finished. He knew there were other people out there who were every bit as passionate about the topic of virtual reality as he was, so he wanted to bring this development to the masses. He decided to sell the Oculus Rift as a DIY kit on Kickstarter .

It was then that a software developer famous for 1990s mega-hit video games like "Doom" and "Quake" reached out, asking for a prototype of the Oculus Rift. Not too long after that, the video game development company Valve also publicized the Kickstarter campaign - drawing much more attention to it than Luckey ever would have been able to manage on his own.

Yet despite a situation that could have already been considered to be a rousing success, he wasn't finished.

After dropping out of college to see to Oculus VR and the Oculus Rift full-time, the Kickstarter campaign was able to earn a massive $2.4 million. It began to get so much attention that it caught the attention of Facebook.

In March 2014, Facebook purchased Oculus VR - and the underlying Oculus Rift design and technology - for an incredible $3 billion. While keeping in mind that the amount of money Luckey made was never publicly disclosed, some estimate that it is around $700 million.

All of this, and he was still only 22 years old. If nothing else, Palmer Luckey is proof positive of the fact that hard work, dedication, and passion can get you far in this life. Yes, some people get where they are through ample amounts of luck - but in this case, that couldn't be further from the truth.

October Extended Due Date Just Around The Corner

Mon, 10 Oct 2022 09:38:09 GMT

Article Highlights:

October 17 is the extended due date for filing federal
individual tax returns for 2021.
Late-filing penalty
Interest on tax due
Other October 17 deadlines

If you could not complete your 2021 tax return by the normal April filing due date and are now on extension, that extension expires on October 17, 2022. Failure to file before the extension period runs out can subject you to late-filing penalties.

There are no additional extensions (except in designated disaster areas), so if you still do not or will not have all of the information needed to complete your return by the extended due date, please call this office so that we can explore your options for meeting your October 17 filing deadline. This may mean filing the return with the information you currently have and then completing and filing an amended return when the rest of your info is available.

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns was September 15 (September 30 for fiduciary returns). So, you should probably make inquiries if you have not received that information yet.

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 17 for most states.

In addition, interest continues to accrue on any balance due not paid or paid late, currently at the rate of 6% per year. This rate is subject to adjustment quarterly.

Please call this office immediately if you anticipate complications related to providing the needed information, so that a course of action may be determined to avoid the potential penalties.

Additional October 17, 2022, Deadlines – In addition to being the final deadline to timely file 2021 individual returns on extension, October 17 is also the deadline for the following actions:

FBAR Filings - Taxpayers with foreign financial accounts, the aggregate value of which exceeded $10,000 at any time during 2021, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The original due date for the 2021 report was April 18, but individuals have been granted an automatic extension to file until October 17, 2022.

SEP-IRAs – October 17, 2022, is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2021. The deadline for contributions to traditional and Roth IRAs for 2021 was April 18, 2022.

Special Note – Disaster Victims – If you reside in a FEMA designated disaster area, the IRS provides additional time to file various returns and make payments. For example, for taxpayers in areas affected by hurricanes Fiona and Ian, the extended due date for filing their 2021 Form 1040 returns is extended until February 15, 2023.

Please call this office for extended due dates of other types of filings and payments and for extended filing dates in disaster areas.

Video Tips: Tax Relief For Hurricane Ian Victim

Sun, 09 Oct 2022 09:47:29 GMT

The IRS is offering tax relief for individuals and businesses within any area designated by the Federal Emergency Management Agency to be impacted by Hurricane Ian. This means extensions on various tax deadlines and extra accommodations for hurricane victims. Watch this video for further details.

Will A Small Business Grant Help Your Organization? Breaking Things Down

Fri, 07 Oct 2022 10:40:20 GMT

According to one recent study , there are currently more than 32 million small businesses operating in the United States. For the sake of discussion, know that this term refers to those organizations with fewer than 500 employees.

To put that number into perspective, those small businesses create more than 1.5 million new jobs every year according to the same research from above. That breaks down to about 64% of all new jobs annually. All told, over 90% of all businesses fall into this category - making them one of the biggest drivers of economic growth that there is.

At the same time, any seasoned entrepreneur can tell you that starting your own business is not easy regardless of its size. It takes a lot of time, effort, passion, and money to get a company off the ground in any industry.

That, in essence, is what small business grants are designed to aid with. They may not be able to help with the time or effort parts, but they can and often do provide the necessary capital to get a company off the ground and moving in the right direction.

But what are small business grants, where do they come from, and how do you take advantage of them in your own situation? The answers to questions like those require you to keep a few important things in mind.

What is a Small Business Grant?

At its core, a small business grant is exactly what it sounds like - seed money that has been given to a startup company or project, typically by a government agency or nonprofit organization, that is used to give you the best chance possible at success.

The major advantage of getting a grant of any type is that it gives you access to funds you wouldn't have otherwise had. In the context of a small business, this can help secure that perfect location for your physical storefront or hire enough employees to get started on developing your products and services. There's also no rule that says you can only apply for and receive one grant during your lifetime - there are many that you can apply for so long as you qualify.

All told, there are several different types of grants that you can apply for depending on your needs. Take those offered by the Small Business Administration , for example. The SBA regularly offers grants for the purposes of research and development under the Small Business Technology Transfer program. This is money designed to encourage you to focus on R&D opportunities that have "a high potential for commercialization if successful."

Another type of grant offered by the SBA has to do with those aimed at management and technical assistance. This is offered under the appropriately named Management and Technical Assistance Program.

When it comes to the SBA in particular, however, there are a number of important things to keep in mind when it comes to qualifying. For starters, the SBA does not actually provide grants for starting or expanding a business. So opening your doors or continuing to grow can't be your priority - you need to fall into one of the categories outlined above.

You should also be aware that new grant programs are being developed all the time based on what is happening in the world, as was evidenced by the COVID-19 relief program that went into effect in 2020. So even if you don't qualify for something with the SBA now, you should continue to check to see what is available on a regular basis because you never know what might happen.

Is a Small Business Grant Right for my Organization?

Generally speaking, a small business grant is a good choice for your company if A) you need the capital it would provide you with, and B) you meet the qualifications of whatever program you're looking at, to begin with. Remember that because it is a grant, the money typically does not have to be repaid.

Of course, there are some potential disadvantages of grants that you should be aware of moving forward. For starters, the process itself is very time-consuming. Not only do you have to research available grants to make sure that you qualify, but you're going to have to write a proposal to outline exactly what you'll be doing with that money and to prove that you qualify.

Grants are also very difficult to receive in a lot of situations because funds are limited. There isn't an endless pool of money to draw from - only a handful of organizations may get selected for a grant in any particular year. In some cases, only one organization may get selected. For both of these reasons, it's not a good idea to rely solely on grants alone when it comes to making your long-term plans as a small business owner.

Speaking of long-term plans, just because you received a small business grant once doesn't mean that you'll automatically do so again. Renewal is not a guarantee, which again can make the future uncertain.

Finally, depending on the specific grant and who is giving out the money, there may be strings attached that you are uncomfortable with. Once you submit your proposal for example and outline exactly what you'll be doing with the funds, you have to stick to that plan to the letter.

So if you find yourself in a situation where the grant money would offer significant benefits and none of the potential downsides are a deal breaker, exploring the opportunities of a small business grant is definitely the right move to make.

Where Do I Find Small Business Grants?

Finding small business grants is something that you can do in a myriad of different ways. As mentioned, you can use the Small Business Administration's website to get started. There are also many sites like Digital.com that compile lists of small business grants that you can apply for in the given year. It is also encouraged that you use the Internet to find Small Business Development Centers in your area, as well as local incubators. All of these can be great sources of information throughout this process.

How to Apply For (and Win) Small Business Grants

Applying for small business grants typically involves following the directions listed on the grant's website. Again, you'll need to make sure you qualify and provide any documented proof that is required. You'll also likely need to submit a proposal outlining where that money will be going and why it matters.

Be as convincing and as passionate as possible in your proposal while making sure that it falls within the listed guidelines. Show someone the real, tangible impact that capital will make. The more compelling you are, the better your chances of winning that grant.

In the end, small business grants certainly bring with them many distinct advantages. However, you do need to get your expectations in order before you apply. Winning one is often not a guarantee and you shouldn't depend on this as your only source of income for any period of time. But the money can and often does help small businesses of all types succeed, regardless of the industry that they're operating in. If nothing else, it is a resource that is worth exploring.

If you want to talk over your business or possible startup idea, give this office a call.

Able Accounts And Individuals With Disabilities

Thu, 06 Oct 2022 10:54:20 GMT

Article Highlights:

Asset limitations when receiving Medicaid or federal Supplemental Security Income
Annual Contribution Limits
$100,000 Account Limit
Qualified Expenses
ABLE Account Beneficiary Compensation
Saver’s Credit
Sec 529 Plan Rollovers

Congress created Achieving Better Life Experience (ABLE) accounts in 2014. Prior to the creation of the ABLE accounts, individuals with disabilities who were eligible for Medicaid or federal Supplemental Security Income were limited to a maximum of $2,000 in assets, such as bank savings accounts. Now, disabled people are allowed to have up to $100,000 in one of these special accounts without jeopardizing their Medicaid or Supplemental Security Income.

ABLE accounts are available to individuals who became disabled before the age of 26. Once an account is established, anyone can contribute to it, provided that the sum of the contributions for the year does not exceed the annual gift tax exclusion, which is currently $16,000. These accounts are a less-expensive substitute for special needs trusts, which have significant administration costs. If contributions will exceed the annual gifting limit and $100,000 overall, a special needs trust will be required.

Each state must enact its own legislation to make ABLE accounts available in that particular state. As of August, 2022, only four states (Idaho, North Dakota, South Dakota, and Wisconsin) haven’t established ABLE programs. Even so, many states allow nonresidents to participate in their program, while some states only allow their own residents to participate in their ABLE account program.

ABLE accounts are fashioned after qualified state tuition programs, sometimes referred to as Section 529 plans. Although there is no tax benefit associated with contributions to the accounts, the earnings in the accounts accumulate tax-free and are also tax-free if used for qualified expenses such as:

Health care,
Education,
Employment training and support,
Assistive technology,
Personal support services,
Housing, and
Transportation expenses.

As a note of caution, qualified expenses do not include food, entertainment or vacations.

Only one account can be established for each beneficiary. The maximum annual contribution to an ABLE account is equal to the annual gift tax exemption amount, which for 2022 is $16,000.

Certain ABLE account beneficiaries who are employed may make an additional contribution to their ABLE account up to the lesser of:

The account beneficiary's compensation for the tax year, or
The poverty line for a one-person household. For 2022, this amount is $12,880 in the continental U.S., $16,090 in Alaska, and $14,820 in Hawaii.

Working ABLE account beneficiaries will only be able to take advantage of making additional contributions to their accounts through 2025. ABLE accounts are designed so that certain employed ABLE account beneficiaries may be eligible to claim the nonrefundable saver's credit for a percentage of their contribution. To claim the saver's credit, an individual must:

Be at least 18 years old at the end of the tax year
Not be a dependent or a full-time student, and
Meet the income requirements.

The saver's credit is phased out for higher income taxpayers.

Families of a person with a disability may roll over funds from a 529 plan to the individual's ABLE account. Such rollovers count toward the annual contribution limit. For example, the $16,000 annual contribution limit would be met by parents contributing $10,000 to their child's ABLE account and rolling over $6,000 from a 529 plan to the same ABLE account.

If you have questions related to ABLE account contributions, the saver’s credit, or rollovers from qualified tuition plans, please give this office a call.

Personal Finance Tips From Warren Buffett

Tue, 04 Oct 2022 13:01:47 GMT

There are a lot of seasoned investors out there who have made a lot of money on things like the stock market over the years. They've done their research, they've made choices that they believe in, and they have been rewarded handsomely because of it. Any one of these people would be someone worth listening to, especially if you're concerned about not just the present state of your finances but how things will play out in the future, too.

Then, there's Warren Buffett.

Paul Morigi / Getty Images Entertainment via Getty Images

Tip #1: It's All About Value

One of the biggest misconceptions about Warren Buffett and his long-term financial strategy involves the idea that he's always on the lookout for the biggest payday possible. Sure, it would be nice to make huge amounts of money in one or two strategic moves - but this also isn't necessarily realistic.

Therefore, Buffett takes a different approach. He focuses on getting high value at the lowest price possible whenever he can. As he has famously said in the past, "price is what you pay, value is what you get."

In other words, especially if you're making moves to help accomplish your longer-term personal finance goals, always focus on value. Don't pay a price that is higher than the amount of value that you're getting in return.

Tip #2: Start Building Those Positive Money Habits

Another tip that people can learn from Buffett - and one that far too many people ignore until it's too late - involves establishing solid financial habits as early as possible. Buffett has always believed that most human behaviors are habitual. Once you begin to repeat a process or a series of steps over and over again, it soon becomes second nature. Not too long after that, those "chains" of a new habit are far too strong to be broken. Or, as the old saying goes, "you can't teach an old dog new tricks."

This is an especially important concept in the world of personal finance. If you develop very poor money management habits at an early age, you're probably going to carry them with you for the rest of your life. At the same time, if you develop positive habits, they too will serve you well for years to come.

But you can't get to that point without having the right personal financial plan in place, to begin with. This is a step that you need to take as early on in the process as possible.

Tip #3: If You Can, Avoid Debt

One critical Warren Buffett personal finance tip involves a misconception that a lot of people have concerning debt. Many assume that debt is just a natural part of life. It's a "cost of doing business," so to speak. It's hard to function in life without a credit card, and eventually, you'll need to take out loans to go to school, buy a house, and more.

While having a certain amount of debt is probably a foregone conclusion, Buffett insists that people need to avoid it as much as possible. To use the example of credit card debt, it doesn't make sense to put $100 on a credit card at a 20% interest rate for an item that you'll barely end up using. At that point, you're not working hard to pay off the item. You're working hard to pay off the interest.

Warren Buffett has dramatically expanded his fortune over the years by eschewing borrowing whenever he could. He insists that this is something that regular, average people can embrace, too.

Tip #4: Embrace the Power of Cash on Hand

One of the great certainties in life is that it is, in fact, uncertain. You truly never know what is right around the corner. Sometimes, as is true with your average economic downturn, we can see things coming. However, nobody could have predicted the long-lasting impact that something like an unprecedented global pandemic would bring with it, but here we are.

Indeed, the COVID-19 pandemic is a perfect example of why another one of Buffett's tips is so important. He believes that one of the core elements of guaranteeing financial security involves always keeping cash reserves on hand.

In his own situation, he says that his company Berkshire Hathaway always keeps at least $20 billion in cash reserves - and typically more. This is because he wants to be prepared for a situation when those reserves may mean the difference between success and utter failure. No, it's not possible for your average person to maintain cash reserves that high. But by staying liquid and keeping cash reserves, you too can put yourself in the best possible position to fend off whatever life happens to throw at you.

Tip #5: Educate Yourself

One of the biggest mistakes that Warren Buffett has always seen people make involves a lack of understanding of what personal finance even is, to begin with. A lot of people just assume that "if I work hard and save money, everything will work out in the end." Instead, successful planning for your goals takes a decidedly more hands-on approach. To be able to do that and achieve the outcomes that you're looking for, you need to be prepared to educate yourself whenever possible.

That is to say, people need to learn more about how money actually works. What steps can a person take to limit their exposure? How does one go about mitigating risk? What happens when the Federal Reserve raises interest rates? All of these are questions that people need answers to if they're going to be successful in the world of personal finance.

However, they're not going to come easy. Do your own research or take a class at a community college if you need to. The more you understand how personal finance works, the more you'll be able to put these concepts to work for you.

Tip #6: Don't Forget to Invest in the Most Important Asset of All - Yourself

Finally, Warren Buffett has always done what he could to underline the importance of planning for a sound financial future before it's too late. If you want to make sure that you have enough money to live the lifestyle you've always wanted in retirement, for example, you're not going to get to that point if you start saving just five years before the big day.

You need to start today. Right now. That requires you to develop (likely with the help of a financial professional) a plan that will make accomplishing those goals a foregone conclusion.

Once you've taken the time to do that, you need to have the confidence to stick with it. You know where you want to go and you know where you're starting - you have to believe in the road map you've drawn up that will help get you there. That means believing in yourself every step of the way. It doesn't matter how conditions may charge or what is going on with the market right at this moment. If you've followed advice like everything outlined above and have developed the right, organic plan to meet your needs, you'll accomplish your goals and exceed your expectations along the way.

That is a very exciting position to be in from a personal finance perspective and it's one that few are lucky enough to enjoy.

Always Looking Forward

In the end, few people will enjoy the level of success that Warren Buffett has when it comes to his personal finances - this much is true. Even though we'd all like to become one, it's very rare for anyone to achieve billionaire status let alone to do it in the way that he has.

But that's okay because there is still an incredible amount to be learned from his long-term approach. By consistently maintaining a diversified portfolio, emphasizing value investing, keeping one eye firmly fixed on the future, and more, it's clear that this is one situation where the phrase "slow and steady wins the race" very much applies. By paying attention to tips like those outlined above, you too can carve out a bright financial future for yourself - which is exactly how it should be.

Research Credit Potentially Doubled By The Inflation Reduction Act

Tue, 04 Oct 2022 11:07:45 GMT

Article Highlights:

Inflation Reduction Act
Research Credit Payroll Tax Option
Research Credit
Qualified Research
Qualified Small Business

The Inflation Reduction Act that President Biden signed into law back in August, has a lesser-known provision that could benefit many small business startups, allowing them to potentially double the amount of the research and development tax credit they can claim from $250,000 to $500,000 per year against payroll taxes.

This little-known tax benefit for new, qualified small businesses is the ability to apply a portion of their research credit – up to $500,000 after December 31, 2022, to pay the employer’s share of their employees’ FICA withholding requirement (the 6.2% payroll tax). This is double the amount allowed under prior law. This can be quite a benefit, as in their early years, start-up companies generally do not have any taxable profits for the research credit to offset; quite often, it is in these early years when companies make expenditures that qualify for the research credit. This can substantially help these young companies’ cash flow.

Research Credit – The research credit is equal to 20% of qualified research expenditures in excess of the established base amount. If using the simplified method, the research credit is equal to 14% of qualified research expenditures in excess of 50% of the company’s average research expenditures in the prior three years.

Qualified Research – Research expenditures that qualify for the credit generally include spending on research that is undertaken for the purpose of discovering technological information. This information is intended to be useful in the development of a new or improved business component for the taxpayer relating to new or improved functionality, performance, reliability or quality.

Qualified Small Business (QSB)– To apply the research credit to payroll taxes, a company must be aQSB and must not be a tax-exempt organization. A QSB for purposes of this credit is a corporation or partnership with these criteria:

The entity does not have gross receipts in any year before the fourth preceding year. Thus, the payroll credit can only be taken in the first 5 years of the entity’s existence. However, this rule does not require a business to have been in existence for at least 5 years.
The entity’s gross receipts for the year when the credit is elected must be less than $5 million.

Anyperson (other than a corporation or partnership) is a QSBif thatperson meets the two requirements above after taking into account the person’s aggregate gross receipts received for all the person’s tradesor businesses.

Example – The taxpayer is a calendar-year individual with one business that operates as a sole proprietorship. The taxpayer had gross receipts of $4 million in 2022. For the years 2018, 2019, 2020 and 2021, the taxpayer had gross receipts of $1 million, $7 million, $4 million, and $3 million, respectively; the taxpayer did not have gross receipts for any taxable year prior to 2018. The taxpayer is a qualified small business for 2022 because he had less than $5 million in gross receipts for 2022 and did not have gross receipts before 2018 (the beginning of the 5-taxable-year period that ends in 2022). The taxpayer’s gross receipts in the years 2018-2021 are not relevant in determining whether he is a qualified small business in taxable year 2022.Because the taxpayer had gross receipts in 2018, the taxpayer will not be a qualified small business for 2023, regardless of his gross receipts in that year.

The research credit must first be accrued back to the preceding year, where it must be used to offset any tax liability for that year. Then, the excess, up to $500,000 maximum, (up from a maximum of $250,000 in years before January 2023) can be used to offset the 6.2% employer payroll tax. Any amount not used is carried forward to the next year.

This expanded R&D tax credit won't show up on tax returns until 2024 since it can first be claimed for tax year 2023.

If you have questions related to the research credit or if your business could benefit from using the credit to offset payroll taxes, please give this office a call.

Video Tips: Improperly Forgiven PPP Loans Are Now Taxable

Sat, 01 Oct 2022 07:50:11 GMT

The IRS recently issued guidance addressing improper forgiveness of a Paycheck Protection Program loan (PPP loan). When a taxpayer's loan is forgiven based upon misrepresentations or omissions, they are not eligible for exclusion and must include in income the portion of proceeds that were unfairly given up.

Tax Relief For Victims Of Hurricane Ian

Fri, 30 Sep 2022 10:43:34 GMT

Article Highlights:

Federal Disaster Declaration.
Filing Dates Extended.
Option as When to Declare the Disaster Loss.
Records Located Within Disaster Area.
Other Disaster Areas.

The Federal government provides special tax law provisions to help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area as they have for Hurricane Ian. The following highlights the special tax provisions:

Filing Due Dates Affected –

October 17, 2022 – Is the extended due date for 2021 returns that are on a valid extension.This means individuals who had a valid extension to file their 2021 return due to run out on October 17, 2022, will now have until February 15, 2023, to file. However, because tax payments related to these 2021 returns were due on April 18, 2022, those payments are not eligible for this relief and late payment penalties will apply to any tax due on the return.
January 17, 2023 – Is the filing due date for the 4th quarter estimated tax payment which now is not due until February 15, 2023.
The February 15, 2023 deadline also applies to:

o Quarterly payroll and excise tax returns normally due on October 31, 2022, and January 31, 2023.

o Businesses with an original or extended due date also have the additional time including, among others, calendar-year corporations whose 2021 extensions run out on October 17, 2022. Similarly, tax-exempt organizations also have the additional time, including for 2021 calendar-year returns with extensions due to run out on November 15, 2022.

In addition, penalties on payroll and excise tax deposits due on or after Sept. 23, 2022, and before Oct. 10, 2022, will be abated as long as the deposits are made by Oct. 10, 2022.

Option as When to Declare the Disaster Loss – The IRS allows both individuals and businesses in a federally declared disaster to claim a disaster loss in either the current tax year or the previous tax year. Claiming the loss in the prior year allows taxpayers to get a faster tax refund for the disaster loss. So hurricane Ian losses can be claimed on either:

The 2022 return or
The 2021 return by amending an already filed 2021 return or the unfiled 2021 that is currently on extension through October 17, 2022. That extension has been extended through February 15, 2023, as part of the disaster relief.

However, careful consideration should be given to which year’s return will provide the greater tax benefit. Also, consider that claiming the loss on the 2021 where there would otherwise be a tax due can reduce or eliminate any late payment penalties.

Be sure to write the FEMA declaration number – DR-4673-FL − on any return claiming a loss. See Publication 547 for details.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227 . This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

The tax relief is part of a coordinated federal response to the damage caused by Hurricane Ian and is based on local damage assessments by FEMA. For information on disaster recovery, visit DisasterAssistance.gov .

Similar provisions apply to other disaster areas . Here are some recent areas:

California Wildfires - With the extension date being January 3, 2023.FEMA declaration number - FEMA-4610-DR.
Puerto Rico and Hurricane Fiona - With the extension date being February 15, 2023.FEMA declaration number - EM-3583-PR.
Alaska -Victims of storms and flooding that began on September 15, 2022. Filings extended until February 15, 2023. FEMA declaration number - DR-4672-AK.

For questions related to disaster tax issues please give this office a call.

Inceased Tax Credits For Home Builders

Thu, 29 Sep 2022 12:02:15 GMT

Article Highlights:

Contractor Developer Credit
Retroactive Extension to 2022
Increased Credit 2023 through 2032
Prevailing Wage Requirements
Qualifications
Qualifying Residential Projects
Non-Refundable Credit
Basis Adjustment

As part of the Inflation Reduction Act, passed in August 2022, modifying Internal Revenue Code Sec. 45L , contractors will benefit from the increased tax credit for building Energy Efficient New Homes effective January 1, 2023. In addition, this credit that had previously expired after 2021, has been extended through 2032.

For 2022, the old credit rules have been retroactively extended providing a $2,000 tax credit for site built home and a $1,000 or $2,000 tax credit for manufactured homes that meet the energy saving requirements of 50% for a site built home and 30% to 50% for manufactured homes.

Beginning in 2023 and before 2033 the amount of the credit is increased, and can be $500, $1,000, $2,500, or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets the prevailing wage requirements.

$2,500 Credit - for single family and manufactured homes when constructed per the standards set by the Energy Star Residential New Construction Program or the Manufactured Homes Program.
$5,000 Credit - for single family and manufactured homes when they are certified by the Department of Energy as a Zero Energy Ready Home.
$500 Credit - For multifamily homes when meeting the Energy Star Single Family New Homes Program.
$1,000 Credit - for multifamily homes when they are certified by the Department of Energy as a Zero Energy Ready Home.

Prevailing Wage Requirements - Under the prevailing wage requirements, for any qualified residence, the taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractors or subcontractor in the construction of the residence are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the residence is located as determined by the Secretary of Labor.

Failure to satisfy the prevailing wage requirements can be cured by paying to each affected worker an amount equal to the difference between the amount actually paid and the amount which would have been paid under the prevailing wages rules, plus interest, and paying a $5,000 penalty per affected worker.

Qualifications – To qualify for the credit:

The home must be in the U.S.
The home must be sold, leased, or rented out.
The dwelling’s heating and cooling energy consumption should fall below certain national energy standards.
The dwelling unit must be certified to be at least 50% more energy efficient than a similar unit constructed per the 2006 International Energy Conservation Code, with at least 10% being derived from building envelope component improvements.

Qualifying Residential Projects - Various types of residential projects qualify for the tax credit, including:

Single-family homes (both track and custom builds)
Multi-family apartment and condominium projects (3-stories or less)
Assisted living facilities
Student housing
Substantial reconstruction or rehabilitation

Non-Refundable Credit – The tax credit is non-refundable, meaning it can only offset current tax liability and any excess is not refundable. However, it may be carried forward for up to 20 years by the builder or developer and used to offset tax liability in those years. .

Basis Adjustment – The contractor must reduce the basis of the home for which the credit is claimed by the amount of the credit.

Of course there will be further guidance and clarifications forthcoming related to the changes affecting the 2023 through 2032 credit from the IRS. If you have questions please give this office a call.

Video Tips: TAax Deductions For First-Time Homeowners

Sat, 24 Sep 2022 12:28:41 GMT

First-time homeowners should make themselves familiar with authorized deductions, and programs that can assist with home ownership and that can be beneficial. When it comes to home ownership, the IRS considers a home to be a house, condominium, cooperative apartment, mobile home, houseboat or house trailer that contains a sleeping space, toilet, and cooking facilities. Watch this video to see which home expenses can and cannot be deducted from your tax return.

Have You Explored Quickbooks' Insights And Snapshots Pages?

Thu, 22 Sep 2022 13:35:16 GMT

There’s more than one way to get where you’re going in QuickBooks. The software was designed to make similar information available by taking multiple paths. This gives you the option to choose what makes the most sense for you, and what’s most convenient.

Let’s say you need to get a quick summary of your finances. There are multiple choices. You could, for example:

Run a Report . This gives you the opportunity to narrow down the data in your company file so QuickBooks only displays exactly what you want to see. It also takes time.
Go to the Customer Center or Vendor Center. You can learn everything you need to know about your business associates and related transactions. But again, this method isn’t very speedy.

There are better ways to get fast access to information about your company’s health: Insights and Snapshots .

What Are Insights?

When you open the 2021 version of QuickBooks (this is also available in some earlier versions), you’ll see two tabs at the top. One says Home Page and the other, Insights . Click on Insights .

You can modify QuickBooks’ Insights page to display just the set of charts and graphs that you want.

To ensure that you’re seeing everything that’s available, click the gear icon in the upper right. This opens a list of all of the charts and graphs that are available on the Insights page. If they’re not all checked, go ahead and click in front of the ones that aren’t turned on so you can see everything at first. You can change this later.

Directly below the gear icon, QuickBooks displays either Cash Basis or Accrual Basis . You would have established this when you were setting up QuickBooks. If you’re not absolutely sure what the difference is or whether you made the right choice, please contact us.

How Do You See All of the Charts?

QuickBooks can’t show all of the content available for the Insights screen at one time, so you won’t see everything if you’ve selected all seven options. You should see the Profit & Loss chart at the top. You can change the date range by clicking the down arrow next to the field in the upper left. Below that are two additional charts that remain on the screen even if you move on to additional content: Income and Expenses . These three graphs give you a quick look at whether you’re making or losing money. Two links here allow you to Create Invoice and Create Bill .

To get to the other charts, click the Next arrow to the right of Profit & Loss . Keep clicking to see six more graphical representations of various elements of your business. They are Prev(ious) Year Income Comparison , Top Customers by Sales , Income and Expense Trend , Business Growth , Net Profit Margin , and Prior Year Expense Comparison . Like you could with Profit & Loss , you can change the date ranges for these charts.

The first three that appear are self-explanatory. If you have questions about any of the others, please let us know. These charts can provide a good understanding of problems that may be lurking, and we encourage you to look at them every time you open QuickBooks.

What Are Snapshots?

You can see a great deal of information about individual customers by viewing their Customer Snapshot .

There’s some overlap between Insights and Snapshots in terms of content, but there are plenty of new charts here, too, in addition to tables and links to actions. To see them, click Snapshots in the QuickBooks toolbar. You’ll see that there are three kinds, accessible by clicking labeled tabs:

Company. The Company Snapshot displays some of the charts you saw on the Insights screen, but it also includes tables and graphs like Account Balances, Customers Who Owe Money , and Expense Breakdown.
Payments. How do your accounts receivable (A/R) look? This screen tells you, in great detail. One chart compares your paid invoices to your unpaid ones and another shows you how much money is tied up in overdue payments (1-30, 31-60, 61-90, and greater than 90 days). There are tables listing Recent Transactions , Customers Who Owe Money, and Payment Reminders. And links take you to related reports and payment activities.
Customer. This screen provides different information about each customer than you’ll find in the Customer Center. There are details like Number of years as a customer and Average days to pay . Tables list Recent Invoices and Recent Payments , and charts illustrate their Sales History and Best-Selling Items.

If you’d like to make one of these Snapshots appear as your opening page, display it, and then open the Edit menu and select Preferences . Click Desktop View in the left vertical pane. With My Preferences open , click on the button in front of Save current desktop to check it, and uncheck Show Home Page when opening a company file .

We know it’s tempting to just open QuickBooks and do your daily work, then get out. But we strongly recommend that you take a few minutes every time you run the software to use these tools that excel at showing you how you company is doing. Questions? We’re here to answer them.

October 2022 Business Due Dates

Thu, 22 Sep 2022 12:58:23 GMT

October 17 - Corporations

File a 2021 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.

October 17 - Taxpayers with Foreign Financial Interests

If you received an automatic 6-month extension of time to report your 2021 foreign financial accounts to the Department of the Treasury, this is the due date for Form FinCEN 114.

October 17 - Social Security, Medicare and withheld income tax

If the monthly deposit rule applies, deposit the tax for payments in September.

October 17 - Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in September.

October 31 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the third quarter of 2022. Deposit or pay any undeposited tax under the accuracy of deposit rules. 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 November 10 to file the return.

October 31 - Certain Small Employers

Deposit any undeposited tax if your tax liability is $2,500 or more for 2022 but less than $2,500 for the third quarter.

October 31 - Federal Unemployment Tax

Deposit the tax owed through September if more than $500.

October 2022 Individual Due Dates

Thu, 22 Sep 2022 12:48:10 GMT

October 11 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during September, you are required to report them to your employer on IRS Form 4070 no later than October 11. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

October 17 - Taxpayers with Foreign Financial Interests

If you received an automatic 6-month extension of time to report your 2021 foreign financial accounts to the Department of the Treasury, this is the due date for Form FinCEN 114.

October 17 - Individuals

If you have an automatic 6-month extension to file your income tax return for 2021, file Form 1040 and pay any tax, interest, and penalties due.

October 17 - SEP IRA & Keogh Contributions

Last day to contribute to a SEP or Keogh retirement plan for calendar year 2021 if tax return is on extension through October 17.

Bunching Your Deductions Can Providing Big Tax Benefits

Thu, 22 Sep 2022 12:39:16 GMT

le Highlights:

Itemized Versus Standard Deductions
Medical Expenses
Taxes
Charitable Contributions

If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy.

The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if that provides a greater benefit. As a rule, most taxpayers just wait until tax time to add up their eligible expenses and then use the higher of the standard deduction or their itemized deductions.

If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next.

For the most part, itemized deductions include medical expenses, property taxes, state and local income (or sales) taxes, home mortgage and investment interest, charitable deductions, and casualty losses. The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions, although there are circumstances in which the other deductions might come into play. There are many opportunities to bunch deductions, and the following are examples of the bunching strategies most commonly used:

Medical Expenses – You contract with a dentist for your child’s braces. The dentist may offer you an up-front, lump sum payment or a payment plan. By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. If you use a credit card, you must realize that the credit card interest is not deductible, and you need to determine if incurring the interest is worth the increased tax deduction. Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 7.5% of your adjusted gross income (AGI) is actually deductible. So, there is no tax benefit in bunching medical deductions unless the expenses exceed this limitation.

If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the following year when the 7.5% threshold is less.
Taxes – Property taxes on real estate are generally billed annually at mid-year, and most locales allow property owners to make semi-annual or quarterly payments. Thus, you have the option of paying it all at once or paying in installments. This provides the opportunity to bunch the tax payments by paying one semi-annual installment or two quarterly installments and a full year’s tax liability in one year and only paying one semi-annual installment or two quarterly installments in the other year. In doing so, you are able to deduct 1-½ year’s taxes in one year and 50% of a year’s taxes in the other. If you are thinking of making the property tax payments late as a way to accomplish bunching, you should be cautious. The late payment penalty will probably wipe out any potential tax savings. This strategy won’t work if your mortgage payments include real property taxes that are held by the lender until the taxes are due, as you can only deduct the tax payments that the lender makes on your behalf during the tax year.

If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction. So, for instance, if you are paying state estimated tax in quarterly installments, the fourth-quarter estimate is generally due in January of the subsequent year. This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year.

A few words of caution about the itemized deduction for taxes! Taxes are only deductible for regular tax purposes. So, to the extent you are taxed by the AMT (alternative minimum tax), you derive no benefits from the itemized deduction for taxes. Also, through 2025, the maximum amount per year that you can deduct on your federal return for state and local taxes (property taxes and state income or sales taxes) is $10,000 ($5,000 if using the married separate filing status).
Charitable Contributions – Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion. For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire next year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no charity deduction for church in the other year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year. Be sure you get a receipt or acknowledgment letter from the organization that clearly shows in which year the contribution was made.

If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing.

Health Savings Accounts Fill Multiple Tax Needs

Thu, 22 Sep 2022 12:16:25 GMT

le Highlights:

Medical Savings Account
Retirement Account
High-Deductible Plan
Eligible Individuals
Monetary Qualification for an HSA
Qualification Chart
Maximum Contributions
Establishing an HSA

The Health Savings Account (HSA) is one of the most misunderstood and underused benefits in the Internal Revenue Code. Congress created HSAs as a way for individuals with high-deductible health plans (HDHPs) to save for medical expenses that are not covered by insurance due to the high-deductible provisions of their insurance coverage.

However, an HSA can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement-plan options an HSA provides them another resource for retirement savings – one that isn’t limited by income restrictions in the way that IRA contributions sometimes are.

Although the tax code refers to these plans as “health” savings accounts, they can also be used for retirement, as there is no requirement that the funds be used to pay medical expenses. Thus, a taxpayer can pay medical expenses with other funds, thus allowing the HSA to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses.

Withdrawals from an HSA that aren’t used for medical expenses are taxable and – depending on the taxpayer’s age – can be subject to penalty. Once a taxpayer has reached age 65, nonmedical distributions are taxable but not subject to a penalty (the same as for a traditional IRA once the IRA owner reaches age 59½). At the same time, regardless of age, a taxpayer can always take tax-free distributions to pay medical expenses.

Example: Henry is age 70 and has an HSA account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is tax-free.

Eligible Individual – To be eligible for an HSA in a given month, an individual:

must be covered under a HDHP on the firstday of the month;
must NOT also be covered by any other health plan (although there are some exceptions);
must NOT be entitled to Medicare benefits (i.e., generally must be younger than age 65); and
must NOT be claimed as a dependent on someone else’s return.

Any eligible individual – whether employed, unemployed or self-employed – can contribute to an HSA. Unlike with an IRA, there is no requirement that the individual have compensation, and there are no phase-out rules for high-income taxpayers. If an HSA is established by an employer, then the employee and/or the employer can contribute. Family members or any other person can also make contributions to HSAs on behalf of eligible individuals. Both employer contributions and employee contributions made via the employer’s cafeteria plan are excluded from the employee’s wage income. Employees who make HSA contributions outside of their employers’ arrangements are eligible to take above-the-line deductions – that is, they don’t need to itemize deductions – for those contributions.

The Monetary Qualifications for a HDHP –

Example – Family Plan Does Not Qualify : Joe has purchased a medical-insurance plan for himself and his family. The plan pays the covered medical expenses of any member of Joe’s family if that family member has incurred covered medical expenses of over $1,000 during the year, even if the family as a whole has not incurred medical expenses of over $2,800 during that year. Thus, if Joe’s medical expenses are $1,500 during the year, the plan would pay $500. This plan does not qualify as a HDHP because it provides family coverage with an annual deductible of less than $2,800.

Example – Family Plan Qualifies : If the coverage for Joe and his family from the example above included a $5,000 family deductible and provided payments for covered medical expenses only if any member of Joe’s family incurred over $2,800 of expenses, the plan would then qualify as a HDHP.

Maximum Contribution Amounts – The amounts that can be contributed are determined on a monthly basis and are calculated by dividing the annual amounts shown below by 12. Thus, if an individual’s health plan only qualified that person for an HSA for 6 months out of the year, then that person’s contribution amount would be half of the amount shown.

In addition to the amounts shown, an eligible individual who is age 55 and older can contribute an additional $1,000 per year.

How HSAs Are Established – An eligible individual can establish one or more HSAs via a qualified HSA trustee or custodian (an insurance company, bank, or similar financial institution) in much the same way that an individual would establish an IRA. No permission or authorization from the IRS is required. The individual also is not required to have earned income. If employed, any eligible individual can establish an HSA, either with or without the employer’s involvement. Joint HSAs between a husband and wife are not allowed, however; each spouse must have a separate HSA (and only if eligible).

If you have questions related to how an HSA could improve your long-term retirement planning or health coverage, please call this office.

Read This Before Tossing Old Tax Records

Tue, 20 Sep 2022 13:51:40 GMT

Article Highlights:

Discarding old tax records
Statute of limitations
Basis substantiation

Now that your taxes are complete and filed for the year, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of the assets.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal statute of limitations. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits an amount that is more than 25% of the gross income reported on a tax return. In addition, of course, the statute doesn’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded. If you live in a state with a longer statute, then add a year or so to that number.

Example: Sue filed her 2021 tax return before the due date of April 18, 2022. She will be able to safely dispose of most of her records after April 18, 2025. On the other hand, Don files his 2021 return on June 2, 2022. He needs to keep his records at least until June 2, 2025. In both cases, the taxpayers should keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets such as stocks, bonds, and real estate. They need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category:

Stock acquisition data — If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale. And if the result of those sales, and sales of other capital assets, is a loss that you’ll be carrying forward to future tax returns – loss exceeds $3,000 ($1,500 if filing as married separate) – keep the purchase and sale records for four years after filing the return on which the last of the loss is used up.
Stock and mutual fund statements — Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements for at least four years after the final sale.
Tangible property purchase and improvement records — Keep records of home, investment, rental property or business property acquisitions, AND related capital improvements for at least four years after the underlying property is sold.

In addition, if you own a business that has a loss that creates a net operating loss (NOL) that you’ll be carrying forward to deduct in future years, you should keep all of the business’s records that substantiate income and expenses from the loss year for at least four years after filing the return on which the NOL deduction is used up.

Have questions about whether or not to retain certain records? Give this office a call before tossing out those documents. It is better to be sure before discarding something that might be needed down the road.

If You Want To Maximize Your Social Security Income, You Need To Start Planning Now

Mon, 19 Sep 2022 07:36:29 GMT

According to one recent study , about 27% of people in the United States between the ages of 55 and 67 years old have less than $10,000 saved for retirement. If you needed just one statistic to outline how important it is to plan ahead when you're younger, let it be that one.

Similarly, you need to understand that planning isn't about simply making sure that you CAN retire. It's also about doing what you can to maximize those benefits when they do start to arrive. The system itself is designed to reward certain actions and, if you make the right financial decisions today, you'll be able to succeed after you retire.

Thankfully, getting to that point isn't necessarily as difficult as many believe it to be. If your goal is to maximize your Social Security benefits by planning ahead, all you need to do is keep a few key things in mind.

Maximize Your Social Security, Maximize Your Retirement

One of the most important reasons why you want to start planning now about what your retirement years actually look like comes down to the fact that a lot of the decisions you'll be faced with aren't ones you can make overnight.

Case in point: the choice of when, exactly, you'll end up formally retiring. While it's undoubtedly true that you've already worked incredibly hard and would probably like to retire sooner rather than later, it isn't always necessarily a good idea to do so. The longer you delay your retirement, the bigger those benefits get.

Everybody has a "full retirement age" which, as the term suggests, is when you get to start collecting your full benefits. Full benefits are dictated based on how much money you've earned in your lifetime. If you retire before you hit this age, you'll still get money - but you won't get as much as you would if you had delayed.

If your full retirement age is 67, and you retire at 62, for example. You'll only get 70% of your benefits. If you wait until the age of 70 to retire, you'll get 124% of your benefits.

However, this may not be an easy choice to make depending on what you have going on in your life (with your health being a top consideration), which is why you should start thinking about it and planning now.

Another reason why it's so important to start planning today to maximize your Social Security income has to do with how the system works, to begin with. Remember that while your age is important, ultimately it is the amount of money that you make that will dictate how much you get in benefits after you retire.

Therefore, the more you make, the more you'll eventually get. While "make more money" may seem like obvious advice if you still have 30 years before you retire simply keeping this in mind could influence a lot of the decisions you'll make during your career. It may be a motivating factor when deciding to move from one employer to the next, or whether you should switch careers altogether. Again, these are not decisions that will come to you instantly - they'll take a lot of careful consideration to get right which is why you should always be proactive.

Planning is also critical to maximize your income because it allows you to work certain elements into your long-term strategy that may have otherwise gone overlooked. Case in point: spousal benefits. If you happen to be married but haven't earned too much in the way of your own income during your relationship, you might be able to sign up for what is called spousal benefits. This allows you to get up to 50% of your husband or wife's eligible amount after you retire. Even divorced people are eligible for spousal benefits, so long as they haven't gotten married to someone else.

Dependent benefits are similar in concept, albeit from a different perspective. If you're about to retire but still have a dependent who is under 19 years old, they may be able to get up to 50% of your benefits without decreasing the amount of money you get, too.

As so much of success in terms of retirement involves a solid long-term financial strategy, it stands to reason that these are all things that you'll want to incorporate now so that you can reap the benefits (no pun intended) later on.

Finally, one of the biggest reasons why planning ahead will help you maximize your financial strategy is because it helps bring your spouse into the conversation as early on in the process as possible.

If you're married, both of you will eventually retire. Depending on your situation, it may make more sense for one of you to delay collecting Social Security benefits while the other retires either at or possibly even before their "full benefits age." In some scenarios, this would be a way to protect whoever makes less money.

You won't know whether this is the case, however, if you don't A) plan your retirement alongside that spouse, and B) start planning as soon as you're able to. Doing so will allow you to come up with the type of joint strategy you need to make sure that both of you can retire without worry or regret when the time comes.

Your Financial Future Begins Now

In the end, it's pivotal to understand that retirement success is all about playing the long game. It's not like you'll just hit a certain day on the calendar, leave your job for the last time and everything is guaranteed to go smoothly from there on out.

If you truly want to enjoy the retirement lifestyle you've always seen for yourself, you need a financial plan. You need to look at the moves you're making as an investment in your future. That requires not just the best strategy to help accomplish your goals but years of action to get to that point.

Ultimately, that's why if you want to maximize your Social Security income, you need to start planning - not next year, not six months from now, but today.

Video Tips: Missing Out On Your Tax Refunds?

Sat, 17 Sep 2022 07:42:59 GMT

Many people, especially lower-income taxpayers, forfeit sizable tax refunds because their income is below the mandatory filing threshold so they don’t file a return, and don’t realize there are tax credits available to them that can result in refunds in the hundreds, if not thousands, of dollars.

Steve Jobs: From Couch Surfing To Revolutionary Entrepreneur

Fri, 16 Sep 2022 08:30:08 GMT

If you had to make a list of some of the most profoundly successful entrepreneurs to ever live, there is at least one name that would absolutely be on it: Steve Jobs.

Today, people know Steven Paul Jobs as the co-founder of Apple Computer. He was a majority shareholder in Pixar, one of the most successful animated film studios ever. He was a member of The Walt Disney Company's Board of Directors. He changed the face of personal computing and then became a legend all over again years later with the release of the iPod. The debut of the iPhone changed the way we think about not just the Internet, but communication in general, forever.

If you were to name a pivotal technology-related event that took place in the last four decades, there is a good chance that Steve Jobs had a hand in it. But one of the most influential people in tech history didn't start out that way - especially in those early days of his life.

Justin Sullivan/Getty Images News via Getty Images

The Steve Jobs Success Story: In the Beginning

Steve Jobs was born in 1955 in San Francisco, California. His mother was named Joanne Carole Schieble, while his father was Abdulfattah Jandall. He was given up for adoption and was adopted by Clara Jobs and Paul Jobs shortly thereafter.

Paul Jobs had many jobs throughout his life, including time spent as a machinist. That love of tinkering is something that he certainly passed on to Steve Jobs. Paul even built a workbench in the family garage so that young Steve could experiment with various things and work on his craftsmanship.

In terms of his education, Steve Jobs had a difficult early few years. Many have noted that he had a hard time operating in a "traditional" classroom environment. He grew to resent authority figures pretty quickly and often misbehaved in a variety of ways. Believe it or not, he was even suspended from school on multiple occasions.

Part of this had to do with the fact that Steve Jobs tended to be far more advanced than a lot of his classmates. His mother had taught him to read as a toddler, for example, so he was pretty far ahead developmentally speaking in most classes that he took. This led to an onset of boredom, which typically leads to misbehavior in children his age.

By fourth grade, however, he had started to take more advanced classes and began to curb that unfortunate behavior that he had become known for.

It wasn't until high school, however, that his perspective began to expand. He had always been interested in science and technology, but now he was starting to draw inspiration from sources that were decidedly more creative in nature. He started listening to music - especially rock and roll - in a way that he never had before. He took creative writing classes. He read the works of William Shakespeare, Herman Melville, and other fine literature. The list goes on and on.

It's arguable that the seeds of the Steve Jobs that the world would come to know began here - both in terms of his creativity and in terms of the famous Steve Jobs leadership style.

After high school, his good friend Steve Wozniak started at the University of California Berkeley campus. Jobs liked to visit him often and would study in the student union at Stanford University, which was nearby. Soon, Jobs enrolled in higher education himself - specifically at Reed College, which is located in Portland, Oregon.

However, he dropped out of Reed College after just a single semester. He did so without letting his parents know about his decision. He said that his primary motivator was that he felt bad about spending his parents' hard-earned money on classes that he felt apathetic about. However, he did continue to audit a few classes from that point forward, which essentially allowed him to attend for free. They included calligraphy courses and others.

What followed was a period in Jobs' life that can be described as one of self-discovery. He famously spent time couch-surfing at a Hare Krishna temple, where he would also eat the free meals they offered whenever he could. Right around this time he also went to India to visit a very specific ashram. After that ashram was closed, he luckily found another.

Ultimately, he returned home to the United States and tried psychedelics for the first time. Not too long after that, he began practicing Zen Buddhism. He returned to a job he had earlier in his life at Atari. However, it was his friendship with Steve Wozniak that saw him start to make appreciable amounts of money. Steve Wozniak had developed something called a "blue box," which was a device that generated the tones necessary to "trick" a telephone network into letting someone make free long-distance calls. The blue box was a hit and once Steve Jobs decided to start selling them, he split all of the profits he made with Wozniak.

The Beginning of Apple Computer

The success of the blue box is partially what inspired Jobs to realize that he could eventually beat the massive computer companies at their own game, even though he lacked the substantial resources that they had.

After Steve Wozniak himself got inspired to start building computers, the duo founded Apple Computer in a garage. They were so strapped for cash in those early days that Jobs even asked his sister to help assemble the computers they were building.

That initial computer was the Apple I. Admittedly, there wasn't much you could do with it by today's standards. However, you could hook it up to a keyboard and monitor and it didn't need anything extra to display text - making it the first "all-in-one" device of its type. The Apple II followed not too long after that and was a much more professionally designed device.

Then came the Macintosh, otherwise known affectionately as the Mac for short. Even though it was priced at $2,500 in 1984, it was still the first affordable computer to come with a GUI, or "graphical user interface." Note that if you've seen the famous Super Bowl ad that introduced the Mac to the world, it should be mentioned that it was directed by Ridley Scott. Scott was responsible for films like "Alien" and "Blade Runner," among others.

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Onward to Revolution

After a tumultuous period where Jobs left Apple Computer, Inc. and left John Sculley in charge, he eventually returned. While he was away he got involved with the special effects house that would eventually become the aforementioned Pixar. Their film "Toy Story" won Academy Awards and was the first fully computer-generated film of its type.

At the dawn of the century, Steve Jobs released the iPod to the world - a device that would change the music industry for all time. For years, people had been using Internet connections to download music to their personal computers, but their options in terms of listening to them while on the go were limited. You could burn your own CDs (or purchase ones from the store) and take them with you via a portable CD player, but those devices were prone to skipping. MP3 players had been around for a few years, but they were limited in terms of capacity.

The iPod, however, was something different. Not only could it easily fit hundreds of high-quality songs on one device, but it was also incredibly simple to use. A unique click wheel allowed you to scroll through your library and a single button was all it took to play whatever song you'd like. Music was managed through the iTunes application on both Windows and Mac computers.

Before too long, the company began selling songs via the online Apple Store platform - then called the iTunes Store. Finally, music was as easy to buy as it was to play. You didn't have to purchase full albums if you didn't want to - you could purchase only your favorite songs and put them all together via playlists. Within years, even major music retailers like Tower Records began to close all over the country.

In 2007, Jobs would incite another revolution - this time in terms of how we communicate with one another. While "smartphones" were certainly nothing new at the time, even the most advanced models left a lot to be desired. They could send SMS text messages and could even go online, but trying to visit a website often resulted in all content being converted to plain text. This lost all formatting, making most sites difficult to navigate - if you could do so at all.

The iPhone, however, was different. In addition to being a stable cell phone, it was also a powerful Internet communication device. It could run full versions of websites from a built-in web browser and had a variety of applications built in that were effortless to use (keep in mind this is before the App Store debuted). It even essentially had the capabilities of an iPod built right into it - and one that could play video files, too.

In the End

Sadly, Steve Jobs was diagnosed with pancreatic cancer in 2003. After years of living with the disease, he passed away on October 5, 2011. Prior to that, he had introduced another innovative technology product: the iPad. What was originally dubbed as little more than a "large iPhone" became a must-have device for readers and people who want to work on-the-go as well.

While Steve Jobs may be gone, the impact he left on all of our lives will never be forgotten. Our days would look a lot different if we didn't have our iPhones or personal computers to stay connected with the world around us. Truly, Steve Jobs was more than just a successful technology entrepreneur. He was a visionary - someone who had an unending urge to change the world and who did so time and time again throughout his career.

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There is a very good chance that we will never see something quite like the Steve Jobs success story again in our lifetimes. But that's okay - because the way that he inspired future generations will allow up-and-comers to keep changing the world, for the better and for all time, exactly the way it should be.

If you are looking for a partner to help your business succeed, feel free to contact us to talk over your dreams.

Best Practices For Avoiding Cash Flow Problems With Your Business: A Guide

Tue, 13 Sep 2022 10:06:15 GMT

If you had to make a list of some of the biggest issues that plague small business owners on a regular basis, cashflow problems would undoubtedly be right at the top.

Cash flow is about more than just the money coming into and going out of your business. It represents your ability to capitalize on opportunities as an entrepreneur as opposed to watching them pass you by because you lack the necessary cash on hand. It's about making sure that you have the cash inflow you need to pay your employees on-time. It's about understanding how you're going to pay vendors and other suppliers to get your products and services into the hands of the people who need them on-time. The list goes on and on.

Based on this, it should not come as a surprise that an estimated 82% of all small businesses that close do so because of a significant cash flow problem. When you also consider the fact that the number of small businesses that fail to make it beyond their fifth anniversary is estimated to be 48% , it's easy to see why this is one critical aspect of being an entrepreneur that you do not want to overlook.

To be clear, none of this is to say that if you manage to avoid significant cash flow problems you're guaranteed to run a successful business for years to come. Unfortunately, the situation is a lot more malleable than that - there are still a lot of other variables that need to be accounted for.

It's simply that proper cash flow forecasting is imperative to avoid a lot of the major mistakes that new entrepreneurs in particular commonly make. It will also help avoid disruption and can be a key contributing factor in your business's ability to scale and grow larger over time.

Thankfully, getting a handle on cash flow problems as a small business owner isn't necessarily as difficult as one might assume. It does, however, require you to keep a number of crucial things in mind along the way.

The Ins and Outs of Cash Flow: Breaking Things Down

First, it's important to get a handle on just what is meant by the term cash flow in the first place. Generally speaking, it can be separated into two categories: cash inflow and cash outflow.

Cash inflow refers to the amount of money that is coming into your business at any given time. This is typically represented by the money being generated when you sell your products or services. Note that not every dollar that comes into the organization is revenue, mind you - you still have expenses and things of that nature to account for.

Cash outflow, as the name suggests, is the money going out of your business. This includes not just payments to people like your employees but also payments to vendors and other suppliers. Regular expenses and debt payments would also fall under the cash outflow umbrella.

These two concepts are closely related and a cash flow problem in one area will almost immediately start to impact the other. If you start making late payment after payment to your suppliers, for example, your relationship will be harmed, and you may find it difficult to find people to work with in the future. Making a late credit card or other debt payment could hurt your ability to borrow (and negatively impact your credit rating). It can even harm your reputation not just with your customers, but with your employees as well.

Maintain Those Cash Reserves

One of the biggest lessons that many small business owners learned given everything going on in the world over the last few years has to do with the importance of cash reserves.

One day, everything is going smoothly and exactly as expected. The next day, something unprecedented happens - like a sudden global pandemic begins, forcing most businesses to indefinitely close their doors without any indication of when or even how they'd re-open again. A ccording to one recent study , 17% of small business owners said that they'd have to shut down permanently if they were faced with just a two-month-long revenue loss.

This is why cash reserves are critical - they help you prepare for whatever life happens to throw at you, regardless of how unexpected it may be. In other words, don't immediately spend every extra dollar coming into your business after expenses and other payments are accounted for. Try to build up as large of a reserve as possible so that if something does happen, you'll at least be able to weather the storm for a while until you come up with a more permanent solution or until conditions return to normal.

To circle back around to the concept of how devastating a late payment can be, another one of the biggest sources of cash flow problems touches on the same idea, albeit from a different perspective: your accounts receivable status.

Simply put, accounts receivable refers to the money that you are being paid by your customers (either standard consumers who purchase a product or service or other businesses) in exchange for something of value. If you're a B2B organization that sells a product to other businesses, for example, you likely send out invoices to those customers on a regular basis. That represents money you are owed, certainly - but the longer those invoices go unpaid, the more likely you are to wind up in a decidedly negative cash flow position.

Not only is this a common problem that a lot of businesses face, but it's also one that is, unfortunately, getting worse. One survey conducted in 2020 showed that over the course of the previous two years, small business owners reported that their rate of outstanding receivables increased a massive 81%. Keep in mind that this survey was also taken prior to the onset of the pandemic, meaning that this number probably only got higher over the following two years.

In an effort to help prevent this from becoming a major cash flow issue for your own small business, there are a few important steps you can take. First, make sure that you're closely following all outstanding invoices in the first place. You can't collect on invoices that you're not sure were sent in the first place. You need a system in place that clearly outlines who owes what amount of money, when those invoices are due, and who has paid and who hasn't.

Likewise, in an effort to entice certain people who may make regular late payments, you could offer some type of pricing discount or other incentives. You could offer a discount of a certain percentage if the invoice is paid immediately, for example. Or a similar reduction in prices if the invoice is paid in cash. Yes, you'll lose out on a bit of money from offering a discount, but you'll avoid having to wait for indefinite amounts of time to gain access to the money that you are owed. Never neglect payment terms like this as far as cash flow is concerned.

Work With a Financial Professional

Another one of the most common cash flow problems that new entrepreneurs deal with in particular involves attempting to handle all aspects of this part of their business on their own.

By now, you're an expert in running your business - that doesn't make you an expert on the financial side of the equation. Simply keeping up with something like accounts receivable information or expenses can quickly become a full-time job, which is a problem since you already have one of those you're supposed to be devoting the majority of your attention to.

Thankfully, the solution is clear: find a financial professional that you trust who has experience in the specific industry that you're operating in. Not only will they be able to help you come up with an effective cash flow management strategy, but they can also put together essential documents like a cash flow statement and cash flow forecast data as well. The former paints a vivid picture of where you stand today, while the latter helps you see what you will achieve if you stay on the current trajectory.

A cash flow forecast is particularly important as, if you're on a trajectory for poor cash flow or even negative cash flow, you'll know about it as soon as possible so that you can hopefully do something about it. Even if everything is going smoothly, they'll still ensure you have the most accurate and actionable information to make the best decisions for your business.

Keep Control Over Your Expenses

Finally, one of the most common cash flow problems that a lot of businesses face has to do with ballooning expenses. Yes, there are certain things that are beyond your control that are "costs of doing business" - like the amount you're paying for utilities to run a physical location, for example.

But especially if you're experiencing dwindling cash flow, there are a number of steps you should take immediately. Take a look at all the business services you're paying for and stop the ones that aren't absolutely necessary, at least temporarily. If the issue is that your suppliers are increasing their prices, try to find ones that offer similar items at lower costs without compromising quality.

In general, look for opportunities to reduce your operating costs as much as you can, at least for a little while. It can certainly help ward off any impending disaster and allow you to get back on your feet through a series of strategic financial moves in the days and weeks to come.

In the end, especially in the early days of any small business, you need to come to terms with the fact that cash flow will matter more than profit. You're not going to break even overnight, but negative cash flow and related issues could bring your organization to its proverbial knees before you know it.

Not only does something like a cash flow forecast help give you advanced notice of any problems that you may encounter in the future, but it also makes sure that you have the cash on-hand needed to fend off unexpected situations. It puts you in a better position to capitalize on opportunities and helps your business continue to scale and evolve over time. When you also consider the fact that it will also help lower your stress levels as an entrepreneur because you can spend less time worrying about money and more time putting it to good use, you're looking at a perfect storm in the best possible way.

If your business is experiencing cash flow problems or you want to talk over budgeting or other cash flow tips, reach out to our office for a consultation. We are here to help.

Everything You Need To Know About Starting A Business: Your Step-By-Step Guide

Mon, 12 Sep 2022 11:57:43 GMT

According to one recent study conducted by the Small Business Administration, there are approximately 32.5 million organizations that classify as a small business in operation in the United States. Half of all American workers are either employed by a small business or own a small business and are significant drivers of not only the economy in this country but on a global scale as well.

Coming up with an idea for a new business, however, is one thing. Actually becoming a successful business owner is something else entirely.

Because of that, if you're going to start a new business, you need to have more than just an idea. An excellent product or service can only get you so far if your business structure isn't where it needs to be. There are several critical steps that need to be taken that go beyond your initial business idea to help make sure that you end up as one of the approximately 52% of business owners that are still here five, 10, or even 20 years from now.

To be a successful entrepreneur, you need to think about factors like business financing. You need to guarantee that your legal structure is in order. You need to focus on market research so that you fully understand the customers you've dedicated yourself to serving.

Business insurance, workforce development, your business entity type - all of these things must be considered before you "hit the ground running" and try to bring your initial vision to life.

Any seasoned business veteran will tell an aspiring entrepreneur that it takes a long time to become an "overnight success." A rock-solid foundation must first be laid so that you have something stable to build from moving forward.

But while the process of starting a business is time-consuming, it isn't necessarily as difficult as some people assume it to be. Running a successful business requires you to follow a precise process and to keep a few important things in mind along the way.

1. Hone Your Business Idea

By far, the most important step to take when starting a new business involves making sure that your actions are motivated by the right idea in the first place.

It's not too difficult to come up with an idea for a new product or service. But what makes yours unique? For the best results, you should be able to easily answer the following three questions:

What is it that your product or service does?
How is it different from similar products or services that are already on the market?
What problems does it solve for your potential customers or what value does it bring to their lives?

If the answer to any of those questions is "I don't know," you need to go back to the drawing board and refine your idea until things start to come into focus.

Market research will help enormously to that end. Your primary motivator when starting a business should be to bring something fresh and exciting to people's lives. Therefore, it stands to reason that in order to do that, you need to know as much about who these people are as possible.

Thorough market research will allow you to drill down your potential customers in an almost intimate level of detail. Who are these people? What do they need? What do they want? What do they like? What do they dislike?

Market research can help you answer all of these questions and more. Not only will this then be the insight that you can use to refine your initial idea, but it will inform a lot of the choices you'll make from that point forward. Marketing is a prime example of that.

2. Develop the Right Business Plan

Next comes what is arguably the most essential part of starting a new business - making sure that you have the right business plan to operate from at the outset.

At this point, you'll continue to ask yourself a series of important questions. What is the overall purpose of your business? What long-term goals do you hope to accomplish? How are you going to come up with the business finances necessary to get your enterprise off the ground?

Keep in mind that everyone's answers to these questions will be a bit different because every situation is unique. There is no "one size fits all" approach to starting a business.

Once you know what you're doing and most importantly why, you can begin to put together a plan for how you're going to accomplish it.

Again, market research will prove invaluable to that end because it helps you better understand your target customers. You'll also want to conduct a competitive analysis to see what other companies in the industry are offering similar products and services to yours. At that point, you can figure out what they're doing well - and what you can do even better.

Although it may seem counterintuitive, you'll also want to think about a potential exit strategy at this point. Keep in mind that you're trying to put together a roadmap for your new business, essentially. You need to know where you're starting and where you hope to end up in order to connect those two points in the most efficient way possible.

Therefore, if you hope to start a successful business and sell it in 10 years, you need to start making decisions with that goal in mind. If you want to leave the business to your kids so that it stays in the family once you retire, you'll need to begin thinking about how to accomplish that, too. Tax planning actually starts before you choose your business entity and structure.

3. Dive Into the Financial Side of the Equation

Another part of starting a business comes down to business finances. This, too, will play a pivotal role in the plan that you're in the process of developing.

First, you'll want to consider how you're going to come up with the funds necessary to start your business in the first place. Do you have the cash on-hand to cover startup costs, or will you be taking out a business loan? What do those startup costs actually look like in your scenario?

Obviously, startup costs will be smaller if you're selling entirely online via an eCommerce portal as opposed to opening up a brick-and-mortar retail location, so all of this needs to be carefully considered.

Keep in mind that a number of small business services exist to help people in your exact situation. In addition to the aforementioned business loans you also have the option of business grants or even third-party investors. Crowdfunding is also a very popular option these days to pull in funding from multiple sources.

You'll also need to perform what is called a "Break Even Analysis." As the name suggests, this is the total amount of money you need to make by way of your product or service for your new business to be profitable.

This number will vary wildly depending on the industry. In some, like food services, it can take years for you to break even and start turning a profit. In others, it will be a much smaller amount of time.

In general, take the fixed costs associated with starting your business and divide them by variable costs subtracted by the average price of your product or service. The number you're left with will give you the break-even point.

This is a key number to keep in mind because it can help shed insight into how far you've come and how far you still have left to go. It will also help you determine a key price for your product or service at the outset.

4. Registration Begins

At this point, you'll begin the registration process - one that again has multiple moving parts that need to be accounted for.

First, you'll need to determine your business structure. One such option is a sole proprietorship, which is applicable when you plan on owning your new business entirely on your own. Don't forget, however, that operating as a sole proprietor does have the potential to impact your personal credit.

Another option is that of a limited liability company, also referred to as an LLC for short. This is actually the most common selection for small business owners because it offers certain legal protections that other avenues do not. There are also tax benefits that you get as well.

Two other options are to choose a corporation, S-corporation or partnership. You'll likely want to consult with a financial professional or legal council to determine which one makes the most sense for your situation and your long-term goals.

At that point, you can begin to register with all of the appropriate entities, including your local government and the federal government by way of the Internal Revenue Service.

This will involve completing and submitting several essential documents, including your articles of incorporation, your operating agreements, and your "Doing Business As" (DBA) document that outlines, among other things, your business name.

You'll also want to trademark your business name for additional legal protection moving forward.

This is also the part of the process where you will obtain your employer identification number (EIN) from the Internal Revenue Service. You'll fill out income tax forms for both federal and state income outlining your obligations once you do officially open your doors.

5. Insurance and Other Key Considerations

Another one of the key factors that you'll need to account for at this point involves choosing the right business insurance plan. This is another part of the process that will vary depending on exactly what type of business you're planning on starting.

If you're operating entirely on your own, you'll need a different type of business insurance than if you were opening a retail location that will see customers visit on a regular basis. You'll also need to account for things like property damage and potential theft of valuable assets.

Whether or not your business is founded to sell a product versus a service (or vice versa) will also impact the type of policy you need as a small business owner.

Again, it would be wise to consult with a financial professional who has experience in the industry that you're planning on entering. They can help you make sure that business insurance and other essential factors are properly accounted for so that you don't run into trouble later on.

One element of becoming a successful entrepreneur also involves the acknowledgment that, as much as you'd like, you probably can't handle everything on your own. You may be able to start that way, but eventually, you're going to need a team of people to surround yourself with who can fill in a lot of the skills gaps that you may lack.

What this means is that you need to start thinking about workforce development. Depending on the size of your business and your long-term goals, you don't necessarily need a Board of Directors or anything to that extent. But you do need someone who understands crucial factors like marketing. You need someone who will be able to know which vendors to partner with and where to get the supplies you'll need to bring your product or service to life. You'll want a seasoned financial professional (either in-house or a third party) who can handle your business finances on an ongoing basis. Don't forget that the major reason why a lot of small businesses ultimately fail comes down to cash flow problems, after all.

Defining these roles and their responsibilities, and finding the right people to fill those positions, will be one of the key ingredients to your success in the years to come. At the very least, they'll make your day-to-day obligations easier. At best, they'll help keep you on the right path and moving in the right direction to make the biggest impact possible once you launch and every day thereafter.

6. Start Thinking About Marketing and Branding

One mistake you can't afford to make as an entrepreneur involves assuming that branding begins and ends with your business name. While having a memorable name is important, that's not going to instill awareness (and ultimately loyalty) among your potential customers.

Before starting your business and selling your product or service, you must build your brand. When that product or service does launch, people won't need to warm up - they'll already be excited about what you have to offer.

In the End

Once you've completed all of these steps, you'll be well on your way to starting a new business. Having said that, you need to see this point for what it truly is - the beginning of a larger journey, not the end of something.

Every day, conditions will change. Your industry - and your customers - will throw you curveballs. You need to be in a position to continue to adapt to them and make intelligent choices in the future.

All of these best practices will go a long way towards helping you bring your new business to life, yes. But if you want to keep that business alive, you need to continue to think about these and similar factors consistently. That will put you in the best possible position to not just be initially successful but to ultimately stay that way, which in and of itself is the most important benefit of all.

If you are thinking of starting a new business, or have questions regarding a current one, feel free to reach out to us to talk things over.

Video Tips: A Reminder Of The Third Quarter Estimated Tax Payment

Thu, 08 Sep 2022 14:13:47 GMT

The third quarter estimated tax payment is due on September 15th. This is a reminder for those who have not yet made their payment. Estimated taxes are required for those who expect to owe $1,000 or more in taxes for the year. If you need help estimating your taxes, please contact our office for additional assistance.

Electric Vehicle Credit Undergoes Major Overhaul

Tue, 06 Sep 2022 07:50:19 GMT

Article Highlights:

Assembly Requirement
August 15 Deadline
Transition Rule
The New Law
Income Limit
Manufacturer's Suggested Retail Price Limitation
New Vehicle Definition
Transfer of Credit to the Dealer
Credit for Used Vehicles

With the recent passage of the Inflation Reduction Act of 2022, the electric vehicle credit has undergone some major changes. Although most of the changes take effect in 2023, to qualify for the current credit, vehicles purchased after August 15, 2022, are required to meet the final assembly requirement of the new law.

That requirement necessitates vehicles sold after August 15, 2022, undergo final assembly in North America.

"Final assembly" means the manufacturer must produce new clean vehicles at a plant, factory, or other place located in North America from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle.

The U.S. Department of Energy has prepared a preliminary list of Model Year 2022 and early Model Year 2023 vehicles that may meet the final assembly in North America requirement.

Although the current law phasing out the credit once a manufacturer has produced 200,000 vehicles has been eliminated beginning in 2023, it still applies for vehicles sold in 2022. Even though those vehicles meet the final assembly requirement, because of the 200,000 limit they may not qualify for credit or reduced credit in 2022 but will again qualify in 2023 under the new rules. The U.S. Department of Energy list tags those that have reached the 200,000 limit. Visit the IRS site for a list of qualifying vehicles to see if a vehicle might still qualify for a reduced credit.

Transition Rule - The legislation also provides a transition rule where a taxpayer who, from January 1, 2022, and before August 16, 2022, purchased, or entered a written binding contract to purchase, a new plug-in electric drive motor vehicle and placed that vehicle in service on or after August 16, 2022, may elect to use the credit rules in effect before the Inflation Reduction Act changes, thus avoiding the final assembly and other requirements of the new law.

The New Law – The new law, generally effective beginning January 1, 2023, includes some new stringent requirements including that the critical minerals and other battery components used in the manufacture of a qualifying vehicle be from North America. Because of the current limited availability of these critical minerals this requirement is being phased in through 2029, giving manufacturers time to develop North American sources for these materials.

Also beginning 2023, the law imposes income limits on who qualifies for the credit, as well as limiting the cost of the vehicles eligible for the credit as follows:

Income limit - No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the:

Current tax year, or
The preceding tax year

Exceeds the threshold amount as indicated in the table below. Thus there is no phaseout; just one dollar over the limit and no credit will be allowed.

MAGI means adjusted gross income increased by any foreign earned income and housing exclusions and excluded income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico.

Manufacturer's Suggested Retail Price Limitation - No credit is allowed for a vehicle with a manufacturer's suggested retail price more than the following:

New Vehicle Definition – Where under prior law a qualifying vehicle was required to have a battery with a minimum of 4 kilowatts-hours, after 2022 a qualifying vehicle’s battery must be a minimum of 7 kilowatts-hours.

Transfer of Credit to the Dealer – After 2022, the new law adds an interesting twist that allows a taxpayer to utilize the credit to reduce the vehicle’s cost. This is accomplished by the taxpayer, who, on or before the purchase date, can elect to transfer the clean vehicle credit to the dealer from whom the taxpayer is purchasing the vehicle in return for a reduction in purchase price equal to the credit amount.

Making the election cannot limit the use or value of any other dealer or manufacturer incentive to buy the vehicle, nor can the availability or use of the incentive limit the ability of the taxpayer to make the election.

A buyer who has elected to transfer the credit for a new clean vehicle to the dealer and has received credit from the dealer but whose MAGI exceeds the applicable limit is required to recapture the amount of the credit on their tax return for the year the vehicle was placed in service.

Credit For Used Vehicles – The new law includes a credit for used clean vehicles that cost $25,000 or less that are purchased from a dealer. This credit is limited to the first time the vehicle is resold, and available only to taxpayers whose MAGI is no more than half that of the MAGI limit for the new clean vehicle credit. The credit amount is the lesser of $4,000 or 30% of the purchase price. However, other details of this credit need further guidance from the IRS. Watch for additional information in the future.

If you have questions about these new rules on the clean vehicle credit, please give this office a call.

Video Tips: Receiving A Phone Call From The IRS? Beware Of Scammers!

Mon, 05 Sep 2022 07:54:56 GMT

There have been instances where scammers have posed as IRS representatives in order to extract money from unsuspecting victims. Here are a few tips on how to protect yourself from these scammers. First, be aware of the different methods that the IRS uses to contact taxpayers. If you receive a phone call or email from someone claiming to be from the IRS, do not reply or give out any personal information. Second, remember that the IRS will never threaten you with arrest or demand immediate payment. Finally, if you are unsure about whether or not a contact is legitimate, you can always call the IRS directly to confirm or ask for assistance from a professional office.

IRS Providing Penalty Relief To 1.6 Million Taxpayers

Thu, 01 Sep 2022 08:05:49 GMT

Article Highlights:

Penalty Relief
2019 & 2020 Tax Returns
Includes 1040, 1120, Certain 1099 Series Filings
Refunds Are Automatic
September 30, 2022, Deadline
The First-Time Abatement Penalty Relief

To help struggling taxpayers affected by the COVID-19 pandemic, the IRS has issued a notice , which provides penalty relief to most people and businesses who file or filed certain 2019 or 2020 returns late.

This includes nearly 1.6 million taxpayers who will automatically receive more than $1.2 billion in refunds or credits. Many of these payments will be completed by the end of September.

Besides providing relief to both individuals and businesses impacted by the pandemic, this action is designed to allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.

The relief applies to the Failure to File Penalty. The penalty is typically assessed at a rate of 5% per month and up to a maximum of 25% of the unpaid tax when a federal income tax return is filed late. This relief applies to Form 1040 (Individual) and 1120 (Corporate) series, as well as others.

To qualify for this relief, any eligible income tax return must be filed on or before Sept. 30, 2022. So to take advantage of this relief contact this office immediately if you have not already filed your 2019 or 2020 returns.

In addition, the IRS is providing penalty relief to banks, employers and other businesses required to file various information returns, such as those in the 1099 series. To qualify for relief, the notice states that eligible 2019 returns must have been filed by Aug. 1, 2020, and eligible 2020 returns must have been filed by Aug. 1, 2021.

Because both deadlines fell on a weekend, a 2019 return will still be considered timely for purposes of relief provided under the notice if it was filed by Aug. 3, 2020, and a 2020 return will be considered timely for purposes of relief provided under the notice if it was filed by Aug. 2, 2021. The notice provides details on the information returns that are eligible for relief.

The notice also provides details on relief for filers of various international information returns, such as those reporting transactions with foreign trusts, receipt of foreign gifts, and ownership interests in foreign corporations. To qualify for this relief, any eligible tax return must be filed on or before Sept. 30, 2022.

Penalty relief is automatic. This means that eligible taxpayers need not apply for it. If already assessed, penalties will be abated. If already paid, the taxpayer will receive a credit or refund.

As a result, nearly 1.6 million taxpayers who already paid the penalty are receiving refunds totaling more than $1.2 billion. Most eligible taxpayers will receive their refunds by the end of September.

Penalty relief is not available in some situations, such as where a fraudulent return was filed, where the penalties are part of an accepted offer in compromise or a closing agreement, or where the penalties were finally determined by a court.

This relief is limited to the penalties that the notice specifically states are eligible for relief. Other penalties, such as the Failure to Pay Penalty, are not eligible. But for these ineligible penalties, taxpayers may use existing penalty relief procedures, such as applying for relief under the reasonable cause criteria or the First-Time Abate program.

The First-Time Abatement Penalty Relief is a one-time administrative abatement of late filing and late payment penalties where the taxpayer has:

Not previously been granted relief under this provision, and
Has been compliant in the three prior years.

Please contact this office as soon as possible if you have unfiled 2019 and 2020 returns so you can take advantage of the penalty relief. The returns must be filed by September 30, 2022, to qualify for this relief.

Video Tips: Are You Prepared For The Resession?

Sun, 28 Aug 2022 08:35:57 GMT

As the saying goes, hope for the best but prepare for the worst. With concerns about a recession on the rise, now is the time to start thinking about how you would weather an economic downturn. There are a number of steps you can take to recession-proof your finances, and it's important to have a plan in place in case the economy takes a turn for the worse.

Mid-Year Tax Planning Checklist

Thu, 25 Aug 2022 08:43:21 GMT

Article Highlights:

Mid-Year Planning
Avoiding Unpleasant Surprises
Events That Have Tax Consequences

All too often, taxpayers wait until after the close of the tax year to worry about their taxes and miss opportunities that could reduce their tax liability or financially benefit them. Mid-year is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them. Here are some events that can trigger tax consequences. Did you (or are you going to):

Get Married, Divorced, or Become Widowed?
Change Jobs or Has Your Spouse Started Working?
Have a Substantial Increase or Decrease in Income?
Have a Substantial Gain from the Sale of Stocks or Bonds?
Buy or Sell a Rental?
Start, Acquire, or Sell a Business?
Buy or Sell a Home?
Retire This Year?
Reach Age 72 This Year?
Refinance Your Home or Take Out a Second Home Mortgage This Year?
Receive a Substantial Inheritance This Year?
Take Advantage of Tax-Beneficial Retirement Savings?
Make Any Significant Equipment Purchases for Your Business?
Purchase a New Business Vehicle and Trade-in or Dispose of the Old One?
Adequately Document Your Cash and Non-Cash Charitable Contributions?
Keep Up With Your Estimated Tax Payments?
Make Any Unplanned Withdrawals from an IRA or Pension Plan?
Add a Solar Electric System to Your Home or Purchase an Electric Vehicle?
Hire Veterans’ or Other Individuals in Your Business Who May Qualify for the Work Opportunity Tax Credit?
Trade or Sell Cryptocurrency?
Incur Expenses Adopting a Child?
Start Receiving Social Security Benefits?
Exercise an Employee Stock Option?
Start Using a Part of Your Home for Business This Year?
Exchange Real Properties Used in Your Trade or Business or Held for Investment?
Start a Retirement Plan in Your Self-Employment Business?
Make Gifts of Over $16,000 to Any One Individual This Year?

Of course, these are not the only issues that have tax consequences.

If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to consult with this office—preferably before the event—and definitely before the end of the year.

Inflation And An Economic Slowdown: A Double Whammy For Your Finances

Tue, 23 Aug 2022 09:33:12 GMT

Newspapers and media reports have been filled with talk of inflation and recession. Experts are arguing about the definition of the latter. Pundits are pondering whether the slow down reflected in the latest consumer price index report means that inflation has peaked. You, in the meantime, are still staring in disbelief at the numbers that are rolling by as you fill your tank with gas or the total tally when you buy a few bags of groceries.

Are We in a Recession?

It really doesn’t matter what anyone calls the nation’s economic condition when you’re having trouble paying your household bills – or worrying that’s where you’ll find yourself soon. Though gas prices have been dropping steadily and retailers like Walmart, and Home Depot are reporting strong financial results, there is some concern that higher prices may be driving their gains, and there is only so long that consumers will be able to maintain their spending habits.

That diminished spending on goods and services is one of the top signs of recession , along with cuts in manufacturing and production, increases in unemployment, and stagnating or dropping income. As frightening as each of these elements sounds, it is when you personally experience a combination of them that you feel a real impact. The good news is that there are steps you can take to prepare.

Can You Recession-Proof Yourself?

Recessions impact everybody one way or another, but they are definitely more painful for those who aren’t prepared. Here are a few things that you can do to minimize the financial impact on your family:

Review your financial plan. If you have been investing, now is the time to take a look at your short- and long-term goals and weigh them against the potential of a shifting economy. If you have too much money in one particular investment, now might be a good time to diversify, and if you are anticipating needing to take a significant amount of cash out in the short term, it’s a good idea to make sure that your investments aren’t particularly vulnerable to market volatility.
Take a close look at your spending and make adjustments. We all give ourselves a bit of grace when it comes to our budgets, but if you have reason to believe that rising prices are going to do more than make you wince, now is a good time to analyze what you’re spending on and see what you can eliminate or cut down on. Refinancing loans, canceling subscriptions, and being a bit more frugal in your habits are just a few examples of things that can make a big difference.
Have a contingency plan, and the savings to back it up. Do you have an emergency savings fund? Is there enough in it? Most experts advise calculating your monthly expenses and then putting away at least three times that amount to carry you through a job loss or some other economic crisis.
Pay down debt. If you are carrying credit card debt, or have any other loans that are charging you high-interest rates, double down on paying them off. It may hurt to skip a luxury in favor of putting more into paying down your debt, but if you face a job cutback, you’ll be glad for every dollar less that you owe.
Find extra income. It may sound more easily said than done, but if you can find a way to earn some money on the side, it will cut into the impact that rising prices are having on your lifestyle – or help you pay down debt or boost your savings.

The good news is that most recessions end in less than a year. We’ve been here before and we’ll get through it again, but that doesn’t mean that it will be easy. If you need financial advice to help you navigate the challenge, contact our office today to set up an appointment.

Life Changing Events Can Impact Your Taxes

Tue, 23 Aug 2022 09:12:50 GMT

Article Highlights:

Marriage
Buying a Home
Having or Adopting Children
Getting Divorced
Death of Spouse

Throughout your life there will be certain significant occasions that will impact not only your day-to-day living but also your taxes. Here are a few of those events:

Getting Married – If you just got married or are considering getting married, you need to be aware that once you are married you no longer file returns using the single status and generally will file a combined return with your new spouse using the married filing jointly (MFJ) status. When you file MFJ all of the income of both spouses is combined on one return, and where both spouses have substantial income, that could mean your combined incomes could put you in a higher tax bracket. However, when filing MFJ you also benefit by being able to claim a standard deduction equal to twice that of the standard deduction for a single taxpayer. It may be appropriate for a couple planning a wedding, or even those who just got married, to estimate differences of filing as unmarried and filing married so there are no unpleasant surprises at tax filing time. It may be appropriate to adjust withholding to compensate for the MFJ status.

Be mindful that filing status is determined on the last day of the tax year, so no matter when you get married during the year you will be considered married for the entire year for tax purposes. Once married here are some tasks that should be done:

Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple and can be done on the SSA’s websit e. Alternatively, you can call the SSA at 800-772-1213 or visit a local SSA office. Your income tax refund may be delayed if it is discovered that your name and SSN don’t match at the time your return is filed.
Notify the IRS - If you have a new address, you should notify the IRS by completing and sending in Form 8822 , Change of Address.
Notify the U.S. Postal Service - You should also notify the U.S. Postal Service of any address change so that any correspondence from the IRS or state tax agency can be forwarded to your correct address.
Notify the Health Insurance Marketplace – If either or both of you are obtaining health insurance through a government health insurance marketplace, your combined incomes and change in family size could reduce the amount of the premium tax credit to which you would otherwise be entitled, requiring payback of some or all of the credit applied in advance to reduce your monthly premiums. More complicated yet, if either or both of you are included on your parents’ marketplace policy, those insurance premiums must be allocated from their return to your return.

Here are a few tax-related items you should be aware of when filing a joint return:

New Spouse’s Past Liabilities – If your new spouse owes back taxes, past state income tax liabilities or past-due child support or has unemployment debts to a state, the IRS will apply your future joint refunds to pay those debts. If you are not responsible for your spouse’s debt and do not want your share of any tax refund used to pay your spouse’s past debts, you are entitled to request your portion of the refund back from the IRS by filing an “injured spouse” allocation form. As an alternative, you can file separately using the “married filing separate” filing status; however, that generally results in higher overall tax.

Capital Loss Limitations – If an individual has sold stock or other investment property at a loss, when filing as unmarried, each individual can deduct up to $3,000 of capital losses on their tax return for a possible combined total of $6,000, but a married couple is limited to a single $3,000 loss and if they file married separate, then the limit is $1,500 each.

Spousal IRA – Contributions to “Spousal IRAs” are available for married taxpayers who file jointly where one spouse has little or no compensation; the deduction is limited to the lesser of 100% of the employed spouse’s compensation or $6,000 (2022) for the spousal IRA. That permits a combined annual IRA contribution limit of a certain amount (up to$12,000 for 2022). The maximum amount is $7,000 if you or your spouse is age 50 or older ($14,000 if you are both 50+). However, the deduction for contributions to both spouses’ IRAs may be further limited if either spouse is covered by an employer’s retirement plan.

Deductions – The standard deduction in 2022 for a married couple (both spouses under age 65) is $25,900 and for a single individual is $12,950. So, if both of you have been taking the standard deduction, there is no loss in deductions. However, if in past years one of you had enough deductions to itemize and the other took the standard deduction, and after your marriage you’ll be filing jointly, you would either have to take the joint standard deduction or itemize, which likely will result in a loss of some amount of deductions.

Impact on Parents’ Returns – If your parents have been claiming either of you as a dependent, they will generally lose that benefit. In addition, if you are in college and qualify for one of the education credits, those credits are only deductible on the return where your personal exemption is used. That generally means your parents will not be able to claim the education credits even if they paid the tuition. On the flip side, unless your income is too high, you will be able to claim the credit even though your parents paid the tuition.

Buying a Home – Buying a home, especially your first home, can be a trying experience. Without a landlord to take care of repairs and upkeep of the property those tasks will become your responsibility as a home owner. When you rent, you are responsible for making a rental payment which is not tax deductible. On the other hand, when you own a home, in addition to being responsible for its maintenance, you have to make homeowner’s insurance, mortgage, and real property tax payments. While routine upkeep costs aren’t tax deductible, the interest on the mortgage and the property taxes you pay may be tax deductible, providing you with a significant saving in income tax. However, if the standard deduction amount for your filing status exceeds the total of all itemized deductions the law allows you to claim, you won’t get a tax benefit from the home mortgage interest and property tax payments. So, when figuring if you can afford a home be sure to take into account whether you’ll benefit from those home-related tax savings.

Also consider the long-term benefits of home ownership. Homes have generally appreciated in value in the past, so you can look forward to your home gaining value, and when you sell it, the gain up to $250,000 ($500,000 for a married couple) can be excluded from income if the property has been owned and used as your primary residence for any 2 of the 5 years just prior to the sale.

Many taxpayers don’t feel the need to keep home improvement records, thinking the potential gain will never exceed the amount of the exclusion for home gains ($250,000 or $500,000 if both filer and spouse qualify) if they meet the 2-out-of-5-year use and ownership tests. Here are some situations when having home improvement records could save taxes:

(1) The home is owned for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount.

(2) The home is converted to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property.

(3) The home is converted to a second residence, and the exclusion might not apply to the sale.

(4) You suffer a casualty loss and retain the home after making repairs.

(5) The home is sold before meeting the 2-year use and ownership requirements.

(6) The home only qualifies for a reduced exclusion because the home is sold before meeting the 2-year use and ownership requirements.

(7) One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples.

(8) There are future tax law changes that could affect the exclusion amounts.

Everyone hates to keep records but consider the consequences if you have a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG), and there is a good chance the CG tax rate will be higher than normal simply because the gain pushed you into a higher CG tax bracket.

Having or Adopting Children – Besides the loss of sleep, changing diapers, middle of the night feedings, and constant attention, a new born also brings some tax benefits, including a maximum $2,000 child tax credit which can go a long way in reducing your tax liability. If both spouses work, you will no doubt incur child care expenses which can result in a maximum (can be less) credit of between $600 and $1,050 for one child or twice those amounts for two or more children. The credit amounts are based on a maximum child care expense of $3,000 for one child and $6,000 for two or more multiplied by 20 to 35 percent of the expense based upon a taxpayer’s income. (The amounts noted apply for 2022; there were temporary increases in the credits as part of Covid pandemic relief for 2021. Congress may extend the enhanced credits.)

Of course, the medical expenses are deductible if you itemize your deductions but only to the extent the medical expenses exceed 7.5% of your adjusted gross income. Although rarely encountered, the expense of a surrogate mother is not deductible.

If you adopt a child under age 18 or a person physically or mentally incapable of taking care of himself or herself, you may be eligible for a tax credit for qualified adoption expenses you paid. The credit, which is a maximum of $14,890 for 2022, is not refundable, but if the credit is more than your income tax, you can carry over the excess and have 5 years to use up the credit. If the child is a special needs child, the full credit limit will be allowed for the tax year in which the adoption becomes final, regardless of whether you had qualified adoption expenses. The credit phases out for higher income taxpayers.

It is also time to begin planning for the child’s future education. The tax code offers two tax favored education savings accounts, the Coverdell account allowing a maximum contribution of $2,000 per year and the Qualified State Tuition plan, more commonly referred to as a Sec 529 plan, which allows large sums of money to be put aside for a child’s education. There is no federal tax deduction for contributing to either of these programs, but the earnings from the plans are tax-free if used for qualified education expenses, so the sooner the funds are contributed the greater the benefit from tax-free earnings.

Getting Divorced - If you are recently divorced or are contemplating divorce, you will have to deal with or plan for significant tax issues such as asset division, alimony, and tax-return filing status. If you have children, additional issues include child support; claiming of the children as dependents; the child, child care, and education tax credits; and perhaps even the earned income tax credit. Here are some details:

Filing Status – As mentioned earlier your filing status is based on your marital status at the end of the year. If, on December 31, you are in the process of divorcing but are not yet divorced, your options are to file jointly or for each spouse to submit a return as married filing separately. There is an exception to this rule if a couple has been separated for all of the last 6 months of the year, and if one taxpayer has paid more than half the cost of maintaining a household for a qualified child. In that situation that spouse can use the more favorable head of household filing status. If each spouse meets the criteria for that exception, they can both file as heads of household; otherwise, the spouse who doesn’t qualify must use the status of married filing separately. If your divorce has been finalized and if you haven’t remarried, your filing status will be single or, if you meet the requirements, head of household.
Child Support – Is support for the taxpayer’s children provided by the non-custodial parent to the custodial parent. It is not deductible by the one making the payments and is not income to the recipient parent.
Children’s Dependency – When a court awards physical custody of a child to one parent, the tax law is very specific in awarding that child’s dependency to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the custodial parent may release this dependency to the noncustodial parent by completing the appropriate IRS form.
Child Tax Credit – A federal credit of $2,000 is allowed for each child under the age of 17. This credit goes to the parent who claims the child as a dependent. Up to $1,400 of the credit is refundable if the credit exceeds the tax liability. However, this credit phases out for high-income parents, beginning at $200,000 for single parents.
Alimony – For divorce agreements that are finalized after 2018, alimony is not deductible by the payer and is not taxable income for the recipient. Because the recipient isn’t reporting alimony income, he or she cannot treat it as earned income for the purposes of making an IRA contribution.
Tuition Credit – If a child qualifies for either of two higher-education tax credits (the American Opportunity Tax Credit [AOTC] or the Lifetime Learning Credit), the credit goes to whoever claims the child as a dependent even if the other spouse or someone else is paying the tuition and other qualifying expenses.

Death of Spouse - Losing a spouse is difficult emotionally, and unfortunately, can be accompanied by a number of tax issues that may or not apply to the surviving spouse. Here is an overview of some of the more frequent issues:

Filing Status – If a spouse passes away during the year, the surviving spouse can still file a joint return for that year if the surviving spouse has not remarried. However, after the year of death the surviving spouse will no longer be able to jointly file with the deceased spouse and will have to use a less favorable filing status.
Notification – If the deceased spouse is receiving Social Security benefits the Social Security Administration must be immediately notified. Likewise, payers of pensions and retirement plans of the deceased spouse need to be advised of the spouse’s death.
Estate Tax – Where the deceased spouse’s assets and prior reportable gifts exceed the current lifetime inheritance exclusion ($12.06 million for deaths in 2022), an estate tax return may be required. However, the lifetime inheritance exclusion can be changed at the whim of Congress. Even when an estate tax return isn’t required because the value of the deceased spouse’s estate is less than the exclusion amount, it may be appropriate to file the estate tax return anyway, as there could be an impact on the estate tax of the surviving spouse when he or she passes.
Inherited Basis – Under normal circumstances the beneficiary of a decedent’s assets will have a tax basis in those assets equal to the fair market value of the assets on the date of death. Thus, generally a qualified appraisal of the assets is required. However, for a surviving spouse this can be more complicated depending upon whether the state of residence is a community property state and how title to the property was held.
Changing Titles – The title to all jointly held assets needs be changed into the survivor’s name alone to avoid complications in the future.
Trust Income Tax Returns – Many couples have created living trusts that, while they are both alive, don’t require a separate tax return to be filed for the trust and can be revoked. But upon the death of one of the spouses, this trust may split into two trusts, one of which remains revocable and the other becomes irrevocable. A separate income tax return for the latter trust will usually have to be prepared and filed annually.

These are just a few of the issues that must be addressed upon the death of a spouse, and it may be appropriate to seek professional help.

If you have questions about the tax impact of any of your life changing situations, be sure to give this office a call for assistance.

September 2022 Business Due Dates

Mon, 22 Aug 2022 10:41:38 GMT

September 15 - S Corporations

File a 2021 calendar year income tax return (Form 1120-S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. Provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) or a substitute Schedule K-1 and, if applicable, Schedule K-3 (Form 1120-S) or substitute Schedule K-3 (Form 1120-S).

September 15 - Corporations

Deposit the third installment of estimated income tax for 2022 for calendar year

September 15 - Social Security, Medicare and withheld income tax

If the monthly deposit rule applies, deposit the tax for payments in August.

September 15 - Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in August.

September 15 - Partnerships

File a 2021 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.

September 30 - Fiduciaries of Estates and Trusts

File a 2021 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 1/2 months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.

September 2022 Individual Due Dates

Mon, 22 Aug 2022 10:09:47 GMT

September 1 - 2022 Fall and 2023 Tax Planning

Contact this office to schedule a consultation appointment.

September 12 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

September 15 - Estimated Tax Payment Due

The third installment of 2022 individual estimated taxes is due. Our tax system is a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include:

Payroll withholding for employees;
Pension withholding for retirees; and
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the de minimis amount), no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors:

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception.

However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

The Atlassian Success Story: What You Need To Know

Mon, 22 Aug 2022 09:45:56 GMT

Today, Atlassian isn't just one of the most successful startups in Australia - it's one of the most successful companies of its type on Earth.

As an organization, it is worth more than $50 billion. The portfolio of products that it creates - with software like Jira and Trello being two prominent examples - is used by literally thousands of teams all over the globe. Whether you're talking about its products, its best practices, or its work ethic, Atlassian has created an exceptional reputation for itself in a short amount of time - and it's one story that can certainly serve as an inspiration for us all.

The Unlikely Journey of Atlassian: Breaking Things Down

Atlassian originally began life in Australia in 2002 , based out of Sydney. Flash forward to today and as of 2022, it was estimated that the company had over 242,000 customers all over the world in 190 different countries. In terms of monthly active users, the number was anticipated to be roughly 10 million - one that any company would certainly be happy with.

The organization itself was founded by a man named Mike Cannon Brookes who, with his partner Scott Farquhar, developed a partnership while they were both studying together at the University of South Wales. They knew they had a viable idea for a company and just needed to convince everyone else of the same idea, which is why they ultimately ended up bootstrapping Atlassian for a number of years.

During the same year, the company released a product that it would become renowned for - Jira. Just two years later in 2004 it also released Confluence. One theme remained consistent throughout this time - Atlassian and its founders remained committed to communication, collaboration, and team building at all costs. It was evidenced in the way they ran their business and in the products they developed as well.

When Atlassian started in 2002, they couldn't afford a sales team. They pioneered the freemium or product-led sales approach. This focus on user experience and self-guided user experiences helped them change the software industry and scale to heights not previously imagined.

By 2010, after nearly eight years in business, the hard work of the founders and the remainder of the team had begun to pay off. It was then that Atlassian was able to raise over $60 million in venture capital with help from the team at Accel Partners. By the following year, this bootstrapped company was seeing annual revenue in excess of $102 million. Not only was that a significant number regardless of how you looked at it, but it was a massive increase of more than 35% year over year as well.

By 2019, Atlassian was valued at $26 billion. It has been estimated that the two founders each own roughly 30% of the organization. It had filed for an IPO (initial public offering) a few years earlier, in 2015, on the NASDAQ stock exchange.

In a recent earnings call, it was also revealed that Atlassian beat expectations for the fiscal fourth quarter. Earnings were also firmly in line with overall expectations, this according to the organization's CEO. The possibility that customers may slow down in terms of spending on the company's products was also discussed - a possibility that the CEO didn't think was realistic .

All of this is to say that the story of Atlassian is one that can serve as an inspiration for small business owners everywhere. If you work hard, and you put all of your efforts into furthering a goal that you truly believe in, good things will happen - and Atlassian is just one in a long line of examples that prove it.

Video Tips: An Increase To 2022 Teacher'S Deduction

Sun, 21 Aug 2022 10:52:14 GMT

In 2022, the tax deduction for educators who invest in classroom supplies will be increased. This is great news for teachers and educators, who often have to spend their own money on supplies for their classrooms. The extra deductions will help offset the cost of supplies and make it easier for teachers to afford what they need for their students. Watch the video to learn more and take advantage of this tax opportunity.

How Quickbooks Online Tracks Products And Services, Part 2

Sat, 20 Aug 2022 12:12:36 GMT

If you’ll recall, we went over two product-related concepts in QuickBooks Online in last month’s column. We first discussed getting the site ready for creating and using product and service records. You click the gear icon in the upper right and select Account and Settings , then click the Sales tab to indicate your preferences.

To create a product or service record, you hover your mouse over Sales in the left vertical pane on the main page and click Products and services . Click New in the upper right corner and open a blank record for an Inventory or Non-inventory part, a Service , or a Bundle (assembly). Once you complete a record and save it, it will appear in the list back on the Product and services page.

Working with Products and Services

That’s where we’ll start today, on the Products and services screen. This is a comprehensive table, a dashboard (or home page) for your products and services. It displays real-time information about your items’ pricing and inventory levels, as well as their type and tax status. At the top of the page, you’ll see big, colorful buttons that provide a total of the number of items that are low on stock or out of stock. When you click on one, a list of those products appears.

QuickBooks Online’s Products and services page displays inventory levels and warns you when your stock is low and at zero.

Each row on this screen contains details about the item listed there, like Description , Sales Price and Cost , and Qty On Hand . If you look down at the end of the row, you’ll see options for several types of Actions: Edit, Make inactive , Run report , and Duplicate . Click the gear icon above the table to modify the columns in the table.

The More menu at the top of the screen contains more options: Manage categories , Run reports , and Price rules . If you want to know what actions you can take on multiple items simultaneously, check the box in front of each and click the Batch actions menu, over to the right ( Adjust quantity, Reorder, etc.).

Warning: Be very careful using the Adjust quantity option. There are legitimate reasons for employing it, but you need to make very sure that you understand how this will affect other areas of your accounting. Please ask us if you’re unsure.

Using Products and Services in Transactions

Once you start using product and service records in transactions, you’ll see why we suggested that you create those early on and make them as comprehensives as possible. While you can add products and services in the process of creating an invoice, for example, it’s much easier if you have them ready to go.

Let’s look at a sales receipt to see how this works. Click +New in the upper right corner and select Sales receipt . Select a Customer in the first field and verify that the related fields on the form were filled out correctly. Check and make any changes necessary in the Sales receipt date , Payment method , and Deposit to fields.

Once you’ve built up a list of products and services, they’ll be available when you create transactions.

Enter the Service Date , and then click the down arrow in the field under Product/Service . The top of the list has an entry labeled +Add new . Click it if you need to add a product or service on the fly, or just select the existing one that you want. QuickBooks Online will fill in the Rate , Amount , and Tax (status). You only have to enter the Qty (quantity) that you’re selling.

If you have more items or services to add, you can do so on the next line(s). When you’re done, check the numbers in the lower right and save the transaction. QuickBooks Online will adjust your inventory to account for any items you just sold. You can see this change by going back to the Products and Services screen . Or you can run reports, including:

Sales by Product/Service
Product/Service List
Inventory Valuation Detail
Physical Inventory Worksheet

Supply Chain Woes?

It seems that the serious supply chain problems we were experiencing in previous months have eased up some, but you may still be having trouble stocking some items. We hope this isn’t affecting you too much.

QuickBooks Online, though, can help ensure that you know ahead of time when you must reorder. Its inventory-tracking capabilities can also alert you to items that aren’t selling well, so you don’t get overstocked on anything. And the ability to pull up product and service records when you’re creating transactions saves time and keeps your inventory levels accurate. Please let us know if you need assistance with this element of your accounting – or any of QuickBooks Online’s other tools.

Maximizing Your AIRBNB Rental Income

Fri, 19 Aug 2022 12:53:43 GMT

If you list your property on Airbnb, you know it has been a remarkable boon for property owners looking to earn income from their available space. The online marketplace makes it easy for you, offering free listings and the ability to set your own price while also offering Host Damage Protection and shouldering the payment process. But for all of the success that hosts worldwide have realized, there have also been frustrations. Some hosts have been disappointed by their earnings and disgruntled by the tax ramifications of their rental income. There are actions you can take – both big and small – to maximize your Airbnb rental income. Likewise, you can take steps to reduce your tax obligation. Let’s take a look at both.

Your Airbnb Revenue

Though the money you make by listing your property on Airbnb is referred to as passive income, it is the listings whose owners put in the most effort who make the most money. While offering a property in a convenient or desirable location may be enough to bring people in, there are steps you can take that will make your space more attractive and generate more positive reviews. This in turn will keep your property booked and allow you to raise your rates. Try these strategies:

Make sure that your space looks its best when you’re taking photos and that you’ve used positive, descriptive language to describe your property.
Take the time to understand who is renting your property and cater to their needs. If you’re attracting beachgoers be sure to provide colorful, plush towels and beach chairs. Families with children will appreciate books, toys, and video games, and business travelers will be quick to rent a spot that has a dedicated work area.
Compare your rates to those of successful listings in your area to make sure that they are in line.
Small amenities make a big difference. Leaving a bag of coffee grounds on the counter, a loaf of bread, and a dozen eggs in the refrigerator are a small touch that goes a long way. Similarly, putting out curated soaps or shampoos costs little, but will result in enthusiastic positive reviews that will attract more guests, and may allow you to increase your price to more than cover the small cost incurred.

Optimize Your Rental Income Taxes

The revenue that you take in from renting your property is a form of self-employment, and anything over $1,000 earned in a year is subject to quarterly estimated income tax. These payments are required unless you qualify for the “ 14-day rule ,” which holds that if you rent your property for less than 14 days per year and you use it yourself for more than 14 days per year, there is no reporting requirement, no matter how much you’ve charged. Estimating the taxes you owe each quarter can be based on the previous year’s income – and if it’s your first year as a host the IRS allows you to use your W-2 income. You’ll also need to pay self-employment taxes, and all tolled it can be a big out-of-pocket hit that makes you wonder whether the venture was worth your while.

The good news is that the taxes you pay on your rental income can be offset by the many deductions you’re entitled to take. These may include:

The cost of any improvements or repairs that you make to your property, including furnishings, linens,
The cost of providing internet or cable services for your guests, as well as any subscription services like Netflix, Hulu, or Disney
The cost of having your property professionally cleaned and maintained
The cost of any supplies that you use to clean or maintain the property yourself
Depreciation on the property
Fees that you pay to Airbnb
The mortgage interest paid on the property, as well as property insurance if it is not your primary home

To make sure that you’re getting the most out of your property rental and optimizing your rental income, contact our office today.

What Does The Inflation Reduction Act Mean To You

Thu, 18 Aug 2022 14:39:51 GMT

Article Highlights:

Increased Internal Revenue Service (IRS) Funding
Drug Pricing
Affordable Care Act Insurance Premiums
Corporate Minimum Tax
Excise Tax on Corporate Stock Buybacks
Home Solar Energy Credit Extended and Increased
Credit For Energy Efficient Home Modifications
Clean Vehicle Credit
Credit For Previously Owned Clean Vehicles
Credit For Qualified Commercial Clean Vehicles
Research Credit

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 which is a scaled-back version of the prior Biden administration proposals originally included in the Build Back Better Act. The legislation includes a variety of provisions, including substantial green energy incentives, reduction of Affordable Care Act insurance premiums, IRS funding, corporate minimum tax, and more. This article will explore how these provisions will impact individual taxpayers.

Increased Internal Revenue Service (IRS) Funding – The IRS has been underfunded for years resulting in inadequate customer service causing extensive waits to speak with an agent to solve issues with the IRS, and substantially reduced enforcement activities.

Although some of the $79.6 billion supplemental appropriations will go towards improving customer service, the bulk of the appropriation will go towards increased enforcement, according to the Congressional Research Service . However, Treasury Secretary Janet Yellen has indicated the additional funds will not be used to increase audits of people making less than $400,000 above historic levels.

Drug Pricing - The legislation permits Medicare to negotiate lower drug prices (up to 10 drugs in 2026, another 15 in 2027 and 2028, and another 20 annually starting in 2029) and puts a cap on annual out-of-pocket costs at $2,000.

Affordable Care Act Insurance Premiums – The previously enacted American Rescue Plan temporally included enhanced subsidies for people buying their own health coverage on the Affordable Care Act Marketplaces for the years 2021 and 2022. The Inflation Reduction Act has extended those subsidies for three years, through 2025. These enhanced subsidies increase the amount of financial help for low and middle-income individuals, many of whom were previously priced out of health insurance coverage.

Corporate Minimum Tax – As a fundraiser to help pay for the other provisions, the legislation includes a new corporate minimum tax of 15% that would be imposed on corporations with an average book income of over $1 billion. This provision is projected to raise $258 billion over 10 years.

Excise Tax on Corporate Stock Buybacks – Stock Buybacks are when a company purchases its own shares, resulting in fewer outstanding shares. This tends to benefit corporate executives rather than raising worker wages, research and development, and other productivity-boosting investments. The legislation imposes a 1% tax on stock buybacks. This provision is projected to raise $74 billion over 10 years.

Home Solar Energy Credit Extended and Increased – Before the passage of the Inflation Reduction Act, a resident of a home was entitled to a non-refundable tax credit for the use of solar electric panels, solar hot water, fuel cells, small wind energy, geothermal heat pumps, and biomass fuel property they had installed for the residence. However, that credit was in the process of being phased out by slowly reducing the credit percentage from 30% to 22%, and the credit was scheduled to end after 2023. With this law change, the credit retroactively returns to 30% for the years 2022 through 2032 when it again begins to phase out and ends after 2034. This means those who qualify for the credit in 2022 benefit from a 30% credit rather than the expected 26% under prior law.

Credit For Energy Efficient Home Modifications – This provision provides a non-refundable tax credit for certain energy-saving improvements to a taxpayer’s home. The credit previously expired at the end of 2021, but under the Inflation Reduction Act has been extended and modified through 2032.

The previous lifetime credit limit of $500 has been replaced with an annual maximum credit of $1,200, and the credit percentage increased from 10% to 30%. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements:

$600 for credits with respect to residential energy property expenditures, windows, and skylights.
$250 for any exterior door ($500 total for all exterior doors).
$300 for residential qualified energy property expenses
Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
The $1,200 credit amount increased by up to $150 for a home energy audit. A home energy audit is an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer's principal residence, which identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit.
The new law eliminates treatment of roofs as creditable after 2022
The new law adds Air sealing insulation as a creditable expense.

Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.

Clean Vehicle Credit – After 2022 and through 2032, this credit replaces the current plug-in electric vehicle credit and makes significant changes.

Transition Rule: A taxpayer who, after December 31, 2021, and before August 16, 2022, purchased, or entered a written binding contract to purchase, a new electric vehicle and placed that vehicle in service on or after the date of enactment, may elect to treat the vehicle as being placed in service before the date of enactment of the Act. This transition rule allows a taxpayer to apply the prior law to the vehicle. This allows a taxpayer to avoid the modified AGI (income), vehicle price, and other restrictions under the new law.

Credit Amount – Is based upon two amounts (certified by the qualified manufacturer):

Critical Minerals – This portion of the credit is $3,750 and is based upon the percentage of the value of the applicable critical minerals contained in the battery that were:

(i) Extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect, or
(ii) Recycled in North America

Is equal to or greater than the applicable percentage (see applicable percentage below).

Battery Component Requirement - This portion of the credit is $3,750 based upon the percentage of the value of the components contained in the battery that is used in the vehicle that were manufactured or assembled in North America is equal to or greater than the applicable percentage (see applicable percentage below).

Applicable Percentage – The applicable percentages for each year are included in the following table:

APPLICABLE PERCENTAGES

Final Assembly Requirement - The Act also requires that final assembly of the vehicle occurs in North America. "Final assembly" means the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether the component parts are permanently installed in or on the vehicle. The final assembly requirement applies to vehicles sold after the date of enactment, August 16, 2022.

Not all Vehicles Will Continue to Qualify – Because of the critical mineral, battery, and final assembly requirements, only some of the currently available vehicles will continue to qualify for the new credit.

Manufacturer Limitation - The 200,000-unit manufacturer limit is eliminated for vehicles sold after December 31, 2022.

Manufacturer's Suggested Retail Price Limitation - No credit is allowed for a vehicle with a manufacturer's suggested retail price more than the following:

MANUFACTURER'S SUGGESTED RETAIL PRICE LIMITATION

MAGI limit - No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the:

Current tax year, or
The preceding tax year

MAGI LIMITATION

MAGI means adjusted gross income increased by any foreign earned income and housing exclusions and excluded income Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico.

New Clean Vehicle Definition –

Minimum battery capacity: 7 kilowatt-hours, up from 4 kilowatt-hours under prior law.
Where the seller of the vehicle furnishes a report to the buyer and the IRS that includes:

o The name and taxpayer identification number of the buyer;

o The vehicle identification number (VIN) of the vehicle, unless, by U.S. Department of Transportation rules, the vehicle is not assigned a VIN;

o The battery capacity of the vehicle;

o Verification that the original use of the vehicle commences with the taxpayer; and

o The maximum Clean Vehicle credit allowable to the buyer with respect to the vehicle.
The term "new clean vehicle" does not include any vehicle placed in service after December 31, 2023, where any of the components contained in the battery of the vehicle were manufactured or assembled by a foreign entity of concern .
The term "new clean vehicle" includes any new qualified fuel cell motor vehicle that also meets the final assembly and report requirements.

Transfer of Credit to The Dealer - A taxpayer on or before the purchase date, can elect to transfer the clean vehicle credit to the dealer who the taxpayer is purchasing the vehicle in return for a reduction in purchase price equal to the credit amount.

A buyer who has elected to transfer the credit for a new clean vehicle to the dealer and has received a payment from the dealer in return but whose MAGI exceeds the applicable limit is required to recapture the amount of the payment on their tax return for the year the vehicle was placed in service.

Credit For Previously Owned Clean Vehicles - A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 and before 2032 is allowed an income tax credit equal to the lesser of:

$4,000 or
30% of the vehicle's sale price.

MAGI limit - No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the:

Current tax year, or
The preceding tax year Exceeds the threshold amount as indicated in the table below.

MAGI LIMITATION

MAGI has the same meaning as for the clean vehicle credit.

Previously Owned Clean Vehicle - A previously owned clean vehicle is a motor vehicle:

Model year of which is at least two years earlier than the calendar year in which the taxpayer acquires it.
Original use of which starts with a person other than the taxpayer,
Acquired in a qualified sale, and
Generally meets the requirements applicable to vehicles eligible for the clean vehicle credit for new vehicles or is a clean fuel-cell vehicle with a gross weight rating of less than 14,000 pounds.

Qualified Sale. A qualified sale is a sale of a motor vehicle:

By a dealer,
For a price of $25,000 or less, and
Which is the first transfer since the Act's enactment to a qualified buyer other than the original buyer of the vehicle.

Qualified Buyer. A qualified buyer is an individual who:

Purchases the vehicle for use and not for resale,
Is not a dependent of another taxpayer*, and
Has not been allowed a credit for a previously owned clean vehicle during the three-year period ending on the sale date.

* Even if they have sufficient income to be required to file. Makes no difference if the parent chooses not to claim the child, since the dependency deduction is still "allowable" to the parent.

Transfer of Credit – Follows rules like Clean Vehicle credit transfer rules for vehicles acquired after 2023. Purchasers of previously owned clean vehicles can elect up to the time of sale to transfer the credit to the selling dealer in exchange for cash, or partial payment or a down payment on the vehicle in an amount equal to the credit otherwise allowable to the buyer.

Credit For Qualified Commercial Clean Vehicles - The Inflation Reduction Act of 2022 adds a general business credit for qualified vehicles acquired and placed in service after December 31, 2022, and before 2033.

Credit Amount - The per vehicle credit is the lesser of:

15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or
The "incremental cost" of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine.

Maximum Credit - The maximum credit per vehicle is:

$7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or
$40,000 for heavier vehicles.

Qualified Commercial Clean Vehicle

Acquired for use or lease by the taxpayer, and not for resale.
Manufactured for use on public streets, roads, and highways, or be "mobile machinery."
Have a battery capacity of not less than 15-kilowatt hours (7-kilowatt hours for vehicles weighing less than 14,000 pounds) and
Charged by an external electricity source.
Qualified commercial fuel cell vehicles are also eligible for the credit.
Must be depreciable property.
Made by qualified manufacturers, who have written agreements with and provide periodic reports to the Treasury, can qualify.

Research Credit - The legislation increases the limitation on the ability of small businesses to claim the research credit against payroll taxes from $250,000 to $500,000.

This information related the Inflation Reduction Act is preliminary and, in some cases, will require further IRS guidance and regulations. Watch for additional detail in future articles. If you have questions regarding any of these issues, please give this office a call.

Aretha Franklin'S Tax Situation: What You Need To Know

Wed, 17 Aug 2022 07:49:11 GMT

If someone were to craft a "Mount Rushmore" featuring the likenesses of some of the most influential musicians of all time, Aretha Franklin would undoubtedly be on it.

Born in 1942, Franklin was more than just another singer or songwriter. She was a brilliant pianist. She penned some of the most influential songs of all time. She became a massive commercial success after signing with Atlantic Records in the 1960s, essentially creating her own genre along the way. The list goes on and on.

Having said that, it's important to note that Franklin passed away in 2018 and when she did, she left some financial troubles behind her that her estate had to take care of. How much did Aretha Franklin owe to the IRS and what eventually became of the situation? The answers to those questions require you to keep a few key things in mind.

Aretha Franklin's Estate Tax Problems: An Overview

When Aretha Franklin passed away a few years ago, the IRS quickly determined that her estate owed almost $8 million in back taxes. All of this further complicated a situation that was already ongoing, where family members were battling it out in court (and in the public eye) to see who was owed what in terms of the assets that the esteemed singer had left behind.

Aretha Franklin left behind four children - all boys - who quickly entered into negotiations with the IRS. After years of jumping through legal hoops, it seems like all parties have reached a conclusion that they are satisfied with. After the estate makes an immediate payment of $800,000 to the IRS, Franklin's sons are allowed to continue to question the amount that they say is owed. So while it does not seem like the situation is well and truly over, it does appear that things are moving in the right direction.

All of this paints a very interesting picture of what happens to celebrities in these types of situations. Since Aretha Franklin died, her estate has been steadily making payments to address a long-term tax bill that was left behind. As of December 2021, it was estimated that the balance was still close to $4.75 million.

Of course, a situation like this one is unique because the estate will continue to generate revenue long after Franklin herself has left us all behind. When you're talking about an average person, someone's ability to generate revenue essentially ends when they pass away. When you're talking about a recording artist like Aretha Franklin, her artistry will give for generations. Companies will continue to put out new compilations of her work, monetizing those songs along the way. People will continue to buy them. Her songs will get sold to streaming services that again generate revenue.

All of this begs the question - how do you stay out of trouble with the IRS if even someone like Aretha Franklin can't? By hiring the right professional to make sure that everything is in order all throughout the year, of course.

At that point, the question becomes - what happens to all of that money moving forward? What percentage of it is allocated to pay off the tax bill that the IRS claims the singer/songwriter owes and what percentage goes to her sons?

If you'd like to find out more information about everything going on with the Aretha Franklin estate and taxes, or if you'd just like to discuss your own situation with an expert in a bit more detail, please don't hesitate to contact our firm today.

What an Economic Slowdown Means for Your Small Business

Tue, 16 Aug 2022 13:14:07 GMT

If you pay attention to the financial news, you’ve likely heard that we may — or may not — be in the midst of a recession. While experts argue over whether or not two consecutive periods of falling gross domestic period necessarily confirm an overall decline in economic activity, small business owners have more pressing questions, like, “How is a recession going to affect my business?” and “What can I do to make sure my business survives?”

What is a recession and how will it impact my business?

Economies swing from periods of expansion to periods of contraction. A recession is a period when consumers stop spending, and this leads to an overall negative impact on some — but not all — businesses. Those that survive and thrive in a recession share certain traits: They generally have adequate cash reserves and access to capital, and they are often private companies that can quickly shift their business strategies without fear of rebellion from shareholders.

What you most need to know about a recession is that it tends to make customers cut their spending, so you need to be prepared to respond in a way that keeps your business available to them, keeps you top of mind, and keeps your quality as high as possible despite reduced profits. It’s a challenge, but it’s not impossible.

Can I make my business recession-proof?

Protecting your business against the worst impacts of recession requires some planning and a commitment to resisting panic. The planning part may feel like it’s too late if we’re already in a recession, but that’s not necessarily true. It certainly helps to have deep cash reserves or access to credit, but even businesses without those advantages can find ways to cut back and make adjustments without changing their commitment to quality and customer service.

Cut back on unnecessary spending – You may feel like your expenses aren’t out of line, but taking the time to review the last few months’ worths of credit card and bank statements tend to reveal areas where fat can be trimmed. Are you spending money on subscriptions or memberships that you don’t really need? Are you paying fees for equipment that you aren’t using anymore, or for support services that you arranged for early in your business’ life that you no longer need? Sometimes expenses are actually habits rather than necessities, and businesses — and individuals too — can usually realize some savings when they conduct a quick self-audit.
Maximize your business expenditures – If your business places regular orders with the same suppliers over and over again, there’s a good chance that you can negotiate an additional discount or start buying in bigger bulk to reduce your costs. A lot of businesses are concerned about cash flow and are more open to bartering or arranging some kind of deal in order to keep a good customer in business.
Reduce your inventory – You don’t want your clients to get a sense that the cupboards are bare, but if you’re in the habit of ordering several months’ worth of supplies, you can quickly cut your expenses by shifting to a three-month strategy. Alternatively, if your suppliers are hesitant about your ordering cutback, try arranging for reduced prices for long-term orders, or locking in your prices to avoid increases.

Avoid making common mistakes

One thing that all small businesses can do when anticipating a recession is to learn from mistakes made by others. Conserving cash may be key, but you don’t want to do so in a way that is going to cost you money or customers in the long run. Eliminating employees is one of the biggest examples of a cost-cutting strategy that can backfire. Not only will your operation run less efficiently if you eliminate key staff, but when the recession inevitably ends you’ll need to replace them – and hiring and training aren’t cheap. If you absolutely cannot keep employees onboard, consider furloughs rather than firings in order to keep the door open to bringing valued personnel back.

Cutting back on marketing expenses is another thing that small businesses often make in the face of economic downturns. History has shown that this is a mistake and that the businesses that survived previous recessions and went on to achieve bigger and better sales numbers were the ones that continued reaching out to customers and driving interest in products or services.

Budgeting is hard in uncertain times, but still vital

Business finances fluctuate all the time, and unless your business has already weathered a recession it is hard to forecast how it will impact your operations. Budgeting and saving are absolutely crucial in the face of a downturn. If you need assistance in weathering an economic storm, contact this office to set up a time to create a working strategy.

Tax Benefits For Memebers Of The Military

Tue, 16 Aug 2022 08:14:12 GMT

Article Highlights:

Service Member Residence or Domicile
Service Member Spouse’s Residence or Domicile
Non-Taxable Allowances
Combat Zone Exclusion
Home Mortgage Interest Deduction
Home Property Tax Deduction
Home Sale Gain Exclusion
Moving Deduction
Death Gratuity Payments
Child Credit
Earned Income Tax Credit
IRA Contributions
Reservist’s Travel Expenses
Qualified Reservist’s Early Retirement Plan Withdrawals
Retired Military Disability Compensation
Extension of Deadlines
Joint Returns
Tax Forgiveness
ROTC Students

Military members benefit from a variety of special tax benefits. These include certain non-taxable allowances, non-taxable combat pay, and a variety of other special tax provisions. Here is a rundown on the most prominent of the tax benefits.

Service Member Residence or Domicile – A frequent question by service members is “What is my state of residence for tax purposes?” since one’s duty station may change multiple times while serving. Luckily, the government passed a law to solve this issue. A service member continues to retain his or her home state of residence for tax purposes, even when required to move to another state under military orders. This also applies to other tax jurisdictions within a state, such as for city, county, and personal property taxes. Thus, a service member will continue to file tax returns for his or her home state and not the state where he or she is stationed.

Service Member Spouse’s Residence or Domicile – Thanks to the Veterans Benefits and Transaction Act of 2018, an individual married to a military member now has more choices. Under the act, a spouse can elect to have the same state of domicile as their service member spouse, even if they didn’t previously have the same domicile. If the non-military spouse doesn’t make that election, they can continue to choose to file in their own domicile state.

Making these choices can significantly impact the amount of state tax the spouse might have to pay. As an example, a spouse of a service member stationed in a high-income-tax state can elect to use the state of residency of the service member whose residence state has no or low state income tax and not be subject to the state taxes where his or her spouse is stationed.

Careful – It is tempting for a service member or their military spouse to declare their state of domicile to be without any state income tax such as Texas, Nevada, Florida, etc. That can get them in hot water if they do so without any connections to the state.

Non-Taxable Allowances – Members of the military benefit from a number of non-taxable allowances including:

Living allowances - Basic allowance for housing (BAH), housing and cost-of-living allowances abroad whether paid by the U.S. Government or by a foreign government and overseas housing allowance.

Family allowances - Certain educational expenses for dependents, emergencies, evacuation to a place of safety and separation.

Death allowances - Burial services, death gratuity payments to eligible survivors, and travel of dependents to burial sites.

Moving allowances – Including for relocation, move-in housing, moving household and personal items, moving trailers or mobile homes, storage, temporary lodging and temporary lodging expenses, and military base realignment and closure benefits.

Travel allowances – Including annual round trips for dependent students, leave between consecutive overseas tours, reassignment in a dependent-restricted status, transportation for military taxpayers and dependents during ship overhaul or inactivation, and per diem. State benefit payments – Any bonus payment made by a state or political subdivision to any member or former member of the U.S. uniformed services, or to his or her dependent, only because of the member's service in a “combat zone,” is generally treated as a “qualified military benefit” excludable from gross income.

Other payments – Defense counseling, disability (including payments received for injuries incurred as a direct result of a terrorist or military action), group term life insurance, professional education, ROTC educational and subsistence allowances, survivor and retirement protection plan premiums, uniform allowances, and uniforms furnished to enlisted personnel.

In-kind military benefits – Including legal assistance benefits, space-available travel on government aircraft, medical/dental care, and commissary/exchange discounts.

Combat Zone Exclusion – A member of the U.S. Armed Forces who serves in a combat zone can exclude certain pay from income. This pay includes active duty pay earned in any month served in a combat zone; imminent danger/hostile fire pay; a reenlistment bonus, if the voluntary extension or reenlistment occurs during a month served in a combat zone; accrued leave pay earned in any month served in a combat zone; awards for suggestions, inventions, or scientific achievements the service member is entitled to because of a submission made in a month served in a combat zone; and student loan repayments attributable to the period of service in a combat zone (provided a full year’s service is performed to earn the repayment).

Any part of a month in a combat zone counts as an entire month. Periods when one is hospitalized as the result of wounds, disease, or injury in a combat zone are also excluded, provided the hospitalization begins within 2 years of combat zone activities. The hospitalization need not be in the combat zone. Generally, the excludable combat pay is not included in the individual’s pay reported on Form W-2.

Commissioned Officers – Commissioned officers may exclude their pay; however, the amount of their exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay received).

Home Mortgage Interest Deduction – Military taxpayers who receive a non-taxable housing allowance and also own a home can deduct the mortgage interest on their home as an itemized deduction, even if they are paid with the non-taxable military housing allowance pay. However, the home mortgage interest is still subject to the general rules for deducting home mortgage interest, meaning through 2025, only home acquisition debt interest is deductible. Home acquisition debt is debt used to acquire, build, or substantially improve a home.

Home Property Tax Deduction – Even though they receive a non-taxable housing allowance, a military taxpayer can still deduct their home’s property taxes as an itemized deduction. However, the the deduction for real property tax and state/local income or sales tax is limited to $10,000 annually for years 2018 through 2025.

Home Sale Gain Exclusion – Most taxpayers can exclude up to $250,000 ($500,000 if filing married joint) of home gain if the home was owned and used as their main home for 2 of the 5 years preceding its sale. However, a military taxpayer may choose to suspend the 5-year test period for ownership and use during any period when the taxpayer (or spouse) serves on qualified official extended duty as a member of the Armed Forces. This means that the 2-year use test may be met even if, because of military service, the taxpayer did not actually live in his or her home for at least the required 2 years during the 5-year period ending on the date of sale.

For this exception to the usual test period, a taxpayer is on qualified official extended duty when at a duty station that is at least 50 miles from his or her main home, or while residing under orders in government housing for more than 90 days or for an indefinite period.

The suspension period cannot last more than 10 years and can be revoked by the taxpayer at any time. The 5-year period cannot be suspended for more than one property at a time.

Example – Sarge bought and moved into a home in 2014 that he lived in as his main home for 2½ years. For the next 6 years, he did not live in the home because he was on qualified official extended duty with the Army. He sold the home for a gain in 2022. To meet the use test, Sarge chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty – he disregards those 6 years. Sarge’s 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period.

Moving Expenses Deduction – The moving expenses deduction for all moves, except for certain members of the Armed Forces, is not allowed for years 2018 through 2025. Military taxpayers may still claim a moving expenses deduction if they are required to move because of a permanent change of station. However, the deduction is limited to the actual cost less any non-taxable moving allowance provided.

A permanent change of station includes (1) a move from home to one’s first post of duty when appointed, reappointed, reinstated, called to active duty, enlisted or inducted; (2) a move from one permanent post of duty to another permanent post of duty at a different duty station, even if the service member separates from the Armed Forces immediately or shortly after the move; and (3) a move from one’s last post of duty to home or to a nearer point in the U.S. in connection with retirement, discharge, resignation, separation under honorable conditions, transfer, relief from active duty, temporary disability retirement, or transfer to a fleet reserve, if the move occurs generally within 1 year of ending active duty or within the period allowed under the Joint Travel Regulations .

Death Gratuity Payments – Military death gratuity payments and amounts received under the service members' group life insurance program are not taxable to eligible survivors. In addition, these amounts may be rolled over to a Roth IRA or Coverdell education savings account without regard to the limits that otherwise apply to other taxpayers.

Child Credit – Excluded combat pay is treated as earned income for purposes of determining the refundable portion of the child credit.

Earned Income Tax Credit (EITC) – A taxpayer may elect to treat combat pay that is otherwise excluded from gross income as earned income for purposes of the EITC. Making this election for EITC purposes may or may not be advantageous. If the taxpayer has earned income below the maximum amount of earned income on which the credit is calculated, including the combat pay will increase the credit amount. On the other hand, if the taxpayer’s earned income is already in the phase-out range, electing to include combat pay as earned income will decrease the amount of credit that can be claimed.

IRA Contributions – For 2022, individuals can contribute up to $6,000 ($7,000 if age 50 or over) to their IRA accounts, subject to phase-out limits for certain higher-income individuals. However, any contribution is limited to the individual’s earned income for the year. For service members, their combat pay, even though it is not taxable, is treated as earned income for purposes of an IRA contribution.

Reservist’s Travel Expenses - Armed Forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct travel expenses as an adjustment to gross income. Thus, this deduction can be taken even by taxpayers using the standard deduction. However, the expenses themselves are subject to certain limitations. Transportation, meals (subject to a 50% limit unless in 2021 or 2022 the meal is provided by a restaurant) and lodging qualify, but the deduction is limited to the amount the federal government pays its employees for travel expenses, i.e., the general federal government per diem rate for lodging, meals and incidental expenses applicable to the locale and the standard mileage rate for car expenses plus parking and ferry fees and tolls.

Qualified Reservists Early Retirement Plan Withdrawals - Qualified reservists are permitted penalty-free withdrawal from IRAs, 401(k)s and other arrangements if ordered or called to active duty.

A “qualified reservist distribution” is any distribution to an individual if the individual was, by reason of his being a member of a “reserve component”, ordered or called to active duty for a period in excess of 179 days, or an indefinite period and the distribution is made during the period beginning on the date of the order or call to active duty, and ending at the close of the active duty period.

Retired Military Disability Compensation – Disability compensation, as distinguished from retirement payments, are tax free and made by the Department of Veterans Affairs. Some misinformation has circulated indicating that the disability is included in the retirement benefits paid by the Defense Finance and Accounting Services. That is not true since the disability payments are made by the Department of Veterans Affairs and those amounts are NOT included on a Form 1099-R issued by the Defense Finance and Accounting Services.

Extension of Deadlines – The time limit for taking care of certain tax matters can be postponed. The deadlines for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS are automatically extended for qualifying members of the military.

Joint Returns – Generally, a joint return must be signed by both spouses. However, when one spouse may not be available due to military duty, a power of attorney may be used to file a joint return.

Tax Forgiveness – When members of the military lose their life in a combat zone or as the result of a terrorist action, their income taxes are forgiven for the year of their death and for any prior year that ends on or after the first day of service in a combat zone.

ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

If you have questions related to these military tax benefits or other military tax issues, please give this office a call.

Best Practices for Establishing an Effective Employee Bonus Pool

Mon, 15 Aug 2022 13:29:29 GMT

If you had to make a list of some of the most valuable resources that businesses have when it comes to attracting and retaining top talent, an employee bonus pool would undoubtedly be right at the top.

Despite the fact that unemployment is on the decline and things are getting "back to normal" in the wake of the COVID-19 pandemic, there's still a labor shortage in just about every industry you can name. Businesses are having a hard time filling available positions and if they do find someone with the appropriate skill set, it's difficult to keep them in the fold permanently before they wind up leaving for greener pastures. Things have gotten to the point where most job seekers say that they look at bonuses with more weight than they do even their starting salary - that's how important of a concept this is.

Thankfully, all hope is not lost. If you're an organizational leader who wants to make sure that your business is remaining as competitive as possible, there are a number of essential things that you'll want to keep in mind.

Establishing an Effective Employee Bonus Pool: Breaking Things Down

By far, the most important step that you should take when it comes to establishing an effective employee bonus pool involves building a budget to get a better idea of how things need to play out before you actually start the process in earnest.

Obviously, we'd all love to be able to promise any new hire the proverbial moon - whatever they're looking for is what we're willing to give them to see that person join the organization. But a certain amount of realism also has to enter the equation. What is the maximum amount you can afford to put into a collective employee bonus pool and how many people does that need to cover? What do you need to offer on a position-by-position basis in order to remain competitive? These are all questions that you need to answer before the start of the process so that you can make better and more informed choices moving forward.

Another best practice that most people should follow when establishing an effective employee bonus pool has less to do with the pool itself and is more about what happens in the weeks and months ahead.

Theoretically, if you're able to find the right person for the right position, that employee will generate enough value for the business to justify their own salary. In a lot of cases, they'll end up saving you money by way of performance gains. Whenever you see one of those situations arise where you've come in on-time and under budget, rather than simply using that excess money to pay out organizational leadership, be sure to put it back into the employee bonus pool.

This serves a few different goals, all at the exact same time. For starters, it incentivizes people to work their hardest because the more money they save, the more they ultimately get by way of bonuses. But in a larger sense, it helps save money on behalf of the business which only goes to represent funds that can then be funneled back into other areas of the organization where it can do the most good.

Finally, one must consider the actual structure of bonuses that are paid out from the pool throughout the year. Obviously, it's not necessarily "fair" to have someone who was hired last week get the exact same bonus as someone who has been with the company for five years or longer. Because of that, consider paying out bonuses at a rate that is based on the percentage of how much someone was paid by way of their salary.

This is a fair distribution model that again A) rewards people who have already put in a significant amount of time and effort to further company goals, and B) incentivizes people who may be more recent hires to put forth the same level of care and dedication in the future. If you are using equity as part of your bonus pool, software like Carta can help you determine market rates for positions across the country.

If you'd like to find out more information about the best practices you should follow when establishing an effective employee bonus pool, or if you just have any additional questions that you'd like to discuss with someone in a bit more detail, please don't delay - contact us today for additional assistance.

Video Tips: Protect Yourself from Charity Scams

Sun, 14 Aug 2022 13:52:11 GMT

Donating to a charity is a great way to give back to the community and help those in need. However, it's important to be aware of potential scams before giving your hard-earned money to a charitable organization. By taking some simple precautions presented in this video, you can ensure that your donation goes to a worthy cause.

Take Tax Advantage of a Low-Income Year

Thu, 11 Aug 2022 14:26:38 GMT

Article Highlights:

Exercise Stock Options
Convert a Traditional IRA to a Roth IRA
Maximize IRA Distributions
Sell Appreciated Stock
Delay Business Expenditures
Release Dependency
Delay Personal Deductible Expenditures

People generally assume that tax planning only applies to individuals with the big bucks. But think again, as some tax moves benefit lower-income taxpayers and those who are having a lower-than-normal income year. So, if 2022 is not producing a lot of income for you, or your income will be substantially lower this year than it usually is, you may be surprised to know that you actually might be able to take advantage of some tax-planning opportunities. Implementing some of these ideas will require action on your part before the close of the year. Here are some possibilities to consider.

Exercise Stock Options – If you are an employee of a corporation, the company may offer you the option to purchase shares of it at a fixed price at some future date, so that you can benefit from your commitment to the company’s success by sharing in the company’s growth through the increase in stock value. If those options are non-qualified, then you must report the difference between your preferential option price and the stock’s value when you exercise the option as income. This income will be included in your wages on your year-end W-2 form. In a low-income year, this may give you the chance to exercise some or all of your options without any or with minimal income tax liability.

Convert a Traditional IRA to a Roth IRA – Roth IRA accounts provide the benefits of tax-free accumulation and, once you reach retirement age, tax-free distributions. This is why many taxpayers convert their traditional IRA account to a Roth IRA. However, to do so, you must generally pay tax on the converted amount. Many taxpayers overlook some great opportunities to make conversions, such as in years when their income is unusually low or a year when their income might even be negative due to abnormal deductions or business losses. The current standard deduction is higher than ever before, which may offer a taxpayer the opportunity to convert some or all their traditional IRA to a Roth IRA without any conversion tax. If you are in any of these circumstances this year, you should consider converting some or all of your traditional IRA to a Roth IRA before the end of the year.

Maximize IRA Distributions – If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawals with respect to your tax bracket. With the robust standard deduction and a lower-than-normal income, it may be tax-effective to actually withdraw more than the minimum required by law. In fact, you may even be able to take a distribution from your IRA with no tax liability. Presented with this situation, you would certainly want to take advantage of it before year’s end, even if you do not need the funds, which you could bank for the future.

Sell Appreciated Stock – Income tax rates increase as a taxpayer’s taxable income increases. The regular tax rates start at 10% and then increase in step amounts as one’s taxable income increases, reaching a maximum rate of 37%. However, long-term capital gains are given special treatment and only have three tax rates: 0%, 15%, and 20%. The 0% tax rate applies for taxpayers with taxable incomes up to the following amounts for 2022:

TAXABLE INCOME RANGE FOR THE 0% LONG-TERM CAPITAL GAIN RATE (2022)

This provides a unique opportunity to sell investments that will produce long-term capital gains (investments held for at least a year and a day) and benefit from the 0% long-term capital gain rates. Thus, if you have stocks that have appreciated in value, you may be able to sell them before the end of the year and pay no tax on the gain. The tops of the 0% ranges are adjusted each year for inflation.

Delay Business Expenditures – If you are self-employed, you may find it beneficial to delay business-related purchases until next year to avoid reducing your current yearly income any further and save the deduction until next year, when the items are purchased.

Release Dependency – If you are the custodial parent of a child and receive no benefit from the nonrefundable child tax credit, you may want to consider releasing the dependency of the child to the non-custodial parent for the current year, allowing the non-custodial parent to claim the $2,000 child tax credit. Doing so will not affect your ability to claim the child care credit or the refundable earned income tax credit. However, if the child is attending college, then any tuition credit will go to the one claiming the child. The dependency is released on IRS Form 8332, but care should be taken when completing the form to avoid unintentionally releasing the dependency for more than one year.

Delay Personal Deductible Expenditures – If you itemize your deductions and the deductions will provide no or minimal tax benefit this year, you might consider delaying paying that medical expense, real property tax bill, or state estimated tax payment, or making a charitable contribution, until after the first of the year. Many taxpayers find it beneficial to “bunch” deductions in one year and then claim the standard deduction in the alternate year. For example, by paying two years of church tithing or pledges to a charitable organization all in one year, deducting the total in that year, and then contributing nothing and taking the standard deduction the next year, the combined tax for the two years may be less than if a contribution was made in each year. However, before postponing payments until next year, make sure that no penalties will be associated with delaying your tax-obligation payments.

If you have questions about employing any of these strategies or wish to make a tax-planning appointment, please give this office a call.

Not All Interest Is Deductible For Taxes

Tue, 09 Aug 2022 14:39:56 GMT

Article Highlights:

Interest Categories
Category Deductibility
Interest Tracing Rules

A frequent question that arises when borrowing money is whether or not the interest will be tax deductible. That can be a complicated question, and unfortunately not all interest an individual pays is deductible. The rules for deducting interest vary, depending on whether the loan proceeds are used for personal, investment, or business activities. Interest expense can fall into any of the following categories:

Personal interest – is not deductible. Typically this includes interest from personal credit card debt, personal car loan interest, home appliance purchases, etc.
Investment interest – this is interest paid on debt incurred to purchase investments such as land, stocks, mutual funds, etc. However, interest on debt to acquire or carry tax-free investments is not deductible at all. The annual investment interest deduction is limited to “net investment income,” which is the total taxable investment income reduced by investment expenses (other than expenses related to investments that produce non-taxable income). The investment interest deduction is only allowed to taxpayers who itemize their deductions.
Home mortgage interest – includes the interest on debt to purchase, construct or substantially improve a taxpayer’s principal home or second home. This type of loan is referred to as acquisition debt. For the interest to be deductible the debt must be secured by the home purchased, constructed, or substantially improved. A secured debt is one in which the taxpayer signs a mortgage, deed of trust, or land contract that makes their ownership in a qualified home security for payment of the debt; provides, in case of default, that the home could satisfy the debt; and is recorded under any state or local law that applies. In other words, if the taxpayer can't pay the debt, their home can then serve as payment to the lender to satisfy the debt.

For Debt Incurred Before 12/16/2017 - the debt for which the interest is deductible is limited to $1,000,000 ($500,000 for married separate).

For Debt Incurred After 12/15/2017 - the debt for which the interest is deductible is limited to $750,000 ($375,000 for married separate).

Passive activity interest – includes interest on debt that's for business or income-producing activities in which the taxpayer doesn’t “materially participate” and is generally deductible only if income from passive activities exceeds expenses from those activities. The most common passive activities are probably real estate rentals. For rental real estate activities, there is a special passive loss allowance of up to $25,000 for taxpayers who are active but not necessarily material participants in the rental. The $25,000 phases out for taxpayers with adjusted gross income between $100,000 and $150,000.
Trade or business interest – includes interest on debts that are for activities in which a taxpayer materially participates. This type of interest can generally be deducted in full as a business expense.

Because of the variety of limits imposed on interest deductions, the IRS provides special rules to allocate interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds. Thus interest expense on a debt is allocated in the same manner as the allocation of the debt to which the interest expense relates. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, i.e., “follow the money.”

These tracing rules, combined with the restrictions associated with the various categories of interest, can create some unexpected results. Here are some examples:

Example 1: A taxpayer takes out a loan secured by his rental property and uses the proceeds to refinance the rental loan and buy a car for personal use. The taxpayer must allocate interest expense on the loan between rental interest and personal interest for the purchase of the car, and even though the loan is secured by the business property, the personal loan interest portion is not deductible.

Example 2: The taxpayer borrows $50,000 secured by his home to be used in his consulting business. He deposits the $50,000 into a checking account he only uses for his business. Since he can trace the use of the funds to his business, he can deduct the interest as a business expense.

Example 3: The taxpayer owns a rental property free and clear and wants to purchase a home to use as his personal residence. He obtains a loan on the rental to purchase the home. Under the tracing rules, the taxpayer must trace the use of the funds to their use, and as the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest, the debt must be secured by the home, which it is not. Result: the interest is not deductible anywhere.

As you can see, it is very important to plan your financing moves carefully, especially when equity in one asset is being used to acquire another. Please call this office for assistance in applying the various interest limitations and tracing rules to ensure you don’t inadvertently get some unexpected results.

Video Tips: An Overview of Tax Provisions related to Business Travel

Sun, 07 Aug 2022 14:43:10 GMT

As a business owner or self-employed individual, you can take advantage of tax deductions for your business-related travel expenses, including airfare, lodging, transportation, and meals. This can be a great way to save money on your taxes, but it is important to keep good records of your expenses and make sure that they meet the requirements by law. This video provides a quick overview of the business travel tax deduction and how it can benefit you.

Even if You’re Not Required to File a Tax Return, You May Be Missing Out if You Don’t.

Thu, 04 Aug 2022 11:54:53 GMT

Article Highlights:

Tax Filing Thresholds
Withholding
2021 Recovery Rebate Credit
Earned Income Tax Credit (EITC)
Child Tax Credit or Credit for Other Dependents
Education Credits

Some people may choose not to file a tax return because they didn't earn enough money to be required to file, but these folks may miss out getting a refund if they don’t file. Although there are some exceptions, generally individuals are not required to file a tax return if their income for the year is below the filing threshold for their filing status as shown in the following table.

2021 TAX FILING THRESHOLDS FOR MOST INDIVIDUALS

Many social benefits provided by the government for lower income individuals are distributed through the tax return, often in the form of a tax credit, and a return must be filed to claim those benefits, many of which can be substantial. Some of these credits are partially or fully refundable even if an individual has no tax liability. So, even though you might not be required to file a return you may be missing out on a tax refund if you don’t file one. Here are some examples:

Withholding – If you are not required to file a tax return but had income taxes withheld from your W-2 wages, Social Security benefits, retirement income, or investment income, or you made estimated tax payments, you are entitled to have that withholding or estimate payments refunded. However, you must file a tax return to recover the withholding or tax payments.

2021 Recovery Rebate Credit – Individuals who didn't qualify for a third Economic Impact Payment or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit . However, a 2021 return will need to be filed, even if not otherwise required to file a tax return. The credit will reduce any tax owed for 2021 or be included in the tax refund.

Earned Income Tax Credit (EITC) - A working individual who earned $57,414 or less in 2021 can receive the EITC as a tax refund. For 2021 the amount of the earned income credit ranges from $1,502 to $6,728 depending on your filing status and how many, if any, children you claim on your tax return. Those who did not file a return for tax year 2020 or 2021 or who did not claim the earned income tax credit on their 2020 or 2021 return because they had no earned income in those years may file an original or amended return to claim the credit using their 2019 earned income if they are otherwise eligible to do so.

Child Tax Credit Or Credit For Other Dependents – individuals can claim the child tax credit for 2021 if they have a qualifying child under the age of 18 and meet other qualifications. Other taxpayers may be eligible for the credit for other dependents. This includes people who have:

Dependents who are age 18 or older.
Dependents who have individual taxpayer identification numbers instead of a Social Security number.
Dependent parents or other qualifying relatives whom the taxpayer supports.
Dependents living with the taxpayer who aren't related to the taxpayer.

Education Credits – There are two higher education credits that can reduce the amount of tax someone owes on their tax return. One is the American opportunity tax credit and the other is the lifetime learning credit . The taxpayer, their spouse or their dependent must have been a student enrolled at least half time for one academic period and have paid college or university education expenses to qualify. The taxpayer may qualify for one of these credits even if they don't owe any taxes.

If you are not required to file, and didn’t, you can contact this office to determine if any benefit can be gained by filing a 2021 tax return. Even if you are required to file and didn’t, this office can help you meet your filing requirements and take advantage of the many benefits available.

What Is a Required Minimum Distribution?

Tue, 02 Aug 2022 12:59:58 GMT

Article Highlights:

Required Minimum Distributions
When the Distributions Must Begin
RMD Distribution Tables
Figuring the Amount of the Distribution
Beneficiary Distribution Rules
Surviving Spouse
Eligible Designated Beneficiaries
Account Owner’s Minor Child
Other Beneficiaries
Ten Year Rule
Pending Legislation

Required minimum distributions (RMDs) are required distributions from qualified retirement plans. RMDs are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs.The tax code does not allowtaxpayers to keep funds in their qualified retirement plans indefinitely. Eventually, assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, he or she may have to pay a 50% penalty on the amount that is not distributed. (Note that distributions are not required to be taken from Roth IRAs while the account owner is alive.)

Generally, RMDs begin in the year that the retirement plan owner attains the age of 72. The first year’s distribution can be delayed to no later than April 1 of the following year.However, delaying the first distribution means taking two distributions in the following year: one for the age-72year and one for the next year. If an IRA owner dies after reaching age72but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date. A person who turned72in a previous year is required to take the minimum distribution no later than December 31 of each year. The method for determining the minimum amount is explained below.

Even though the tax code mandates minimum distributions after reaching age 72, there is no maximum limit on distributions, and the retirement plan owner can withdraw as much as he or she wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

The required withdrawal amount for a given year is equal to the value of the retirement account on December 31 of the prior year divided by the distribution period from a table developed by the IRS. For individual's whose spouse is not the sole designated beneficiary, or, the individual's spouse is the sole designated beneficiary but is not more than 10 years younger than the individual, the Uniform Lifetime Table is used.

UNIFORM LIFETIME TABLE – EFFECTIVE 2022

Retirement plan owners must calculate the RMD amount for each qualified retirement account separately. However, people who have more than one retirement account of the same type don’t have to take a separate RMD for each. They can aggregate and withdraw the entire amount from just one retirement plan of the same type or withdraw a portion from each plan to satisfy their RMD. So, for example, a distribution from a 401(k) plan won’t satisfy the distribution requirement from an IRA. Similarly, a Roth IRA distribution won’t count toward the RMD for a traditional IRA.

Two tables are not illustrated in this article because of their size: the Joint and Last Survivor Table, which is used to determine RMDs when the sole beneficiary is a spouse who is more than 10 years younger than the plan owner; and the Single Life Table, which is used for certain beneficiary RMD determinations. For table values that are not illustrated above, please call this office.

Example: An IRA account owner is age 75 in this tax year, and the value of his only IRA account was $120,000 on December 31 of last year. His 73-year-old wife is the sole beneficiary of the IRA. From the uniform lifetime table, we determine the owner’s distribution period to be 24.6. Thus, his RMD for the current year is $4,878 ($120,000/24.6). That amount must be withdrawn by no later than December 31 of the current year.

If, in the preceding example, the taxpayer did not withdraw the$4,878, he would be subject to a 50% penalty (additional tax) of $2,439 ($4,878 x 50%). Under certain circumstances, the IRS will waive the penalty if the taxpayer demonstrates reasonable cause and makes the withdrawal soon after discovering the shortfall in the distribution. However, the hassle and extra paperwork involved in asking the IRS to waive the penalty makes avoiding it highly desirable; to do so, always take the correct distribution in a timely manner. Some states also penalize under-distributions.

Even though a qualified plan owner whose total income is less than the return filing threshold is not required to file a tax return, he or she is still subject to the RMD rules and can thus be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.

BENEFICIARY REQUIRED DISTRIBUTIONS

There are special distribution requirements that apply to beneficiaries which they may be unaware of and that are often misunderstood. Not adhering to the beneficiary distribution requirements can lead to significant complications and penalties.

These beneficiary distributions include special rules for surviving spouse beneficiaries and another set of rules for others. These rules can be complex, and the following is a brief overview. You are cautioned to contact this office to determine how these rules apply to your specific situation. For simplicity, only IRAs are mentioned in the following explanations, but the provisions also apply to qualified retirement plans, such as 401(k)s.

Surviving Spouse – A survivingspouse beneficiary generally has the following options:

Treat their deceased spouse’s IRA as their own IRA by designating themself as the account owner.
Treat it as their own by rolling it over into their own IRA, or to the extent it is taxable, into a:
a. Qualified employer plan,
b. Qualified employee annuity plan (section 403(a) plan),
c. Tax-sheltered annuity plan (section 403(b) plan),
d. Deferred compensation plan of a state or local government (section 457 plan); or
Treat themself as the beneficiary rather than treating the IRA as their own.

Eligible Designated Beneficiaries - These beneficiaries are not subject to the rule (explained below) requiring the account be totally distributed in 10 years (except as noted) and may take lifetime distributions or a lump sum distribution. In addition to a surviving spouse, this category includes:

An individual who is not more than 10 years younger than the account owner (typically a sibling of the decedent but could be someone else).
Disabled or chronically ill individual:
A safe harbor for being considered disabled for this purpose is if the individual is determined to be disabled by the Social Security Administration.
To be eligible the individual must provide to the plan administrator proper documentation of their condition by October 31 of the year following the account owner’s death.
Account Owner’s Minor Child – The IRS has proposed regulations that specify that a minor child is one under the age of 21. Special rules apply to minor children of the account owner (would not apply to a grandchild):
Annual payments, using the single life ables, must be taken until the child reaches age 21.
Once reaching age 21, the child is then subject to the 10-year rule for the balance of the account.
Of course, the beneficiary can always take a lump sum distribution.

Other Beneficiaries – Can take a lump sum distribution or:

Beneficiaries more than 10 years younger than the decedent are subject to the 10-year rule.
Beneficiaries NOT more than 10 years younger than the decedent may take a lifetime payout.

Ten-Year Rule – While it’s true that the account must be depleted by the end of the year that includes the 10th anniversary of the account owner’s death, if the account owner died on or after their required beginning date (RBD), then the beneficiary must ALSO take annual distributions based their life expectancy and then distribute the balance in the 10thyear.

PENDING LEGISLATION

There is legislation pending in Congress that would increase the required beginning date for RMDs. A bill in the House of Representatives would change the RBD from the current age 72 to 73 in 2023, 74 in 2030 and 75 in 2033. A Senate bill would change the RBD from 72 to 75, but not until calendar year 2032.

Please contact this office for assistance determining your RMD requirements and avoid potential penalties for not complying with those requirements.

Video Tips: Which Kind of Interest Is Tax Deductible?

Sun, 31 Jul 2022 13:10:03 GMT

When it comes to deducting loan interest on your taxes, there are a few things you need to keep in mind. First, only interest on certain types of loans is deductible. Second, you can only deduct the interest if you itemize your deductions. And finally, there is a limit on how much interest you can deduct. By being prepared and knowing what to expect, you can make sure that you get the most out of your tax deductions.

Portability of Unused Estate Tax Exclusion

Thu, 28 Jul 2022 13:18:52 GMT

Article Highlights:

Estate Tax
Lifetime Exemption
Surviving Spouse
Portability Election
Financial Drawback
Election Considerations
Portability Extension

When an individual dies, the value of that individual’s estate is subject to estate taxation, which is currently 40% of the individual’s taxable estate. However, there is a lifetime exclusion (exemption) to the estate tax, which for 2022 is $12.06 million. The lifetime exclusion can also be used to offset taxable gifts – those that exceed the annual gift tax exclusion. This means for someone dying in 2022 who hasn’t previously dipped into their lifetime exclusion to offset gift tax, the first $12.06 million of the individual’s estate is exempt from estate tax and passes tax-free to the individual’s beneficiaries. This lifetime exclusion amount is annually adjusted for inflation and is also subject to the whims of Congress. The table below illustrates the exclusion amounts for recent years.

Lifetime Estate Tax Exclusion

In the case of married taxpayers, each spouse has a separate lifetime exclusion equal to the $12.06 million (for 2022).

Example – Looking at a simplistic situation, let’s say a married couple, Ben and Sylvia, have a joint estate valued at $15 million in 2020 when Ben passed away. He had not made any taxable gifts during his lifetime. Ben’s estate subject to estate tax was $7.5 million (half of the $15 million). In 2020, the estate and gift tax exemption amount was $11.58 million; thus Ben’s estate subject to tax is zero ($7.5 million less $11.58 million). Sylvia is Ben’s sole beneficiary, so she inherits his $7.5 million estate, which combined with her $7.5 million brings her estate total to $15 million (and for this example doesn’t increase or decrease over the coming years). Sylvia passes away in 2022 when the estate tax exemption is $12.06 million. Sylvia’s taxable estate is $2.94 million ($15 million less $12.06 million), resulting in an estate tax of $1,121,800 (based on the estate tax rate schedule which is $345,800 on the first $1 million and 40% of the balance).

However, married taxpayers have a special benefit that allows a surviving spouse to make what is called a portability election. The portability election essentially allows the surviving spouse to add the deceased spouse’s unused estate tax exclusion to their own. During the surviving spouse’s remaining lifetime, the exclusion can be used to offset taxable gifts and whatever isn’t used that way is available to reduce the surviving spouse’s estate tax upon his or her death.

Example – Using the previous example, when Ben passed in 2020, the estate tax exclusion was $11.58 million, and his estate was $7.5 million. Thus, his unused estate tax exclusion was $4.08 million ($11.58 million – $7.5 million). Sylvia made no taxable gifts since Ben’s death. Had the portability election been made, which required filing an estate tax return for Ben’s estate, Sylvia’s estate tax exclusion in 2022 would have been $16.14 million ($4.08 million + $12.06 million). Thus, none of Sylvia’s $15 million estate would have been taxed since the exclusion of $16.14 million exceeded the value of her estate. The resulting tax savings is $1,121,800.

However, there is a significant financial drawback related to making the portability election. Even though filing an estate tax return for the first spouse to die might not be required because the estate’s value is less than the exclusion amount, to make the portability election, filing an estate tax return, IRS Form 706, is required. An estate tax return is lengthy, complicated, and costly to have prepared.

This, tied to the fact that the preponderance of surviving spouses’ estates will be less than the lifetime exclusion and they will probably see no benefit from electing carryover of their deceased spouse’s unused exclusion, most surviving spouses make the decision not to go to the expense of filing the Form 706.

However, there are factors that must be carefully considered before making that the decision.

As discussed in the prior examples the surviving spouse will have inherited the deceased spouse’s estate assets, thus increasing the value of the surviving spouse’s estate.
Inflation can cause the value of the surviving spouse’s estate to substantially increase depending upon the number of years the surviving spouse lives after the death of the deceased spouse, the type of assets inherited and how they are invested, the surviving spouse’s expenses, etc.
Then there is the potential that Congress could actually reduce the lifetime exclusion. There has been proposed legislation in the past that would have reduced the exemption to as little as $3.5 million.
There is the possibility of the surviving spouse receiving an inheritance from a relative or friend.
The possibility of hitting the lotto big.

The list goes on, and all possibilities must be considered before making the decision to incur the expense of making the election or not.

Should the decision be made not to file the portability election, the deceased spouse’s estate executor can expect the tax preparer to request a signed statement that preparation of a Form 706 for the deceased spouse’s estate and electing to claim the deceased spouse’s unused exclusion are declined, in case that decision might be questioned in the future by the surviving spouse’s beneficiaries.

Extension to File for Portability – The IRS recently issued Revenue Procedure 2022-32 that provides a liberal extension of time for filing Form 706 exclusively for the purpose of making the portability election, does not require a user fee, and should be used in lieu of the letter ruling process that was previously in effect. Under this simplified procedure, the portability election may be made if a complete and properly prepared Form 706 is filed on or before the fifth anniversary of the decedent's death.

The simplified method is only available to estates that are not required to file an estate tax return based on the value of the gross estate decedent’s date of death must be after Dec. 31, 2010, and the decedent must have been a U.S. citizen or resident on their date of death and have a surviving spouse.

All of this can be quite complex, and you are strongly urged to contact this office for assistance.

Will Your Planned Retirement Income Be Enough after Taxes?

Tue, 26 Jul 2022 13:30:31 GMT

Article Highlights:

States With No Income Tax
Social Security Benefits
Roth IRA Retirement Account
Traditional IRA Retirement Account
Spousal IRA
Back-Door Roth IRA
Saver’s Credit
Employer Pensions
Employee Funded Retirement Plans
Health Savings Accounts
Brokerage Accounts
Municipal Bonds Investments
Home Equity & Gain Exclusion
Reverse Mortgage
Whole Life Insurance Cash Value

That is an important question because the actual money you have to spend when you retire depends upon the after-tax sources of your retirement income. Thus it is important to understand how the various retirement vehicles are taxed. There is significant diversity in taxation since a retiree must consider both Federal and state taxes on retirement income. Of all the states one might consider retiring to, there are eight that have no state income tax. These are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. However, to make up for no revenue from individual income taxes these states may be funded by other types of taxes, such as property taxes, sales taxes, or excise taxes.

Social Security Benefits – Social Security is probably the leading source of retirement for most retirees, and determining the federal taxation can be somewhat complicated and the IRS provides a worksheet . Without using the worksheet we know that no more the 85% of Social Security benefits are subject to federal taxation and in many lower income situations none of the Social Security benefits are taxable. The actual calculation involves adding your other income to half of your annual Social Security benefit. If the amount is less than $32,000 for married tax filers or less than $25,000 for single filers in 2022, you will avoid federal taxes on your benefits. However, those filing Married Separate will find that 85% of their Social Security benefits are always taxable.

State Tax - Besides the states that have no state tax, there 30 that do not tax Social Security benefits, The balance, VT, CT, RI, WV, MO, MN, ND, NE, KS, CO, UT, NM, and MT, tax Social Security benefits based on factors such as age and income or a modified amount. See the Tax Foundation Map .

Roth IRA Retirement Account – Roth IRA contributions are limited to the lesser of earned income or the annual limit which is $6,000 ($7,000 if age 50 or over). With a Roth IRA, a taxpayer gets no tax deduction when contributions are made. However, what the taxpayer gets is tax-free accumulation, and after age 59-½, all distributions are tax-free, including the account earnings, provided the 5-year holding period has been met. Since the earnings are also tax free once the age and holding period requirements are satisfied, the sooner an individual begins making contributions, the greater the benefits at retirement. However, contributions to Roth IRA are restricted for higher income taxpayers.

Traditional IRA Retirement Account – Like Roth IRA contributions, traditional IRA contributions are limited to the lesser of earned income or the annual limit which is $6,000 ($7,000 if age 50 or over). Unlike Roth IRAs, generally contributions are deductible in the year of the contribution. Thus future distributions are fully taxable including the earnings. Where an individual also has a qualified retirement plan, the deductibility is phased out for those with higher incomes. However, they can still make non-deductible contributions, in which case a prorated amount of the distributions will be nontaxable. In addition, individuals can elect to make non-deductible contributions which may be appropriate when an individual intends to subsequently convert the traditional IRA to a Roth IRA as discussed next.

Spousal IRA - Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, if their spouse has adequate compensation. The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse.

Example: Tony is employed, and his W-2 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limit for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $6,000 to an IRA.

Back-Door Roth IRA - Where a high-income individual would like to contribute to a Roth IRA but cannot because of the high-income limitations, there is a work-around, commonly referred to as a back-door Roth IRA, that will allow funding of a Roth IRA for some individuals. Here is how a back-door Roth IRA works:

First, an individual contributes to a traditional IRA. For higher-income taxpayers who participate in an employer-sponsored retirement plan, a traditional IRA is allowed but is not deductible. Even if all or some portion is deductible, the contribution can be designated as not deductible.
Then, since the law allows an individual to convert a traditional IRA to a Roth IRA without any income limitations, the individual can convert the non-deductible Traditional IRA to a Roth IRA. Since the Traditional IRA was non-deductible, the only tax related to the conversion would be on any appreciation in value of the Traditional IRA before the conversion is completed.

Potential Pitfall – There is a potential pitfall to the back-door Roth IRA that is often overlooked by investment counselors and taxpayers alike that could result in an unexpected taxable event upon conversion. For distribution or conversion purposes, all IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable.

This may or not may affect the decision to use the back-door Roth IRA method but does need to be considered prior to making the conversion.

Saver’s Credit - Low- and moderate-income workers can take advantage of a special tax credit that helps them save for retirement and earn a special tax credit. This credit helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees.

Employer Pensions – Generally, since employer pension plans are fully funded by the employer, pension payments will be fully taxable.

Employee Funded Retirement Plans – These include plans such as 401(k) plans, 403(b) plans, self-employed plans, and SEP IRAs. Since these plans are funded with pre-tax dollars the individual receives a current tax deduction (income deferral); thus, the income and accumulated earnings will be taxable when withdrawn for retirement, after reaching age 59½ or later.

Health Savings Accounts (HSA) - Although the tax code refers to these plans as “health” savings accounts, an HSA can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement plan options, an HSA provides another resource for retirement savings—one that isn’t limited by income restrictions in the way that IRA contributions are.

Since there is no requirement that the funds be used to pay medical expenses, a taxpayer can pay medical expenses with other funds, allowing the HSA to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses. Unlike traditional IRAs, no minimum distributions are required from HSAs at any specific age.

Withdrawals from an HSA that aren’t used for medical expenses are taxable and subject to a 20% penalty, with one exception: an individual age 65 or older will pay income tax on non-medical related distributions from their HSA but won’t owe a penalty for using the funds for other than medical expenses.

Example: Henry, age 70, has an HSA account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is both tax- and penalty-free. If Henry had been 64 years old or younger, he’d be taxed on the $6,000 and pay a penalty of $1,200 (20% of $6,000).

Brokerage Accounts – Some individuals invest in stocks and mutual funds for their future retirement. These investments, if held more than a year, will produce long-term gains or losses. Long-term gains are taxed at zero, 15% or 20% depending on the individual’s total income for the year. However, investments held for less than a year will be taxed as ordinary income (taxed at the individual’s regular tax rate, which could be as high as 37%). In addition, a surtax may apply on the individual’s investment income. It is 3.8% of the lesser of the taxpayer’s net investment income or the excess of their modified adjusted gross income over $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others.

Bond Investments – Those who are approaching retirement or have already retired may wish to switch their retirement investments into less uncertain investments since they may not have the longevity to stay the course for a recovery. Bonds provide a safer alternative. Generally, income from municipal bonds is exempt from taxation for federal purposes. In addition, interest earned from municipal bonds issued by an individual’s home state is also exempt from state income taxes.

Home Equity – Provided a retiree has not used up their home equity, that equity can provide a source of retirement income by selling the home and taking advantage of the home gain exclusion of $500,000 for married couples ($250,000 for others). They can do this by downsizing or selling and renting. To qualify for the exclusion the individual must have owned and lived in the home for at least two out of the last five years before the sale. For married taxpayers filing jointly, both spouses must have used the home as their main residence for two of the fives years before the sale, while only one spouse need be the owner for two of the five years.

Reverse Mortgage – As an alternative to selling the home, homeowners aged 62 and older can stay in their home while converting the home equity via a reverse mortgage. With a reverse mortgage the lender pays the homeowner rather than the homeowner making payments. In addition, since the payments constitute home equity they are not taxable.

Whole Life Insurance Cash Value – Cash value accumulated in an insurance policy can also provide a source of income during retirement. The income will be tax-free up to the amount that was paid into the policy.

For some individuals there may be other available sources of retirement income. Please call this office for assistance in your retirement planning.

Video Tips: Tax Breaks for People with Disabilities

Sun, 24 Jul 2022 13:37:13 GMT

Tax time can be stressful for any family, but it can be especially challenging for families with disabilities. In addition to the usual paperwork and deadlines, there are a number of tax credits and deductions that can be very helpful for families dealing with medical expenses and other costs related to disability. Taking advantage of these tax breaks can bring tremendous help to people with disabilities and their families.

How QuickBooks Online Tracks Products and Services

Thu, 21 Jul 2022 14:49:35 GMT

Most small businesses maintain a changing inventory of multiple products. Even if you sell one-of-a-kind goods, you need to know what you’ve sold and what’s available. And if your company sells services, you also have to keep track of what you’re able to offer customers.

QuickBooks Online can meet these needs. It allows you to create detailed records for both products and services. If you carry inventory, it can make sure that you always know what’s available to sell. When you enter sales and purchase transactions, the site draws on the records you’ve created to help you complete invoices, sales receipts, purchase orders, etc., without having to leave the form you’re working on.

Creating your records initially can take some time. And your products and services require regular monitoring and maintenance. But if you’re conscientious about these tasks, you’re not likely to run short on inventory or have too much money tied up in products that aren’t selling fast enough.

Preparing QuickBooks Online

Before you begin creating records and tracking inventory, you need to make sure that QuickBooks Online is set up correctly. Click the gear icon in the upper right. Under Your Company , click Account and settings . Click the Sales tab in the toolbar. You’ll see the Products and services section near the middle of the screen.

Make sure you’ve turned on the Products and services features you’re going to need.

Toggle the slider buttons on and off by clicking on them, and be sure to save your changes when you’re done. One option allows you to turn on price rules. This is still classified as a beta feature, but it’s live on the site. It’s also quite complicated to set up and can create confusion for your customers and revenue loss for you if it’s not done correctly. Let us help if you want to use this tool.

Creating Your Product and Service Records

Your first task, of course, is to build your product and service records. Hover your mouse over Sales in the left vertical toolbar on the home page and select Products and Services. The screen that opens is your home base for dealing with inventory and services. Eventually, it will contain a detailed table containing information about both. Two large buttons at the top of the page warn you when you have Low Stock or you’re Out of Stock.

Click New in the upper right corner. A vertical panel slides out from the right displaying your four options for Product/Service information . They are:

Inventory. If you buy and/or sell products whose quantities you must track, these items are considered inventory.
Non-inventory. You may have products that you buy and/or sell, but you don’t need to track the amount you have in stock. These are considered non-inventory.
Service. These are, well, services that you provide to customers, like landscaping or web design. You might sell these by the hour or project, for example.
Bundle. You might call these assemblies. Bundles are multiple products and/or services that you sell as a package for one price.

Click on Inventory for this example. Here is a partial view of the pane you’ll see:

You can track your inventory levels and reorder points when you create inventory product records in QuickBooks Online.

To create a product or service record, just fill in the blanks on the form and save it. Some fields are optional. In fact, only three are required: Name, Initial quantity on hand, and As of date. Of course, your inventory tracking and the use of product and service records in transactions and reports will be much more effective if you complete as many of the fields as possible. We recommend that you at least provide answers in some additional fields (some of which aren’t shown here), including:

Category (will be useful in reports, for example)
Reorder point (will keep you from running out of items)
Inventory asset account (you can leave the default, Inventory Asset)
Description (for sales forms)
Sales price/rate (what the customer will be charged)
Description (for purchase forms)
Cost (what you pay to buy it)
Expense account (often Cost of Good Sold, but you can ask us to be sure)

Please let us know if you have other questions we can answer that would help you use QuickBooks more effectively.

Tax Benefits for People with Disabilities

Thu, 21 Jul 2022 13:53:20 GMT

Article Highlights:

ABLE Accounts
Disabled Spouse or Dependent Care Credit
Medical Deductions
Home Modifications
Special Schooling
Nursing Services
Impairment-related Work Expenses

Individuals with disabilities, as well as parents of disabled children, are eligible for several income tax benefits. This article explains some of these tax breaks.

ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life.

The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contracts with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $16,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses.

Through 2025, a tax provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:

The beneficiary’s taxable compensation for the year, or
The prior year’s inflation-adjusted poverty level (so using the 2021 poverty level amounts for a one-person household, the 2022 ABLE beneficiary’s contribution could be up to $12,880. The equivalent amount for residents of Hawaii is $14,820 and $16,090 for Alaska.

However, the extra contribution isn’t allowed if the beneficiary’s employer contributes to a qualified retirement plan on the beneficiary’s behalf.

The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.

Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent of any age who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,400 or more (2022) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals. Note that for 2021 only, the credit rate and care expenses allowed were significantly higher and the credit was refundable.

Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 7.5% of their adjusted gross income. Eligible expenses include:

Prostheses
Vision Aids – Contact lenses and eyeglasses
Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing
Wheelchair – Costs and maintenance
Service Dog – Costs and care of a guide dog or service animal. The IRS has stated that “the costs of buying, training, and maintaining a service animal to assist an individual with mental disabilities may qualify as medical care if the taxpayer can establish that the taxpayer is using the service animal primarily for medical care to alleviate a mental defect or illness and that the taxpayer would not have paid the expenses but for the disease or illness.”
Transportation – Modifications or special equipment added to vehicles to accommodate a disability
Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense.

If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.
Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend the school. Fees for tutoring from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included if the tutoring is recommended by a doctor.
Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school, as well as the costs of meals and lodging supplied by the school, are also included as medical expenses.
Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse if the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.
Impairment-related Work Expenses – An employed individual with physical or mental disabilities may claim a deduction for impairment-related work expenses for attendant care at the individual’s place of employment or for other expenses at the job location that enable the individual to work. Those with a physical or mental disability that limits their being employed, or substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working are eligible to deduct their impairment-related work expenses if they itemize deductions. These expenses are claimed as a miscellaneous itemized deduction on Schedule A, not as a medical expense.

If you have questions about any of the disability-related tax benefits discussed in this article, or if you have questions concerning potential medical expenses not discussed above, please give this office a call.

August 2022 Business Due Dates

Thu, 21 Jul 2022 08:48:56 GMT

August 1 - Social Security, Medicare, and Withheld Income Tax

File Form 941 for the second quarter of 2022. Deposit or pay any undeposited tax under the accuracy of deposit rules. 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.

August 1 - Self-Employed Individuals with Pension Plans

If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2021.

August 1 - All 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 2021. 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.

August 1 - Certain Small Employers

Deposit any undeposited tax if your tax liability is $2,500 or more for 2022 but less than $2,500 for the second quarter..

August 1 - Federal Unemployment Tax

Deposit the tax owed through June if more than $500.

August 10 - Social Security, Medicare, and Withheld Income Tax

File Form 941 for the second quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.

August 15 - Social Security, Medicare, and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in July.

August 15 - Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in July.

August 2022 Individual Due Dates

Thu, 21 Jul 2022 08:37:35 GMT

August 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

Shark Tank Investor Daymond John: His Story So Far

Wed, 20 Jul 2022 09:05:22 GMT

If you had to make a list of some of the more popular reality television shows these days, Shark Tank would undoubtedly be right at the top.

Originally premiering in 2009, it's a program that has captured the imagination of people worldwide. A panel of investors - otherwise known as "sharks" - listens to people pitch their idea for new products or inventions, and they bid against one another for who gets to invest in any particular idea.

One of those sharks is Daymond John, a man who worked his way to the top in more ways than one. His story is truly inspiring, and it's certainly worth exploring.

Photo credit: Dimitrios Kambouris/Getty Images Entertainment via Getty Images

Daymond John: An Entrepreneurial Inspiration

Believe it or not, when Daymond John was in high school he actually worked a job at Red Lobster. It's a far cry from the television presence that he is currently known as.

He worked that job full-time while also attending school on an alternating weekly basis. Then, upon graduation, he set out on his path as an entrepreneur. First by creating his own commuter van service, then by entering into the clothing market.

If you've heard of the brand FUBU , you have Daymond John to thank for it. He launched the brand out of his mother's apartment. One of the keys to his success was his eye for marketing. He began donating many of the line's clothing to rappers in and around the New York City area, eventually leading to a commercial featuring LL Cool J.

Prior to that, his mother had taught him how to sew and supported him as he worked towards his goal. In just one day, he was able to make $800 - a game-changer if there ever was one. Over time, the FUBU brand went from making hats to printed t-shirts to the clothing line that we all know it to be today.

Still, as the FUBU brand grew, Daymond John knew that he needed other means to keep the bills paid. FUBU wasn't quite making ends meet, so alternative work choices were required. He sustained a full-time job at a restaurant, for example. However, his vision remained steadfast. He and his mother mortgaged their home for $100,000 to generate the income needed to allow the business to thrive. With that, an international clothing brand was born.

The lessons to be learned from this story are ones of hard work, perseverance, and determination . Daymond John was able to build a veritable business empire off of a distinct idea and those three aforementioned qualities. He refused to give up, and he's accomplished an incredible amount as a result of that. He's not just a millionaire - he's inspiring as well.

All of this is the product of a young man from Brooklyn , born in February of 1969. Indeed, his story should be a lesson to us all: if you truly set your mind to it, there is very little that you cannot accomplish.

Tax and Personal Finance Tips for New Parents

Tue, 19 Jul 2022 09:48:54 GMT

Expanding your family? Whether you’re in the planning stages or your bundle of joy has already arrived, raising a child is one of life’s greatest joys — and biggest expenses. And we’re not just talking about the costs of college. From diapers to daycare, from braces to bicycles, parents are often shocked by the constant outflow of cash that starts days after bringing baby home.

While there’s nothing you can do to avoid incurring these expenses, you can definitely soften their impact by educating yourself about what to expect and planning ahead. Below you’ll find a helpful list of mistakes to avoid, resources not to miss, and steps you can take to boost the chances that bringing up baby will be less of a drain, and more of a pleasure.

Start with a Realistic Budget

Has anybody ever told you that all you need for a baby is a drawer for a bed, a bottle, and a bunch of cloth diapers? There are plenty of people who sing that song, and we have news for you — they’re wrong. If you’ve already given birth then you’re already familiar with some of the bills, but if you’re still in the planning stages, make sure that you include these expenses as you prepare:

Prenatal and postnatal doctor visits for both mom and baby
Birth and delivery costs
Baby clothes, nursery furniture, car seats, playpen, glider, highchair, strollers, baby bath, etc.
Childcare
Diapers and wipes, baby medications and ointments, shampoos, etc.
Formula and bottle-feeding supplies or breast pumps and milk-storage bags , or both

And that’s just for the first year or two of parenting. As your child gets older you will need to add on the costs of toys, clothing, bicycles, braces, summer camps, birthday parties …. And if one of the two of you plan to stay home with your child – even part-time – that will significantly impact your disposable household income.

While the government reports that the average cost of raising a child from birth through adulthood is $233,610, those averages include the people who spend the very most, as well as those who spend the very least. To get a realistic sense of how much you can expect to pay, talk to your friends, and ask them to share what they’re spending, especially when it comes to childcare. Those figures can be truly eye-popping.

Take Advantage of Tax Breaks

Plenty of people kid around about their child representing a tax break , but there is truth behind the joke. The government has created several credits and deductions to help alleviate some of the financial burdens of raising a child, but these breaks are not automatic. You have to fill out your tax forms properly and claim the advantages to which you are entitled. Make sure that you are familiar with everything that is available to you. These may include:

Child tax credit – if you have a dependent child and your annual household income falls within the government’s guidelines, you can cut the taxes that you owe significantly
Child and dependent care credit – if you and your partner or spouse file your taxes jointly and pay to have your child cared for by a daycare, nanny, or babysitter, or even to have them attend a summer camp or a before-or-after school program so that you can work or look for work, you can claim a significant portion of these expenses on your income tax.
Earned income tax credit – depending upon income, parents with one or more dependent children may be eligible for the earned income tax credit (EITC), which cuts tax liability

Most Important of All is to Start Thinking Ahead

Perhaps the most essential advice any new parent can be given is to start planning for the future now – and maybe even yesterday. There are plenty of people who spend the early years of their child’s life saying that they don’t know how they’re going to pay for college – and not doing anything about it. The people who start putting small amounts of money away on a regular basis when their kids are small – and who keep doing so throughout their child’s life – are the ones who sleep soundly as college grows nearer. It is never too soon to create a financial plan for your own retirement as well as to address your child’s education, as well as to cushion against an emergency. Your comprehensive financial plan should include:

A retirement fund, whether it’s an employer-sponsored 401(k) or an IRA that you set up for yourself
An emergency fund to help you through anything from a job loss to auto repairs or unexpected medical expenses. Most people suggest having at least three months’ worth of living expenses available, and some say saving enough for six months without an income.
A college fund. Opening a 529 college savings account and making consistent deposits is something you’ll thank yourself for later.
A life insurance policy and a will. It’s nice to run on the assumption that you’ll always be around to support your family. But accidents and unexpected illnesses happen, and far too many people who don’t include life insurance in their economic plans leave behind families that have to deal with their grief and economic situation. It’s also a good idea to take care of basic legal documents like a will, an advance healthcare directive, and power of attorney.

The Basics

If you’re in the planning stages, it’s a very good idea to start saving now, ahead of the costs you’re about to incur for doctor’s bills, hospital fees, and anything not covered by insurance, as well as for income not earned during last weeks of pregnancy/post-partum. You’ll also want to investigate the benefits and family leave policy that your employer offers.

Preparing for a new family member can be overwhelming. For assistance with putting yourself on the right financial path, contact us today. We can help you review your current situation and create a plan that will work for today as well as for the future.

Ways to Maximize Business Deductions

Tue, 19 Jul 2022 09:30:14 GMT

Article Highlights

New Business
Legal and professional fees
Spousal Joint Ventures
Self-employed Health Insurance
Home Office
Deducting the Cost of Business Equipment
Advertising Expenses
Website Costs
Financing
Vehicle Expenses
Business Meals

As a small business owner, you should always be on the lookout for legitimate ways to minimize your taxes. Waiting for year-end to do your tax planning can be too late and you may miss many possible opportunities. The following are valuable tips that help you maximize your business deductions.

New Business – Normally the costs of starting a business must be amortized (deducted) over 15 years. But taxpayers can elect to deduct up to $5,000 of start-up expenses and $5,000 of organizational expenses on the return for the first year of the business. A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Examples of qualified start-up costs include:

Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
Wages paid to employees, and their instructors, while they are being trained;
Advertisements related to opening the business;
Fees and salaries paid to consultants or others for professional services; and
Travel and related costs to secure prospective customers, distributors and suppliers.

Each of the $5,000 amounts is reduced by the amount by which the total start-up expenses or organizational expenses exceeds $50,000. Expenses not deductible in the first year of the business must be amortized over 15 years.

Legal and Professional Fees - incurred in setting up the business would fall under the organizational expense first year deduction of $5,000 and the balance would be amortized over 15 years. However, legal, and professional fees incurred after the business is up and running can be expensed.

Spousal Joint Ventures – When both spouses in a married couple are involved in the operation of an unincorporated business, it is common – but incorrect – for all that business’s income to be reported as one spouse’s income as a sole proprietorship on IRS Schedule C. In which case, the spouse not filing a Schedule C loses out on the chance to accumulate his or her own eligibility for Social Security benefits and the ability to fund a retirement account.

In addition, to claim a childcare credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the non-Schedule C spouse has another source of earned income, the couple will not be allowed a childcare credit.

There are two ways to remedy this situation, either: (1) by establishing a partnership or (2) a joint venture (each spouse files a Schedule C with their share of the income, deductions, and credits).

Self-employed Health Insurance - If you are a self-employed individual, you can deduct 100% (no AGI reduction) of the health insurance premiums without itemizing your deductions. This above-the-line deduction is limited to net profits from self-employment.

Home Office - Small business owners may qualify for a home-office deduction, which will help them save money on their taxes and benefit their bottom line. Taxpayers can generally take this deduction if they use a portion of their home exclusively for their business and on a regular basis. Plus, this deduction is available to both homeowners and renters.

There are actually two methods to determine the amount of a home-office deduction: the actual-expense method and the simplified method.

Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office, which is generally based on square footage. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted. Unlike the simplified method, the business is not limited to 300 square feet.

Simplified Method – The simplified method allows for a deduction equal to $5 per square foot of the home used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500. A taxpayer may elect to take the simplified method or the actual-expense method (also referred to as the regular method) on an annual basis. Thus, a taxpayer may freely switch between the two methods each year.

Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used. Prorated rent or home interest and taxes are not either, although 100% of home interest and taxes are deductible as non-business expenses if the taxpayer itemizes deductions.

Deducting the Cost of Business Equipment - From time to time, an owner of a small business will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. How to deduct the cost for tax purposes is not always an easy decision because there are several options available, and the decision will depend upon whether a big deduction is needed for the acquisition year or more benefit can be obtained by deducting the expense over a number of years using depreciation. The following are the write-off options currently available.

Depreciation – Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations specify the number of years for the write-off based on established asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment.

Material & Supply Expensing – IRS regulations allow certain materials and supplies that cost $200 or less, or that have a useful life of less than one year, to be expensed (deducted fully in one year) rather than depreciated.

De Minimis Safe Harbor Expensing – IRS regulations also allow small businesses to expense up to $2,500 of equipment purchases. The limit applies per item or per invoice, providing a substantial leeway in expensing purchases. The $2,500 limit is increased to $5,000 for businesses that have an applicable financial statement, generally large businesses.

Routine Maintenance – IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life.

Bonus Depreciation – The tax code provides for a first-year bonus depreciation that allows a business to deduct 100% of the cost of most new tangible property if it is placed in service during 2022. The remaining cost is deducted over the asset’s depreciable life. This provides a larger first-year depreciation deduction for the item. Bonus depreciation is a temporary provision and for eligible business property bought after 2022, the rates drop to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and nothing after 2026.

Expensing – Another option provided by the tax code is an expensing provision for small businesses that allows a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first placed into business service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is $1,080,000 for 2022. To ensure that this provision is limited to small businesses, whenever a business has purchases of property eligible for Sec 179 treatment that exceed the year’s investment limit ($2,700,000 for 2022), the annual expensing allowance is reduced by one dollar for each dollar the investment limit is exceeded.

An undesirable consequence of using Sec. 179 expensing occurs when the item is disposed of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition.

Mixing Methods – A mixture of Sec. 179 expensing, bonus depreciation and regular depreciation can be used on a specific item, allowing just about any amount of write-off for the year for that asset.

Advertising Expenses - Once the business is operating, all forms of advertising are generally currently deductible expenses, including promotional materials such as business cards, digital or print advertisements, and other forms of advertising. However any adverting expense incurred before a business begins functioning would be treated as a start-up expense. Trade shows are a form of advertising, and if a business purchases their own custom trade show booth, that booth can generally be expensed in the year purchased using bonus depreciation or Sec 179 expensing.

Website Costs – Although the IRS has not issued guidance on when Internet website costs can be deducted, the costs should generally be treated under the same principles as other business expenses. Generally, website costs will be either a software expense or an advertising expense, but if they are paid or incurred before a business begins, they would be treated as start-up expenses.

Financing – Interest expenses incurred to finance your business operation are deductible as a business expense. But be careful not to mix personal and business interest expenses. Banks are usually reluctant to lend money on a startup business. However, an equity loan on your home will generally achieve a lower interest rate anyway and the interest can be traced to and deductible as business interest.

Vehicle Expenses - If you use your car for business purposes you can deduct its business use by using either the standard mileage method, which allows a per mile amount, or the actual expense method. However, both methods require that you track your business and total mileage for the year. If using the standard mileage method you need to know the number of business miles driven, and if using the actual method you will need to prorate the actual operating expenses including fuel, insurance, repairs, and depreciation by the percentage of business miles to total miles. You can also deduct tolls and parking fees with either method.

Business Meals - Generally business entertainment is not deductible although business meals are 50% deductible, or 100% if the business meals are provided by restaurants during 2021 through 2022. The 100% deductibility provision is to encourage spending at restaurants, which generally were hard-hit by the COVID-19 pandemic emergency lockdowns. Record keeping for business meals is especially important. Each meal expense must be substantiated by not only the amount, date, time, and place, which are usually included on the receipt, but also the business purpose and the names of the guests and their business relationship.

Of course, the list of potential expenses goes on and is too extensive to include all possibilities here. If you are just starting a business or are already in business and have questions related to the business, please give this office a call.

Video: Tax Tips when Selling Your Home

Sun, 17 Jul 2022 09:56:59 GMT

For homeowners seeking to sell their houses, the tax law allows for a certain portion of the gain to be excluded from taxable income, saving the taxpayers a significant amount of money. However, there are also limitations and exclusions that should be aware of. Watch this video to plan ahead before making your home sale.

Steps You Can Take to Grow Your Business to the Next Level

Fri, 15 Jul 2022 10:13:59 GMT

For small business owners, in particular, growing a business has always been something of a challenge. On the one hand, you don't want to grow too quickly - doing so can significantly damage the trajectory that you've set out on. But at the same time, you also don't want to grow too slowly as this too can cause you to remain stagnant and get passed by some of your competitors.

All of this is also true at higher levels, particularly when it comes to taking that pivotal stop from a $1 million business to a $10 million one. According to studies , most businesses generate about $500,000 in revenue - meaning that they just need to find that next step to get to the desired level. It's certainly not an impossible feat as countless others have done it, but it is something that requires you to keep a few key things in mind.

Growing Your Business: Breaking Things Down

First, it's important to acknowledge that getting to $10 million in revenue for your business isn't actually "the hard part." Most experts agree that getting to that $1 million level is far more difficult.

This ultimately comes down to the disparity between the concepts of "wealth" and "income" - two ideas that people sometimes have a hard time reconciling. Having an overall net wealth of $1 million is certainly an attainable goal. Getting to that point in one year may be less realistic.

Therefore, one needs to understand that ramping up the revenue of a business at the same pace is equally unrealistic. Once you learn to live by the idea of "slow and steady wins the race," you put yourself in a much better position to succeed over the long term.

Indeed, this shift in mindset can pay dividends across the entirety of your organization. You need to re-evaluate your risk aversion, for example, so that you know which opportunities are worth capitalizing on and which must be passed by. You need to be objective with yourself about how tolerant you are to risk in the first place. You should also let that insight inform many of the decisions that follow.

Another way to grow your business from $1 million to $10 million (and beyond) also has to do with being realistic with yourself, albeit in a slightly different way. If your business has grown stagnant, you need to ask yourself why. Is it due to a legitimate lack of opportunity, or is it because of a general pessimism about what the future might hold? The latter is understandable to a certain extent, but it also stands in the way of the growth-minded leader that you need to be. It causes hesitation at moments when action is critical, and it is something that ultimately holds a lot of people back.

Another way to grow your business involves not just learning how to market, but learning how to market correctly. Marketing is a terrific avenue for not only keeping existing customers informed and satisfied but for attracting potential new ones as well. A certain amount of experimentation will be needed and you must spend time getting to learn as much as you can about your audience. Creating buyer personas is a great way to accomplish precisely that.

Finally, you also need to make a determination about what you value in terms of business in general. Some business owners don't actually have an urge to grow - they're perfectly fine existing exactly as they are right now. To be clear, there is absolutely nothing wrong with that. However, if you do have the mindset that growth is in your future, you need to prioritize it in a specific way.

You need to ask yourself WHY you want to grow. Is it for wealth, are you trying to expand, or do you want to leave a legacy behind for the next generation of your family? All of these are important questions to answer because they will dictate a lot of the decisions that you make moving forward.

In the end, growing from a $1 million business to a $10 million one isn't an unattainable goal. It will, however, require you to adjust your mindset and follow crucial best practices like those outlined above.

If you'd like to find out more information about how to grow your business, or if you'd just like to speak to an accounting professional about your own needs in a bit more detail, please don't hesitate to contact this office today.

Do You Want to Grow Your Business With Minimal Investment? Here is How You Do It

Thu, 14 Jul 2022 12:12:30 GMT

With a potential recession on the horizon, most small businesses, in particular, are looking for avenues to cut costs wherever they can. However, that doesn't mean that your business can't still grow - you just have to be savvy about how you do it.

With that in mind, there are a number of ways to grow your business without a significant upfront capital investment that is more than worth exploring.

Growing Your Business: Breaking Things Down

One opportunity to grow your business that a lot of people don't take enough advantage of comes by way of a vigorous networking and outreach campaign. Experts typically agree that doing so is the best way to build a base for your business - something that you can use to build upon regardless of what is happening with the economy.

You don't even necessarily have to leverage in-person events in order to do this. You can use social networking sites like LinkedIn, Twitter, and TikTok depending on the audience that you're trying to reach. If yours is a business that caters to a more professional market, something like LinkedIn would be the prime choice. If you're going after a younger group of consumers, TikTok or Snapchat would serve you well. All of these services offer free accounts and the only real investment is your time.

Another way to grow your business involves creating - and verifying - your "Google Business" profile. Keep in mind that even when it comes to brick and mortar stores, the vast majority of all people will discover a brand for the first time via a search engine. Statistically speaking, that engine is likely to be Google given their market share.

Therefore, you always want to make sure that your "Google Business" profile is updated and accurate. This includes adding not only your contact information but also your business hours, high-quality photos of your physical location and more. It's a way to make a solid first impression among prospects and it's one that you certainly shouldn't overlook.

Finally, make sure to leverage the best practices of search engine optimization (SEO) to your advantage. Again, this doesn't necessarily take an "expert" in order to accomplish. Make sure that you're regularly updating your website with fresh, original content, particularly via your blog. Whenever you post something relevant that you think that your audience would like to see, post it in multiple places like on your social media channels. Make sure to include specific, targeted keywords on each page to give yourself the best chance of ranking highly.

The more of these steps that you're able to accomplish, the more likely you are to grow your business without the significant investment that normally comes with it.

If you'd like to find out more information about budgeting or managing cash flow during a downturn, or if you just have any additional questions that you'd like to discuss with someone in a bit more detail, please contact this office today.

Don’t Overlook Your Charitable Contributions

Thu, 14 Jul 2022 10:53:25 GMT

Article Highlights:

Charitable Itemized Deductions
Bunching Deductions
Qualified Charitable Distributions
Donor-Advised Funds
Volunteer Expenses
Misconceptions
Household Goods and Used Clothing
Documenting Charitable Contributions

Your charitable contributions include a wide variety of tax-saving opportunities, some you may not be aware of and some that are frequently overlooked. And there are some contributions that you may believe are deductible that really are not. Being knowledgeable of what is and is not a qualified charity, a qualified charitable contribution, and charitable giving strategies can go a long way towards maximizing your charitable tax deduction.

To be deductible the contributions must be made to qualified charitable organizations, which generally only include U.S. nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. You can ask any organization whether it is a qualified organization, and most will be able to tell you. You can also check by going to IRS.gov/TEOS . This online tool will enable you to search for qualified organizations.

Also, to be able to deduct charitable contributions, one must itemize their deductions. This means that to achieve any tax benefit from your charitable donations, you cannot use the standard deduction, which for example is $12,950 for those filing single, $19,400 filing head of household and $25,900 for married individuals filing jointly for 2022. The standard deduction is adjusted annually for inflation.

If the total of all your itemized deductions does not exceed the standard deduction amount for the year, then you are better off taking the standard deduction, but in doing so, you will get no tax benefit from your charitable contributions. Congress did revise the law to allow limited amounts of cash contributions made in 2020 and 2021 to be deducted without itemizing, but this was only a temporary provision and doesn’t apply in other years.

Bunching – If your charitable deductions are not enough to bring your itemized deductions greater than your standard deduction, the bunching strategy may work for you. When employing the bunching strategy, a taxpayer essentially doubles up on as many deductions as possible in one year, with the goal of itemizing deductions in one year and then taking the standard deduction in the following year. Because charitable contributions are entirely payable at your discretion, they fit right into the bunching strategy.

For example, if you normally tithe at your church, you could make your normal contributions throughout the current year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution in one year and having no charity deduction for church in the next year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to decide whether to make contributions at the end of the current year or simply wait a short time and make them after the end of the year. Be sure you get a receipt or acknowledgment letter from the organization that clearly shows the year when the contribution was made.

As a rule, most taxpayers just wait until tax time to add up their potential deductions and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, here are some strategies that might work for you.

Qualified Charitable Distribution – If you are age 70.5 or older, you can make charitable contributions by transferring funds from your IRA account to a charity, which are referred to as qualified charitable distributions (QCDs). The only hitch here is the funds must be transferred directly from the IRA to the charity, meaning your IRA trustee will have to make the distribution to the charity. The tax rules don’t set a minimum amount that needs to be transferred but your IRA trustee may do so. The maximum of all such transfers is $100,000 per year, per taxpayer. Also note that distributions to private foundations and donor-advised funds don’t qualify for the QCD.

Thus, this strategy allows you to make a charitable contribution without itemizing deductions; since these distributions are tax-free, you can’t also claim a deduction for them. Even better, QCDs also count toward your minimum required distribution for the year. Because QCDs are nontaxable, your AGI will be lower, and you can benefit from tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare B insurance premiums for higher-income taxpayers.

Caution: Any IRA contributions made after reaching age 70.5 can diminish the tax benefits of this strategy. If any post-age 70.5 IRA contributions have been made, consult with this office before employing this strategy.

If you decide to make a QCD, check with your IRA custodian on the IRA’s rules for how to request the QCD and be sure to give the IRA custodian ample time to complete the process if you are making the request toward the end of the year. Always get a written acknowledgment from the charity, for tax-reporting purposes.

Donor-Advised Funds – Contributing to a donor-advised fund is a way to make a large (and generally deductible) charitable contribution in one year and put funds aside to satisfy the donor’s social obligations to make charitable contributions in future years, without incurring the expenses of setting up a private foundation and satisfying annual filing and other private foundation requirements.

While generally considered a tax strategy for those with an unusually high income for the year, donor-advised funds are available to everyone, although most such funds set up through brokerages have minimum donation requirements, often $5,000–$25,000. Although they may bear the donor's name, donor-advised funds are not separate entities but are mere bookkeeping entries. They are components of a qualified charitable organization. A contribution to a charity's donor-advised fund may be deductible in the year when it is made if it isn't considered earmarked for a particular distributee. The charity must fully own the funds and have ultimate control over their distribution. To document the contribution, the taxpayer must get written acknowledgement from the fund's sponsoring organization that it has exclusive legal control over the contributed assets. Although the donor can advise the charity, which generally will follow the donor’s recommendations, the donor cannot have the power to select distributees or decide the timing or amounts of distributions. The charity must also ensure that all distributions from the fund are arm’s length and do not directly or indirectly benefit the donor.

Example: Don and Shirley donate $25,000 to a donor-advised fund in one year. The $25,000 can be in the form of cash or even appreciated stock. Don and Shirley get a deduction for the full $25,000 as a charitable contribution on their return for the year of the contribution and can suggest the amounts of distributions from the donor-advised fund that should be made to various charities over a number of years. Thus, Don and Shirley achieve a large charitable contribution in one year that can be used to fund their charitable obligations over several years and can claim the $25,000 as an itemized deduction on their return for the year when they made the donation. They do not get a charitable contribution deduction when the funds are paid out from the fund to the various charities.

Volunteer Expenses - If you volunteered your time for a charity or governmental entity, you probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:

Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel costs, taxi fares, and other costs of transportation between the airport or station and hotel, plus 100% of lodging and meals. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel or if your services for a charity do not involve lobbying activities.
The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the costs of your own entertainment and meals are not deductible).
If you use your car or other vehicle while performing services for a charitable organization, you may deduct your actual unreimbursed expenses that are directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

Misconceptions - There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:

No deduction is allowed for contributions of cash or property to the extent the donor received a personal benefit from the donation. Often, the IRS attributes at least some (if not total) personal benefit to amounts spent for items like dinner tickets, church school tuition, YMCA dues, raffles, etc. To determine the allowed contribution amount, subtract the FMV of the “personal benefit” item from the cost and deduct the remainder. Most charities now allocate the deductible, nondeductible portions.
Taxpayers who have purchased tickets for benefit football games, youth-group car washes, parish pancake breakfasts, school plays, etc., with no intention of attending these events, may think they can deduct the expense as a direct contribution to the sponsoring institution. The IRS does not allow such deductions. On the other hand, if the taxpayer returns the ticket to the organization for resale and does not receive a refund of the cost of the ticket, the entire amount paid for the ticket is deductible.
No deduction is allowed for the depreciation of vehicles, computers or other capital assets as a charitable deduction.

Example: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing her horse or to depreciate the value of her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work.

However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent that its use is related to providing services for a charity. Thus, for example, a taxpayer is allowed to deduct the fuel, maintenance, and repair costs (but not depreciation or the fair rental value) of piloting his or her plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer—such as Kathy in our example, who participated in a mounted posse that is a civilian reserve unit of the county sheriff’s office—could deduct the cost of maintaining a horse (shoeing and stabling).

A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he or she retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization (including a government agency). To verify your contribution:

Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing.
Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

Household Goods and Used Clothing - One of the most common tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and has become grossly out of style, the more extensively used piece of clothing could be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and in some cases requires the value to be established by a qualified appraiser.

Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial noncash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items. The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”

Documenting Charitable Contributions – The IRS provides requirements for documenting both cash and non-cash contributions.

Cash Contributions – Taxpayers cannot deduct a cash contribution, regardless of the amount, unless they can document the contribution in one of the following ways:

A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a. A canceled check, b. A bank or credit union statement, or c. A credit card statement.
A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
Payroll deduction records.

Cash Contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization that includes the following details:

The amount of cash contributed;
Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, and a description and good faith estimate of the value of any goods or services that were provided (other than intangible religious benefits); and
A statement that the only benefit received was an intangible religious benefit, if that was the case.

If the acknowledgment does not show the date of the contribution, then the taxpayer must have one of the bank records described above that does show the contribution date. If the acknowledgment includes the contribution date and meets the other tests, it is not necessary to also have other records.

The acknowledgment must be in the taxpayer’s hands before the earlier of the date the return for the year the contribution was made is filed, or the due date, including extensions, for filing the return.

Noncash Contributions Deductions of Less Than $250 - A taxpayer claiming a noncash contribution with a value under $250 must keep a receipt from the charitable organization that shows:

The name of the charitable organization,
The date and location of the charitable contribution, and
A reasonably detailed description of the property. The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).

Noncash Contributions Deductions of At Least $250 But Not More Than $500 - If a taxpayer claims a deduction of at least $250 but not more than $500 for a noncash charitable contribution, he or she must keep an acknowledgment of the contribution from the qualified organization. If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution. The acknowledgment(s) must be written and must include:

The name of the charitable organization,
The date and location of the charitable contribution,
A reasonably detailed description of any property contributed (but not necessarily its value), and
Whether the qualified organization gave the taxpayer any goods or services because of the contribution (other than certain token items and membership benefits).

Noncash Contributions Deductions Over $500 But Not Over $5,000 - If a taxpayer claims a deduction over $500 but not over $5,000 for a noncash charitable contribution, he or she must attach a completed Form 8283 to the income tax return and must provide the same acknowledgement and written records that are required for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include:

How the property was obtained (for example, purchase, gift, bequest, inheritance, or exchange),
The approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and
The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more (this requirement, however, does not apply to publicly traded securities).

If the taxpayer has a reasonable case for not being able to provide information on either the date the property was obtained or the cost basis of the property, he or she can attach a statement of explanation to the return.

Deductions Over $5,000 – These donations require time-sensitive appraisals by a “qualified appraiser” in addition to other documentation. When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.

Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, privately traded stock, land, and buildings. For example, say you donated $5,300 of used furniture to 3 different charitable organizations during the year (a bedroom set valued at $800, a dining set worth $1,000, and living room furniture worth $3,500). Because the value of the donations of similar property (furniture) exceeds $5,000, you would need to obtain an appraisal of the furniture to satisfy the substantiation requirements—even if you donated the furniture to different organizations and at different times during the year. The IRS has strict rules as to who is considered a qualified appraiser.

Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they specifically are not allowed.

Please give this office a call if you have questions or would like to develop a charitable contribution strategy.

Cash Flow Tips for Personal Trainers and Gym Owners

Wed, 13 Jul 2022 12:24:52 GMT

If there was ever an industry whose owners should understand the need for discipline and diligence around bookkeeping and accounting, it’s those who work in the fitness industry. Personal trainers and gym owners are perpetually encouraging their clients to set an intention, make a plan, and then stick with it , yet those very same individuals are so averse to keeping up with their general ledger that it’s the rough equivalent of a client buying a membership on January 2nd, working out religiously every day for two weeks, then disappearing again until two weeks before bikini season.

We’re not here to judge …. we’ve fallen off a workout wagon or two over the years, so no shame about falling behind on your bookkeeping. At the same time, just as setting a manageable, realistic training schedule is the best way for your clients to achieve their fitness goals, the same is true for your financial stability goals. Fitness businesses face unique cash flow challenges that are best managed by establishing and sticking to a regimen.

The Challenges of Running a Fitness Business

Your love of fitness has driven you through your best days and your toughest times and has inspired you to live your dream, share the joy — and make money while doing it . Unfortunately, there’s more to business success than helping people lose weight or get cut. To be successful, fitness businesses need to establish regular clients, keep bringing new people in, and find ways to add cash – whether through events, guest passes, snack and drink sales, or branded merchandise. It’s a never-ending drive that makes sitting down and recording revenue and expenses feel like drudgery.

Equate Getting Financially Fit with Being Physically Fit

It’s that sense of drudgery that you need to grab onto in the same way that you want your clients to take hold of the fitness challenges you present to them. Here are the exercises you need to add to your daily routine that will keep your business moving forward in a healthy way.

There is a real need for fitness clubs to have a day-to-day understanding of their cash flow, and though using an accrual method of accounting makes more sense in terms of understanding your total income and debts, cash flow reporting will help you to see exactly how much cash you have in hand at any given moment to help you make important decisions about what you need to do. One of the most successful ways to approach the need for both long-term and short-term insights into your financial situation is to do both annual planning with a monthly budget and a weekly cash flow forecast that helps you see where your money is coming from and where it is going.
Add your accounting tasks to your calendar. We know that keeping track of all of your transactions is no fun, but if you make a date with yourself on a daily, weekly, or monthly basis to do so, you’ll have a much clearer sense of the progress you’ve made or the financial needs that require attention, and you’ll avoid getting behind and letting the required entries pile up.
Invest in a software program to help you keep your bookkeeping under control and provide you with the ability to easily communicate your data to your accountant and transfer it into a tax software program.
Make sure that all of your business accounts are entirely separate from your personal accounts. It may be more convenient to pay for everything (and take money in) on one account, but you can easily get into trouble, and lose track of how much money you’ve made – or lost – when you mingle your money.

When you decided to take the leap into running your own fitness business, you did so because of your love of the workout and helping others to improve their physical and mental wellbeing. You never pretended to be a math or accounting genius – and you don’t need to be one. You do, however, need to be a responsible business owner who keeps up with the minutia of entrepreneurship, whether that means applying for a business license, paying for rent and insurance, or keeping track of your cash flow. There’s no need to do the heavy lifting yourself. If you need assistance with any of these tasks, contact us today to set up a time for us to chat.

RMDs and IRA-to-Charity Distribution Provisions

Tue, 12 Jul 2022 12:35:31 GMT

Article Highlights

Required Minimum Distributions
Qualified Charitable Distribution
QCD Benefits
Fly In the Ointment

Tax law requires individuals who have reached age 72 to begin taking minimum distributions from their traditional IRA accounts. These are referred to as a required minimum distribution or RMD. The RMD amount is the value of the IRA account on the last day of the prior year divided by the distribution period from the Uniform Lifetime Table, corresponding to the taxpayer’s attained age. For example, if an individual had their 75th birthday in the current year, the distribution period from the table is 24.6. If the balance in the IRA was $500,000 on the last day of the prior year, then the individual’s RMD for the current year would be $20,325 ($500,000/24.6). (The IRS develops the Table using mortality rate data and updated it effective with 2022 distributions.)

Qualified Charitable Distributions - The tax law also permits individuals aged 70½ or over to transfer funds from their IRA accounts to charities in what is referred to as Qualified Charitable Distributions (QCDs). These QCDs are not taxable and where a taxpayer is also required to make required minimum distributions (RMDs), the QCDs count toward the RMD requirement. Thus, in our prior example, if the individual had transferred the $20,325 to a qualified charity in a QCD, the $20,325 would not have been taxable.

QCDs are not limited to the RMDs. For those with large IRA balances QCDs can total up $100,000 per year. Neither are QCDs limited to a single transfer in a tax year so long as the total distributed does not exceed the $100,000 annual limit.

Example: Anne wants to contribute to her church’s building fund, the American Cancer Society, and the American Red Cross in the same year. She can do that by having her IRA make separate direct transfers to each charity.

It is important to remember that all individual’s Traditional IRAs are treated as one for purposes of determining an RMD and that all QCDs must be direct transfers by the IRA trustee to the charity.

QCD Benefits – QCDs can provide significant tax benefits. Here is how this provision, if utilized, plays out on a tax return:

(1) The IRA distribution is excluded from income.
(2) The distribution counts toward the taxpayer’s RMD for the year; and
(3) The distribution does NOT count as a charitable contribution deduction.

At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps for other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses if itemizing deductions, passive losses, taxable Social Security income, and so on. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.

Fly In the Ointment – In the past the tax code did not permit contributions to IRAs by individuals once they reached age 70½, which coordinated with the prior age requirement to begin RMDs and the ability to make QCDs. The age restriction to contribute to IRAs has been eliminated, so now individuals may make IRA contributions at any age provided they have earned income.

Whether intentional or an oversight by Congress, the tax changes did not modify the age at which a taxpayer can begin making QCDs and left it at age 70½ – no longer in synchronization with the revised RMD age of 72.

Unfortunately that has created a situation that can be detrimental for individuals who have earned income and wish to utilize the QCD provisions and continue to contribute to an IRA after age 70½.

The problem being that a QCD must be reduced by the sum of IRA deductions made after age 70½ even if they are not in the same year, causing unexpected tax results for taxpayers that are not aware of this complication. This is best explained by a couple of examples.

Example #1 – Jack makes a deductible IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72. He claims an IRA deduction of $7,000 on his tax return for each year. Then later when he is 74, he makes a QCD of $10,000 to his church’s building fund. Since Jack had made the IRA contributions after age 70½, his QCD must be reduced by the post-70½ contributions that were deducted, and as a result, the $10,000 is a taxable IRA distribution ($10,000 – 14,000 = ). However, he can claim $10,000 to the church building fund as a charitable contribution on Schedule A if he itemizes his deductions.

In the next year, Jack makes a $5,000 QCD to the university where he got his degree. The excludable amount of the QCD is $1,000 ($5,000 - $4,000 = $1,000). The $4,000 is the amount that remained from post-age 70½ IRA contributions that didn’t previously offset QCDs. Jack includes $4,000 as taxable IRA income and can deduct $4,000 as a charitable contribution if he itemizes. No amount of post-age 70½ IRA contributions remains to reduce the excludable amount of QCDs for subsequent taxable years.

Example #2 – Bob makes a traditional IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72 and deducts the IRA contributions on his returns. Then later when he is 74, he makes a QCD in the amount $20,000 to his church’s building fund. Since Bob had made the deductible IRA contributions after age 70½, his QCD must be reduced by the $14,000. As a result, of the $20,000 QCD, $14,000 is a taxable distribution, $6,000 is nontaxable, and Bob can claim a $14,000 charitable contribution

All this can become quite complicated. If you are considering making a QCD and made IRA contributions after age 70½ and don’t understand the tax ramifications, you should consider consulting with this office before you make the distribution.

What Do You Do If the IRS Wants to “Audit” Your Tax Return?

Mon, 11 Jul 2022 13:00:12 GMT

The word “audit” tends to strike fear in the hearts of American taxpayers, but the truth is that not every audit is a result of a problem, or that the Internal Revenue Service suspects you of wrongdoing. There are several reasons why the IRS might want to audit your taxes and financial information, and there are several steps that you can take to make the process as painless as possible.

In light of an uptick in identity theft scams involving tax audits and returns , we want to take a moment before delving into this topic to stress that the IRS will never institute an audit process via telephone or email. Taxpayers are always alerted of an upcoming audit by U.S. mail.

Reasons for IRS Audits

Though it is certainly true that some audits are generated by irregularities, the IRS can also request an audit to verify the information contained within your tax papers, to correct a simple mistake such as failing to attach a Schedule, or because the individual taxpayer has some kind of involvement with other taxpayers — such as business partners or investors — whose paperwork raised questions. You may even have been selected for audit as a result of a random selection process designed to gauge taxpayer returns to see how they compare to national norms.

Different types of audits

There are three types of audits conducted by the IRS. In all cases, the taxpayer will be notified of the review by mail.

Correspondence audit – Generally a result of a low-level error or omission, the agency sends out information to the taxpayer referencing the mistake and requesting that revised information be submitted via mail.
Office audit – This type of audit is more intimidating, as it requires the taxpayer to appear at an IRS office, bringing their documentation along with them. These audits are often the result of deductions or credits that are out of the norm , such as an unusually large medical expense deduction for which the agency requires documentation in the form of invoices and payment receipts.
Field audit – The most intrusive of all audits, a field audit involves IRS agents coming to the taxpayer, usually visiting either their place of business or their home in order to review the tax return in detail.

How to prepare for an audit

Receiving notice of a tax audit will put a stutter in the step of even the most meticulous and upstanding taxpayer, but the nerves set off by the notice can easily be offset with the knowledge that you’ve kept good records and maintained copies of all pertinent documents. If you haven’t been keeping careful records, understand that in the face of an audit it will be up to you to prove that you deserve whatever deduction you’ve taken, so amend your ways and start keeping well-organized files of all financial statements, invoices, and receipts. Doing so will not only be a substantial help in case of an audit, but it will also be remarkably helpful should you need to assess your business’ health or put together a financial statement for potential investors or when applying for a loan.

If you are uncomfortable with addressing the IRS questions on your own, you have the right to be represented by a professional of your choice. That might be a CPA, an attorney, or an enrolled agent. This person or persons can go with you or for you to any face-to-face meetings. There is no requirement that you attend an audit session unless the IRS specifically requests your presence.

After the audit is over, you will be provided with a report. If you agree with the contents of the report, you can simply sign it or whatever assenting form the auditor provides to you.

The taxpayer bill of rights

You may think yourself at the mercy of the IRS, but Congress enacted a taxpayer bill of rights that specifically outlines the IRS’ tax collecting abilities as well as the protections offered to taxpayers in the face of IRS collections.

The taxpayer bill of rights includes:

Right to be Informed
Right to Quality Service
Right to pay no more than the Correct Amount of Tax
Right to Challenge the IRS’s position and be Heard
Right to Appeal an IRS’s decision in an Independent Forum
Right to Finality Right to Privacy
Right to Confidentiality Right to Retain Representation
Right to a Fair and Just system

What if you don’t agree with the audit decision?

Knowing that you have rights is nice, but pushing back against the decision of an IRS examiner can feel challenging. If you’ve complied with all of the examiner’s requests and now find yourself with a Revenue Agent Report that you disagree with, there are specific steps that you can take. You can:

Ask for an informal conference with the examiner’s manager before the deadline provided within the report.
Ask for an Appeals conference to occur before the deadline provided within the report.

If you have received a Statutory Notice of Deficiency, you can also file a petition with the tax court.

How to Get Through an Audit

There is no shame in being unnerved by an IRS audit, but there are several ways that you can minimize the stress that you feel.

Don’t hesitate to request a postponement if you need time to get your documents together.
Familiarize yourself with your rights
Be honest
Discuss your audit strategies with your Authorized Representative, whether that is your CPA, attorney, or another person. That person will respond directly to the assigned IRS agent.
Don’t try to fake your way through an audit. Have the information that is requested so that you can get through it more quickly.
Don’t hesitate about reaching out to the auditor if you disagree with the examination report that they have produced.
Remember that if you are unable to pay a tax liability or disagree with the auditor’s assessment, negotiation is a possibility.

One of the most important decisions you can make in the face of an audit letter is to work with an experienced tax representative who can help you with both your preparations and your response. For information on the assistance we can provide, contact our office today.

Video Tips: A Quick Look at the Work Opportunity Tax Credit

Sun, 10 Jul 2022 13:13:56 GMT

The Work Opportunity Tax Credit (WOTC) is just one of the many tools available to help businesses find qualified candidates and reduce turnover. Employers who are facing a tight job market should definitely check out this valuable tax credit.

Sun Setting on Home Solar Power Tax Credits

Thu, 07 Jul 2022 13:24:30 GMT

Article Highlights:

Non-Refundable Tax Credit
Other Incentives
Qualifications
Financing
Who Gets the Credit
Credit Timing
Newly Constructed Homes
Batteries

If you have been considering installing a solar electric system on your home and taking advantage of the lucrative federal tax credit, time is running out. Unless Congress extends the credit, it will no longer be available after 2023.

The home solar tax credit is a very lucrative non-refundable federal tax credit for 26% (22% in 2023) of the cost of the system with no maximum. So for example, if the solar electric system cost you $20,000 and was placed in service in 2022, your tax credit would be $5,200 (26% of $20,000). A non-refundable tax credit offsets your tax liability, regular and alternative minimum, dollar for dollar, and any excess is added to any credit allowable in the subsequent year.

For example, if your 2022 credit was $5,200 and your 2022 tax liability was $4,000, then $4,000 of the credit would go to pay off your 2022 tax liability and the remaining $1,200 would be added to your 2023 solar credit, if any, and used to reduce your 2023 tax liability.

Many state and local governments and public utilities also offer incentives, such as rebates and tax credits, for investment in renewable energy property. When deciding whether to make a purchase, you should consider the available incentives and your cost savings for operating the system.

Qualifications - To qualify for the credit, the equipment must be installed in a home that is in the U.S. and that you use as your residence. The credit can't be claimed for equipment that is used to heat a swimming pool or hot tub. If the equipment is used more than 20% for business purposes, only the expenses allocable to non-business use qualify for the credit.

The credit covers both the cost of the hardware and the expenses of installing it, such as labor costs for on-site preparation, assembly, and installation of the equipment and for piping or wiring to connect it to your home. You claim the credit in the year in which the installation is completed. If you install the equipment in a newly constructed or reconstructed home, you claim the credit when you move in.

Financing - Solar installation companies offer a variety of ways to pay for their systems other than cash. You could take out a loan, and if that loan were secured by your home, generally you would be able to deduct the interest on the loan. Another option is to lease the system, in which case you would not qualify for the solar credit, as the leasing agency would get the credit and the lease payments you make would not be deductible. In addition, for the lease option, you would have to deal with transferring the lease to the new owner should you decide to sell the home before the lease term is up. (This may entail you paying off the lease or the buyer assuming the debt before the sale can be finalized. Some buyers may not want to take on the additional obligation.) Another option is to allow the solar company to install the solar power system and then purchase the electricity from them. You would not be entitled to the solar credit under the latter arrangement.

Who Gets the Credit - You need not own the property to qualify for the credit, as you need only be a “resident” of the home. For this credit, the tax code does not specify that an individual must own the home, only that it is the taxpayer’s residence.

Example: Son lives with his mother who owns the home. Son pays to have the solar system installed. The son gets the credit.

Credit Timing – With the credit sunsetting after 2023 the timing of completion becomes critical. For purposes of the home solar credit, timing and treatment of expenditures are treated as made when the original installation is completed, except those expenditures in connection with the construction or reconstruction of a structure are treated as made when the taxpayer's original use of the constructed or reconstructed structure begins.

Example: The costs of an installation of solar energy property that was started in 2022 but not completed until 2023 will be eligible only for a credit of 22% of the costs on the 2023 return, even though some or all of the costs were paid in 2022 when the credit percentage was 26%.

Newly Constructed Homes - The credit can be taken for newly constructed homes if the costs of the residential energy efficient property can be separated from the home construction and the required certification documents are available.

The credit for the identifiable solar expenditures in connection with the construction or reconstruction of a structure are treated as made when the taxpayer's original use of the constructed or reconstructed structure begins.

Batteries – Some areas of the of the country are prone to power outages which would make including batteries for power storage desirable and worth the additional costs. They can be included with the original installation or can be added later and will qualify for the credit. If you already have a solar installation you can add a storage battery and qualify for the solar credit for the cost of the battery at the rate for the year the battery is installed. A battery attached to solar panels qualifies for the credit if it’s charged only by solar energy.

If you would like to review your options in more detail, including the tax and other aspects of purchasing a solar system for your home, please give this office a call.

Cutting the IRS Out of Your Gifts

Tue, 05 Jul 2022 13:36:38 GMT

Article Highlights:

Gift Tax Rule
Annual Exemption
Lifetime Exemption
Medical and Tuition Exemptions
Gift Splitting
Gifts of Property

If you are financially well off, you may want to gift money or property to family members or others you care about. If that is the case, there are some gift tax issues you should be aware of. Oh yes, the government even taxes gifts if they are large enough, so it is best to know the rules; otherwise, you may end up making a gift of taxes to the IRS.

The gift tax rules provide two exclusions from gift tax, the annual exclusion and the lifetime exclusion:

Annual Exclusion – The annual exclusion is periodically adjusted for inflation and is currently $16,000 per individual. Thus, you can give $16,000 a year to as many individuals as you wish without any gift tax or gift tax return filing requirements.

Lifetime Exclusion – On top of the annual exclusion, there is a lifetime exclusion that is linked to the estate tax exclusion, which is also inflation adjusted, and for 2022 is $12,060,000. Thus, in addition to the $16,000 annual per donee exclusion, there is a $12.06 million exclusion that applies to the aggregate of all gifts more than the $16,000 per year per donee gifts.

There are complications to utilizing the lifetime exclusion. You must file a gift tax return to claim the lifetime exclusion, and the amounts of the lifetime exclusion used as an exclusion from gift tax will be tracked on any gift tax return(s) filed and will reduce the estate tax exclusion. So for example, if in 2022 you make a gift of $3 million to your child, and you haven’t made gifts in the past that exceeded the annual per donee gift tax exclusion, you will pay no gift tax, but you will have reduced your remaining lifetime exclusion to $9.06 million ($12.06 million less $3 million). If you make more large gifts in the future that use up your remaining lifetime exclusion, not only will you then be subject to gift tax on the excess gifts, but at your passing, and assuming the value of your estate is large enough to be subject to estate tax, you will have no estate tax exclusion left to offset the estate’s value, so it will all be subject to estate tax.

CAUTION - The estate tax rates and the lifetime exclusion have long been a political football. They date back to 2006, when the lifetime exclusion was $2 million. Congress can change the current exclusion at any time. In fact, recent proposed legislation would reduce the exclusion to $5 million.

Special Tuition/Medical Exclusion - In addition to the current $16,000 annual exclusion, a donor may make gifts that are totally excluded from the gift tax in the following circumstances:

Payments made directly to an educational institution for tuition. This includes college and private primary education. It does not include books or room and board.
Payments made directly to any person or entity providing medical care for the donee.

In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify. The tuition/medical exclusion is often overlooked, but these expenses can be quite significant. Parents and grandparents interested in lowering the value of their estate should strongly consider these gifts.

Gift Splitting - A husband and wife can each make annual exclusion gifts, thereby increasing the exclusion from the current $16,000 to $32,000 per year per couple. However, only one of the spouses may be in a financial position to make the gifts. Spouses may elect on the gift tax return to treat a gift made by one spouse as being made by both spouses. Gift splitting can be used for annual exclusion gifts, lifetime exclusion gifts, and gifts above the lifetime exclusions.

Example - Gift Splitting - John and Jane are married and have two children. In a year when the annual exclusion limit is $16,000, they would like to exclude $64,000 ($16,000 x 2 donors x 2 donees) in gifts. Jane received a large inheritance some years back; John has only a modest estate. Jane gives the children $32,000 each. Then the couple elects to gift split so that the $32,000 gift is treated as given one-half by Jane and one-half by John (or $16,000 each). The gifts all qualify for the annual exclusion. Even if both spouses have sufficient resources to make gifts, gift splitting is useful when the husband and wife have different estate planning goals.

For residents of community property states, if community property is given, gift splitting is not necessary. Regardless of who holds the property’s title, or who “makes” the gift, the property is owned one-half by each and is therefore given one-half by each.

Gifts of Property – Gifts of property have some of their own circumstances to consider. For instance, where gifts are made of appreciated property such as stocks or real estate, although the donor’s gift is considered at the fair market value (FMV) for purposes of valuing the gift, the beneficiary of the gift assumes the donor’s basis. As a result, the beneficiary of the gift is assuming any taxable gain the donor would have had if he or she had sold the property instead of gifting it and will have to include as income that gain when and if the gifted property is later sold.New Paragraph

Although the FMV of traded stocks is readily available, the same is not true of most other types of property, in which case a qualified appraisal will be needed to determine the value as of the date of the gift.

Finally, keep in mind that a beneficiary inherits property at its FMV at the date of the decedent’s death as opposed to assuming the decedent’s basis, as happens in the case of a gift.

If you are contemplating gifting money or property to an individual, it may be appropriate to consult this office in advance to minimize the impact on estate taxes and help with any gift tax filings that may be required.

Video Tips: Tax Ramifications of Crowdfunding

Mon, 04 Jul 2022 13:43:17 GMT

When you're raising money for your project or business, it's important to be aware of the potential tax implications of your activities. Crowdfunding can be a great way to raise money, but there are a few things you should keep in mind. Watch this video for a brief discussion on how different types of crowdfunding may have different tax ramifications.

Sold or Thinking of Selling Your Home?

Thu, 30 Jun 2022 13:54:25 GMT

Article Highlights:

Home Sale Exclusion
2 out of 5 Rule
Business Use of the Home
Gain or Loss from a Sale
Previous Use as a Rental
Form 1099-S IRS Matching
Records

If you sold your home this year or are thinking about selling it, there are many tax-related issues that could apply to that sale. To help you prepare for reporting the sale you may have already made or make you aware of what issues you may face if you are in the “thinking about” stage, this article covers the tax basics and some special situations related to home sales and the home-sale gain exclusion.

Home Sale Exclusion – For decades, Congress has encouraged home ownership, including by providing various tax breaks for taxpayers selling their homes. Under the current version of the tax code, you areallowed an exclusion of up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you owned and lived in it for at least 2 of the 5 years counting back from the sale date. You also cannot have previously taken a home-sale exclusion within the 2 years immediately preceding the sale. There is no limit on the number of times you can use the exclusion as long as you meet these time requirements; however, under some extenuating circumstances you may still be able to claim a reduced amount of the exclusion even if you haven’t satisfied the time requirements. The home-sale gain exclusion only applies to your main home, not to a second home or a rental property.

2 out of 5 Years Rule – As noted above, you must have used and owned the home for 2 out of the 5 years immediately preceding the sale. The years don’t have to be consecutive or the closest to the sale date.Vacations, short absences and short rental periods do not reduce the use period. If you are married, to qualify for the $500,000 exclusion, both you and your spouse must have used the home for 2 out of the 5 years prior to the sale, but only one of you needs to meet the ownership requirement. When only one spouse in a married couple qualifies, the maximum exclusion is limited to $250,000 instead of $500,000.

Although this situation is quite rare, if you acquired the home as part of a tax-deferred exchange (sometimes referred to as a 1031 exchange), then you must have owned the home for a minimum of 5 years before the home-gain exclusion can apply.

If you don’t meet the ownership and use requirements, there are some situations in which a prorated exclusion amount may be possible. An example of this situation would be if you were required to sell the home because of extenuating circumstances, such as a job-related move, a health crisis or other unforeseen events. Another rule extends the 5-year period to account for the deployment of military members and certain other government employees. Please call this office if you have not met the 2 out of 5 years rule to see if you qualify for a reduced exclusion.

Business Use of the Home – If you used your home for business and claimed a tax deduction—for instance, for a home office, storing inventory in the home or using it as a day care center—that deduction probably included an amount to account for the home’s depreciation. In that case, up to the extent of the gain, the claimed depreciation cannot be excluded.

Figuring Gain or Loss from a Sale – The first step is to determine how much the home cost, combining the purchase price and the cost of improvements. From this total cost, subtract any claimed casualty loss deductions and any depreciation taken on the home. The result is your tax basis. Next, subtract the sale expenses and this tax basis from the sale price. The result is your net gain or loss on the sale of the home.

If the result is negative, the sale is a loss; losses on personal-use property such as homes cannot be claimed for tax purposes.

If the result is a gain, however, subtract any home-gain exclusion (discussed above) up to the extent of the gain. This is your taxable gain, which is, unfortunately, subject to income tax. If you owned the home for at least a year and a day, the gain will be a long-term capital gain; as such, it will be taxed at the special capital-gains rate, which ranges from zero for low-income taxpayers to 20% for high-income taxpayers. Depending on the amount of all of your income, the gain may also be subject to the 3.8% net investment income surtax that was added as part of the Affordable Care Act. The tax computation can be rather complicated, so please call this office for assistance.

If you have owned your home for 25 years or more, you may face another issue that can affect your home’s tax basis (discussed above). If you purchased your home before May 7, 1997, after selling another home, instead of a home-gain exclusion of the profit from the home you sold, any gain from the sale would have been deferred to the replacement home. This deferred gain would reduce your current home’s tax basis and add to any gain for the current sale. While this situation is rare now, if it applies to you, be sure to look back in your tax records from the year you purchased your home for information about the reinvested gain deferral.

Prior Use as a Rental – If you previously used your home as a rental property, the law includes a provision that prevents you from excluding any gain attributable to the home’s appreciation while it was a rental. The law’s effective date was the beginning of 2009, which means that you only need to account for rental appreciation starting in that year. This law was passed to prevent landlords moving into their rentals for 2 years so that they could exclude the gains from those properties. Prior to the law change, some landlords had done this repeatedly.

Effect of a Mortgage – Some homeowners mistakenly think that the mortgage they have on their home is included as part of their basis. This is not the case. Proceeds from the home’s sale are used to pay off the existing mortgage, and if they are more than the mortgage balance, the excess (less sales expenses) is payable to you when the sale closes. But this is not the profit for tax purposes. The tax profit is the amount described above in “Figuring Gain or Loss from a Sale.”

Form 1099-S – Usually, the settlement agent—typically an escrow or title company—prepares IRS Form 1099-S, Proceeds from Real Estate Transactions, which reports the home seller’s name, tax ID number, proceeds of the sale, date of the sale, etc. This form is provided to both the IRS and the seller. Note that this form only includes information from the sale; it doesn’t provide any basis information to the IRS. Sometimes, sellers think that if the home sale gain exclusion eliminates all of their gain from the sale of their home, they don’t need to report the transaction on their tax return. Unfortunately, this thinking could lead to correspondence (i.e., a bill for tax due) from the IRS as it attempts to match the sales price shown on the 1099-S to the seller’s tax return. To avoid this interaction with the IRS, you should report the home’s sale on your income tax return for the year of the sale; in doing so, you will be including your basis and exclusion information for the IRS.

Records – Assets worth hundreds of thousands of dollars, including your home, need your attention, particularly regarding records. When figuring your gain or loss, you will, at a minimum, need the escrow statement from the purchase, a list of improvements (not maintenance work) with receipts, and the final escrow (settlement) statement from the sale. If you encounter any of the issues discussed in this article, you may need additional documentation.

A few other rare home-sale rules are not included here. As you can see, home-sale computations and tax reporting can be very complicated, so please call this office if you need assistance planning a sale or post-sale reporting.

You May Receive an IRS Form 1099-K This Year

Tue, 28 Jun 2022 14:06:14 GMT

Article Highlights:

1099-K Reporting Threshold
IRS Is After Unreported Income
Venmo, e-Bay, Etsy, and Others
Deductible Expenses
Self-employment tax
Self-employment Retirement
Self-Employed Health Insurance Deduction
Hobby vs. Business

Effective for 2022 and later years, Congress reduced the threshold for the Form 1099-K filing requirement from $20,000 to a mere $600. So, you might ask, what does that have to do with me? This change can impact taxpayers in several ways, some unexpected, so you may find yourself in for a surprise that can be unpleasant in some situations.

This article explores the several ways taxpayers can be affected. But first we need to review the purpose of the 1099-K and what can occur for you to receive one.

The 1099-K was created by the IRS as a means to detect unreported income by businesses. The IRS does that by requiring third-party settlement organizations such as credit card companies, eBay, Venmo and others to report the transac-tions they’ve handled for an individual or business on a 1099-K if the gross amount of those transactions exceeds a specified threshold.

Example: Susan, who owns and operates a gift shop, accepts credit cards for purchases made by her customers. Since the credit card transactions are processed through a third-party settlement organization, that third par-ty must issue a 1099-K for the total dollar amount of credit card transactions that Susan had for the year. The 1099-K goes to the IRS and a copy goes to Susan. The IRS can then compare the 1099-K amount to the amount Susan reports as the gross income from her business. The IRS is also aware of, through studies they have conducted, the amount of cash sales certain types of businesses might have. With this information, the IRS can efficiently identify taxpayers who are not reporting all their income and ID them for audit.

Although primarily intended for businesses, there are situations where you may find yourself a recipient 1099-K.

One such situation is where a taxpayer is downsizing and sells personal property on eBay. If the total amount sold is $600 or more the taxpayer will receive a 1099-K. Although these sales are generally not taxable since used personal items are usually sold for less than their cost, the IRS does not know the circumstances of the sale and if the amount is significant, it needs to be reconciled on the individual’s tax return. A sale of personal property that results in a loss, is not deductible for tax purposes. In prior years, because the threshold for requiring a 1099-K was $20,000, a 1099-K was never issued to most non-business taxpayers, so there was no concern about reconciliation.

Many taxpayers are also involved in the gig economy selling their products through Etsy, eBay, etc., or hiring out their services on TaskRabbit.

Others may be driving for Uber or Lyft or making deliveries through Door Dash, Uber Eats, etc.

Some individuals have been meeting their tax responsibilities from these activities while others have not, thus prompting Congress to reduce the threshold. In either case, it is important that these individuals keep records of their expenses associat-ed with their income-producing activities to reduce any tax liability. Here are some examples:

Cost of goods sold
Advertising
Vehicle travel
Business cell phone service
Internet service for on-line sales
Office supplies
Postage & shipping
Some may qualify for a home office deduction

Since these activities are generally treated as self-employment income, here are other issues to be aware of:

Self-employment tax – Which is like Social Security and Medicare taxes paid by employees and matched by the employer through payroll taxes. Except a self-employed individual pays both the employee’s and the employer’s share, which combined can total 15.3% of net profit.

Self-employment Retirement – Self-employment Income qualifies for IRA contributions and the very popular Simplified Employee Pension Plan (SEP) where a self-employed individual can contribute a tax-deductible amount of 20% of their net earnings to the retirement plan.

Self-Employed Health Insurance Deduction – Most self-employed individuals can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of the taxpayer, spouse, dependents, and children under age 27 even if the child is not a dependent. However, this deduction is limited to the net income from the business.

Hobby vs. Business – Whether the activity is truly a business or just a hobby impacts how the income is reported on the tax return, deductibility of expenses (including medical insurance premiums), whether self-employment tax applies, and if contributions to retirement plans can be based on the activity’s income.

As you can see, all of this can become quite complicated and the penalties for not reporting self-employment income can be severe. Please contact this office about what expenses are deductible for your specific type of endeavor and your business filing obligations.

Video Tips: Business Owners' Tax Advantages

Sat, 25 Jun 2022 14:13:20 GMT

If you are a small business owner, there may be tax benefits that you are not fully utilizing. Among them, some benefits such as business meal tax deduction have been enhanced to 100% in favor of small business owners. Watch this video for the tax advantages on which you may be missing out.

Small Businesses Can Benefit from the Work Opportunity Tax Credit

Thu, 23 Jun 2022 08:23:29 GMT

Article Highlights:

What is the Work Opportunity Tax Credit?
Maximum Credit
Who Can Claim the Credit?
Qualified Employees
Pre-screening and Certification
Tax-exempt Employers

The Work Opportunity Tax Credit (WOTC) is a general business credit that is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025.

The WOTC may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups.

In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:

Is in their first year of employment with the business;
Is certified as being a member of a targeted group; and
Performs at least 400 hours of services for that employer.

However, an employer cannot claim the WOTC for employees who are rehired.

Maximum Credit - Thus, the maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be considered in determining the WOTC for certain qualified veterans.

Who Can Claim the Credit - Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in certain U.S. territories. Taxable employers claim the WOTC against income taxes, and in general, may carry the current year’s unused WOTC back one year and then forward 20 years. The procedure is different for eligible tax-exempt employers; they can claim the WOTC only against payroll taxes and only for wages paid to members of the Qualified Veteran targeted group.

Qualified Employees - An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups:

Qualified IV-A Recipient - An individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.
Qualified Veteran - A “qualified veteran” is a veteran who is any of the following:
A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first 15 months of employment.
Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
Unemployed for a period totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
A disabled veteran entitled to compensation for a service-connected disability hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
A disabled veteran entitled to compensation for a service-connected disability who is unemployed for a period totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.
See IRS Notice 2012-13 for addition details.
Ex-Felon - A “qualified ex-felon” is a person hired within a year of:
Being convicted of a felony or
Being released from prison from the felony
Designated Community Resident (DCR) – Who is at least 18 years old and under 40, who resides within one of the following:
An Empowerment Zone
An Enterprise community
A Renewal community and continues to reside at the locations after employment.
Vocational Rehabilitation Referral - A “vocational rehabilitation referral” is a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:
A state plan approved under the Rehabilitation Act of 1973 OR
An Employment Network Plan under the Ticket to Work program, OR
A program carried out under the Department of Veteran Affairs.
Summer Youth Employee - A “qualified summer youth employee” is one who:
Is at least 16 years old, but under 18 on the date of hire or on May 1, whichever is later, and
Is only employed between May 1 and September 15 (was not employed prior to May 1) and
Resides in an Empowerment Zone (EZ), enterprise community or renewal community.
Supplemental Nutrition Assistance Program (SNAP) Recipient - A “qualified SNAP benefits recipient” is an individual who on the date of hire is:
At least 18 years old and under 40, AND
A member of a family that received SNAP benefits for:
> the previous 6 months OR
> at least 3 of the previous 5 month
Supplemental Security Income (SSI) Recipient - An individual is a “qualified SSI recipient” if a month for which this person received SSI benefits is within 60 days of the date this person is hired.
Long-Term Family Assistance Recipient - A “long term family recipient” is an individual who at the time of hiring is a member of a family that meet one of the following conditions:
Received assistance under an IV-A program for a minimum of the prior 18 consecutive months; OR
Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period; OR
Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.
Qualified Long-Term Unemployment Recipient - A qualified long-term unemployment recipient is one who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all or the unemployment period.

Pre-screening and Certification - An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit , with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.

Tax-exempt Employers - Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who began work for the organization after 2020 and before 2026. Tax-exempt employers claim the credit against the employer Social Security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans .

Form 5884-C is filed after the organization files the related employment tax return for the period for which it is claiming the credit. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.

Please contact this office for additional information and assistance to determine if the WOTC is appropriate for your business.

Keeping Up with Receivables: Know Who Owes You

Wed, 22 Jun 2022 08:43:17 GMT

There are so many financial details to keep track of when you’re running a small business. You have to make sure your products and services are in good shape and ready to sell. You have to stay current with your bills. Orders need to be processed as quickly as possible, as do estimates and invoices. And you may have numerous questions from customers and vendors that must be addressed.

Your number one priority, however, is ensuring that your customers are paying you. Whether you accept credit cards or bank transfers or issue sales receipts for cash and checks, you need to always know where you stand with incoming payments. “Are my receivables current?” should be a question you’re asking yourself or your staff frequently.

QuickBooks Online offers numerous ways to know whether you’re being paid for your products and/or services and who might be falling behind. That information is critical to your understanding of how your receivables are stacking up against your payables. You should be able to gauge whether you’re making a profit, staying even, or losing money. Here’s a look at the tools you can use.

Learning When You Launch

QuickBooks Online provides a good overview of your current cash flow as soon as you log into the site and see your two-pronged Dashboard. The first thing you see when you click the Business overview tab is a cash flow forecast that goes up to 24 months. Other content includes a profit and loss graph and charts showing expenses, income (including open and overdue invoice totals), and sales. Your account balances are there, too.

This is helpful data, but it’s broad. To get far more detailed information, hover your mouse over Sales in the toolbar and select All Sales . The horizontal bar across the top displays dollar and transaction totals for estimates, unbilled activity, overdue (invoices), open invoices, and (invoices) paid last 30 days. When you click one of the bars, the list changes to show only that particular set of transactions.

Partial view of the toolbar at the top of the Sales Transactions page

The table of transactions is interactive. That is, there’s an Action column at the end of each row. Click the down arrow next to any of the activity listed there, and you’ll see a menu of options. Depending on the status of each, these options include commands like Receive payment , Send reminder , P rint packing slip , Send , and Void .

Running Reports

The Sales Transactions page provides more of your receivables nuts and bolts than the Business overview screen does. But to get the most in-depth, customizable, comprehensive view of who owes you, you’ll need to run reports. Click Reports in the toolbar and scroll down to Who owes you .

There are three columns here. You’ll land on Standard , which is a complete list of all of the pre-formatted reports that QuickBooks Online offers. Click Custom reports to see the reports you’ve customized and saved. Management reports opens a list of three reports that can be viewed by a variety of date ranges: Company Overview , Sales Performance , and Expenses Performance . You can view, edit, and send these, as well as export them as PDF and Microsoft Word files.

There are five reports listed under Who owes you that you should be creating on a regular basis. How regularly? That depends on the size of your business. The greater your sales volume, the more frequently you should run them.

When you select A/R Aging Summary , you’ll see at a glance which customers have current balances and those that are 1-30, 31-60, 61-90, and 91+ days past due. A few customization options appear at the top, like Report period , Aging method , and Days per aging period . To really zero in on the precise data set you want, click Customize . The panel that slides out from the right contains option in several areas: General , Rows/Columns , Aging , Filter (by customer), and Header/Footer.

QuickBooks Online helps you target the data set that you want.

There are four other reports that can help you track your receivables:

Open Invoices displays a list of invoices that still contain a balance.
Unbilled Time tells you about any billable time that hasn’t been invoiced.
Unbilled Charges lists billable charges that haven’t been invoice.
Customer Balance Summary simply provides all open balances for you customers.

These are all very simple reports that you shouldn’t have any trouble customizing and running. They can give you a complete picture of where your receivables stand. But there are other reports that will require our help. These are standard financial reports that should be created monthly or quarterly, including Statement of Cash Flows , Profit and Loss , and Balance Sheet . You’ll need these critical financial statements if, for example, you’re applying for a loan or trying to attract investors. Please let us know if you want us to run and analyze these so you can get a detailed, comprehensive view of your financial health.

Does your business have cash flow issues? We can walk you through the QuickBooks Online tools that help identify them.

Student Loan Debt - Paying and Avoiding it, plus tax benefits

Tue, 21 Jun 2022 09:09:06 GMT

Article Highlights:

Tax Advantaged Repayment of Student Loans
Employer Provided Educational Assistance
Qualified Tuition Programs
The Deductibility of Student Loan Interest
Student Loans Forgiven in 2021 through 2025
Avoiding Student Loan Debt
Section 529 Plans
Coverdell Education Savings Account
Education Tax Credits
The American Opportunity Credit
The Lifetime Learning Credit

Despite recent rounds of forgiveness for thousands of borrowers, nearly 43 million Americans are responsible for roughly $1.6 trillion in federal student loans which results in a significant long-term burden for students after graduation. The average debt varies by state from $28,600 in North Dakota to $54,900 in the District of Columbia.

Although the U.S. Department of Education has, as a COVID-19 pandemic relief measure, currently suspended loan payments, reduced the interest rate to zero and stopped collections on defaulted loans, all that is scheduled to end after Aug. 31, 2022. Unfortunately, it is time start thinking about how to deal with the resumption of payments and interest charges

This article looks at the issue of student loan debt from an income tax perspective including:

Tax Advantaged Repayment of Student Loans
The Deductibility of Student Loan Interest
Treatment of Forgiven Student Loans
Avoiding Student Loan Debt

Tax Advantaged Repayment of Student Loans

The tax code provides two tax advantaged ways of repaying student loan debt that may apply to individuals under certain circumstances that should be employed to reduce the debt when available:

Employer Provided Educational Assistance – The tax code (Sec 127) includes a provision that allows employers to pay for employees’ education as a working condition fringe under an educational assistance program of the employer. It is limited to $5,250 per year and is not taxable income to the employee.

The CARES Act of 2020 expanded the definition of expenses available to qualify for the $5,250 employer-provided educational assistance exclusion to include employer payments of the employee’s student loan debt. This special allowance is available for payments made through December 31, 2025 Thus, where the individual works for an employer that has an educational assistance program, they should take advantage of the plan to pay down their debt.

Tax Tip - The employee isn’t allowed to claim the above-the-line student loan interest deduction for interest that the employer paid. So, in some cases it may be advantageous for the employer to designate their payment as going to principal only so the employee can claim a deduction for the interest that they paid.
Qualified Tuition Programs – Qualified Tuition Plans (sometimes referred to as Section 529 plans) are plans established to help families save and pay for education expenses in a tax-advantaged way that allow taxpayers to gift large sums of money for a family member’s education expenses, while continuing to maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified education expenses.

Normally, funds from these accounts are only allowed to pay for education expenses. Distributions from a 529 plan of up to $10,000 can be used to pay the principal and interest on qualified higher education loans of the account’s designated beneficiary or a sibling of the designated beneficiary. However, the $10,000 limit is a lifetime limit.

To prevent double-dipping, Sec 529 plan distributions used to pay interest on the education loan cannot also be used for the above-the-line deduction for student loan interest.

The Deductibility of Student Loan Interest

The student loan interest deduction is not limited to the interest paid on government student loans. In fact, virtually any loan interest will qualify as long as the loan proceeds are used solely for qualified higher-education expenses (that is, it is a sole-purpose loan). However, the maximum interest that is deductible each year is $2,500. Thus, in addition to government student loans, home equity lines of credit, personal loans from unrelated parties, and even credit cards can be used if they otherwise qualify. Pension plan loans and loans from related parties do not qualify.

Example #1 – Jack takes out an equity line of credit on his home and borrows $30,000 to finance a solar electric installation on his home and $10,000 to pay his daughter’s qualified education expenses. Because this loan is not used for a single purpose (he used it to borrow funds for more than education), he cannot deduct a portion of the interest as above-the-line education loan interest. However, if Jack had only used the loan to pay for qualified education expenses, then up to $2,500 of the loan interest could have been deducted as above-the-line student loan interest.

Example #2 – Mark has a Visa card that he uses for a variety of purposes, and he also uses it to pay his daughter’s qualified education expenses. Because the credit card is not used exclusively to pay for qualified education expenses, none of the interest will qualify as student loan interest. However, if Mark had only used the credit card to pay for qualified education expenses, then up to $2,500 of the credit card interest could have been deducted as above-the-line student loan interest. Caution: Although we use a credit card as an example of an alternate student loan, it is not practical because of the high interest rates.

The deduction is ratably phased-out in 2022 for taxpayers with an AGI (income) of $70,000 to $85,000 ($145,000 to $175,000 for joint returns) and not allowed at all for taxpayers filing as married separate or an individual who is a dependent of another. These phaseout levels are periodically adjusted for inflation.

If a loan is not subsidized, guaranteed, financed, or otherwise treated as a student loan under a program of the federal, state, or local government or an eligible educational institution , a payee (the lender) must request a certification from the payer (the borrower) that the loan will be used solely to pay for qualified higher-education expenses. Form W-9S , Request for Student’s or Borrower’s Social Security Number and Certification, is provided by the IRS for this purpose.

The deduction for student loan interest can be deducted whether the standard deduction or itemized deductions are claimed since it is an adjustment to income, often referred to as an above-the-line deduction.

To qualify as an eligible loan, the loan must have been taken out solely to pay the costs of attending an eligible educational institution for an individual during a period when the individual is a qualified student. Eligible costs include:

Tuition
Fees
Room and board
Books and equipment
Other necessary expenses (including transportation)

The expense must be incurred within a reasonable time before or after the debt is incurred. The regulations provide that a loan is incurred within a reasonable period if:

The expenses are paid with the proceeds of a loan from a federal post-secondary education loan program; or
The expenses are related to a particular academic period and the loan proceeds used to pay the expenses are disbursed within a period that begins 90 days prior to the start of, and ends 90 days after the end of, that academic period. A home equity line of credit can be used to meet these requirements by paying education expenses as they become due, provided that the loan is not used for any other purpose.

Such expenses must be reduced by any:

Income excluded from employer-provided educational assistance;
Income excluded from U.S. savings bonds used to pay higher-education expenses;
Nontaxable distributions from Coverdell ESAs; and
Scholarships, allowances, or other payments (such as distributions from Sec. 529 plans) that are excludable from gross income.

An eligible student is one enrolled in a degree or certificate program who is at least a half-time student. What constitutes half the normal course load will be determined by the definition of the school being attended. Generally, a full-time student is one carrying at least 12 units.

The above-the-line interest deduction may only be claimed by a person who is legally obligated to make the payments on the qualified educational loan. However, tax regulations allow payments on above-the-line education interest made by someone other than the taxpayer/borrower to be treated as a gift, allowing the interest to be deductible by the taxpayer.

Student Loans Forgiven in 2021 through 2025

Normally, when a debt is cancelled, and unless a specific exception applies, the borrower is required to include the forgiven amount as taxable income. A provision was included in the American Rescue Plan Act, signed into law March 11, 2021, that student loans forgiven in 2021 through 2025 will be free from income tax if the loan was provided expressly for post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if such loan was made, insured, or guaranteed by:

(A) The United States, or an instrumentality or agency thereof; a State, territory, or possession of the United States, or the District of Co1umbia, or any political subdivision thereof; or an eligible educational institution.
(B) Generally, any private education loan.
(C) Generally, most loans made by educational organizations.

Avoiding Student Loan Debt

Although not everyone has the resources, if you have children below college age, there are tax-advantaged plans that allow you to save for the costs of their higher education and possibly avoid or minimize student debt. There are also tax credits that will help pay for tuition and expenses while the student is in school.

Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for education expenses in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2022, an individual can contribute $16,000 without gift tax implications (or $32,000 for married couples who agree to split their gift). The annual amount is subject to inflation-adjustment. There is also a special gift provision allowing the donor to prepay five years of Sec 529 gifts up front without any gift tax consequences.

Contributions are not limited to parents, and it is not uncommon for grandparents and other relatives to also contribute to these plans.
Coverdell Education Savings Account - These accounts are education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools. A total of $2,000 per year can be contributed (but is not deductible) for each beneficiary under the age of 18. The ability to contribute to these plans phases out when the modified adjusted gross income of the contributor is between $190,000 and $220,000 for married taxpayers filing jointly, and between $95,000 and $110,000 for all others.
Education Tax Credits - If you currently have a child or children attending college, there are two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), that you may be able to take advantage of. Both are available for qualified post-secondary education expenses for a taxpayer, spouse, and eligible dependents. Both credits will reduce your tax liability dollar for dollar until the tax reaches zero.
The American Opportunity Credit (AOTC) - is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. Forty percent of the American Opportunity credit is refundable (if the tax liability is reduced to zero). This credit phases out for joint filing taxpayers with modified adjusted gross income (MAGI) between $160,000 and $180,000, and between $80,000 and $90,000 for others (except no credit is allowed for those who file married separate returns).
The Lifetime Learning Credit - is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer (family) not per student. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. The MAGI phaseout ranges are the same as those for the AOTC, and like the AOTC, the Lifetime Learning Credit is not allowed for taxpayers who file married separate returns.

Qualifying expenses for these credits are generally limited to tuition. However, if required for the enrollment or attendance of the student, activity fees and fees for course-related books, supplies, and equipment qualify, but for the Lifetime Learning Credit course materials and supplies are eligible only if purchased directly from the educational institution.

While it is possible that Congress may add more tax-related benefits for assisting parents and students to pay for higher education costs, you shouldn’t depend on their actions (or inactions). You should consider starting the planning process as soon as possible, and don’t overlook the credits and deductions available for the current students in your family.

If you would like assistance in planning for your children’s future education or are considering borrowing money to pay for higher-education expenses, it may be appropriate to consult with this office for assistance.

July 2022 Business Due Dates

Mon, 20 Jun 2022 09:32:52 GMT

July 1 - Self-Employed Individuals with Pension Plans

If you have a pension or profit-sharing plan, you may need to file a Form 5500 or 5500-EZ for calendar year 2021. Even though the forms do not need to be filed until August 1, you should contact this office now to see if you have a filing requirement, and if you do, allow time to prepare the return

July 15 - Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in June.

July 15 - Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in June.

July 2022 Individual Due Dates

Mon, 20 Jun 2022 09:16:28 GMT

July 1 - Time for a Mid-Year Tax Check-Up

Time to review your 2022 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.

July 11 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 11. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

Video Tips: Summertime Tax Issues Related to Children

Fri, 17 Jun 2022 09:38:37 GMT

School is replaced with childcare for working parents and older children may have summertime jobs. Both activities include income tax issues to consider. If you are parents that are planning for your children's summer break, watch this video to see how it may impact your taxes next year.

How to Protect Yourself When Selecting Investors for Your Startup

Thu, 16 Jun 2022 10:29:58 GMT

Any seasoned entrepreneur will tell you that coming up with an idea for a startup is ultimately the easy part of this process. Figuring out how you're going to get the funds necessary to make that vision a reality? That part is a bit trickier.

In fact, selecting investors for your startup can be the hardest part of the process – not only because you want to make sure you’re making the right choices for your new company, but also because it’s important to surround yourself with individuals who will support you both now and years down the road as your business grows.

Thankfully, there are a number of best practices that you can use to help find not just an investor, but the right investor to meet your current and future needs.

Choosing the Right Investors: Breaking Things Down

By far, one of the most important things to understand about finding an investor for your startup is that you're trying to find a GOOD fit, not necessarily a PERFECT fit.

The odds are good that no investor will be 100% perfect for the vision you have for your startup – such is life. Even in the event that you could find a startup investor who would tick every box, it would probably take so long that it wouldn’t be worth the effort. You would ultimately delay the building of your company, not to mention the amount of time it would then take to get your products or services to consumers.

Finding the Best Investor For You

The first step to finding the best investor for you is to make a list of characteristics and standards that are important to you. Remember, you are looking for someone who can help you bring your vision to life, so it is imperative for all of your startup investors to add value to your organization. Prioritize certain qualities above others and if you don’t check all of the boxes in the end,, that's okay -- hardly anyone does, and there are still numerous successful startups.

Another best practice to follow when finding an investor for your startup involves trying to sell them not on what your product or service can do in a literal sense, but on what problem it is trying to help people solve. In other words, don’t communicate in terms of technical specifications, but by sharing the unique value that you'll be able to bring to the table with a little help from a qualified investor.

Investors want to see that you're not pushing a "solution in search of a problem," so to speak. They want to see that you've identified a potential gap in the marketplace that you – and you alone – can fill with your business concept. That's how to get people excited and that's how you get people to invest.

What Types of Startup Investors Are There?

If you would prefer not to go the route of working with a venture capitalist or professional startup investor, there are numerous other options available to you as a small business owner.

Especially in those precarious early days, for example, some entrepreneurs often turn to friends and family members for assistance. They won't necessarily be permanent investors, but they can certainly help get you off the ground and buy more time until you can land something more stable. If you take this approach, make sure that you clearly communicate what the money will be going towards in terms of your current business needs and what type of positive impact it will make. Rarely will someone be willing to give you money based on a "great idea" alone.

Some new business founders also apply for loans from the Small Business Administration rather than immediately seeking out a private investor. The Small Business Administration doesn't lend money directly, but the organization does have a handy lender match tool that you can use to find financial institutions that have been pre-approved for situations like yours, whatever your specific circumstances happen to be. The benefit here is that the SBA also guarantees certain types of loans, which usually translates to lower interest rates and better repayment terms than you might be able to find elsewhere.

If you do choose to go with a private investor, such as a venture capitalist,, one of the ways that you'll want to protect yourself involves understanding what a fair percentage actually is. Again, nobody is going to give you capital for your startup just for the sake of it – they're going to expect something in return (you’ve watched ABC’s Shark Tank , right?).

But you don't want to offer a percentage of your net profits that is too low – say, 5%- - because that really isn't worth the effort on the investor’s part. Likewise, offering a percentage that is too high will almost immediately begin to eat into any profit you earn. Always spend time working out a fair percentage based on the amount of money you're being given and other situation-specific variables to create a deal that is beneficial for all involved.

If you have any additional questions about the qualities to look for in an investor for your startup, or if you'd just like to go over the details of your own unique situation feel free to reach out to our practice.

This Month's Success Story: The Founder of Whatsapp

Thu, 16 Jun 2022 10:12:25 GMT

From the moment that Steve Jobs first walked across a stage in California and introduced the world to the iPhone in 2007, the ways in which we communicate with one another had changed forever. It's just that few of us could have predicted how striking of a change that would be at the time.

One such person who could tell which way the wind was blowing was Jan Koum. Born in Ukraine, you may not be familiar with Koum's name but you're undoubtedly familiar with his work: WhatsApp, one of the most powerful mobilize messaging platforms on Earth.

WhatsApp: The Story So Far

To be clear, mobile messaging was hardly a new idea that came about with the introduction of the iPhone. Indeed, older phones had been capable of SMS text messaging for years. But this was something different, and Koum could absolutely see it.

Koum's interest in computer programming began when he was just 18 years old. He moved to the United States and enrolled in San Jose State University around that time. Likewise, he was also employed as a security tester at Ernst & Young.

During this time he also interviewed with Yahoo and was able to land a position as an infrastructure engineer.

According to Forbes , Koum was always something of a troublemaker at school - especially during his early years. But his passion for technology never wavered and he ended up teaching himself computer networking by pouring over manuals that he'd purchased from a used book store in his area, which he would then return when he was finished with them.

In 2009, Koum bought his first iPhone and could immediately see the potential. By now, he was 33 years old. At that point, the iTunes App Store (as it was then called) had only existed for about seven months. But still, Koum could see that it was about to launch countless messaging apps as people searched for a viable, fully-featured alternative to the one built into each of Apple's devices.

After a brainstorming session with some friends about what the ideal mobile messaging app might look like, Koum landed on the name WhatsApp. His reasoning was simple: when you say it fast enough, it sounds like the phrase "what's up."

For months, his period of brainstorming continued. He paid a visit to the home of a Russian friend, Alex Fishman, who had a tendency to invite local Russian community members to his home for "pizza and movie" nights on a weekly basis. The duo talked for hours about Koum's idea for WhatsApp.

In an interview, Fishman recounted how Koum was showing him his phone's address book and mentioned how he thought users would love to see statuses next to the names of each entry. Flash forward a few years and this would become one of WhatsApp's defining features.

After more brainstorming and a (relatively) short amount of development time, WhatsApp was initially launched later on in 2009. Unfortunately, those early days left a lot to be desired.

Initially, the app was unpopular for a few different reasons. For starters, it faced a tremendous amount of competition and was constantly being lumped in with inferior solutions. Secondly, the app was constantly crashing for many users. Clearly, there were some kinks in the plan that needed to be worked out.

But Koum stuck in there and it's a very good thing that he did.

Not too long after WhatsApp's launch, Apple added a new feature to the iOS operating system: push notifications. Instead of needing to open an app to see your messages, they would instantly appear right there on the lock screen.

Koum took things one step further by adjusting the WhatsApp code, allowing it to instantly notify users when they received a message. What was initially a non-existent audience turned into a small but loyal one, which then ballooned into one of the largest for an app of its type.

Things moved so quickly that Koum was even able to bring in $250,000 in funding for additional development.

Things changed for Koum forever in 2014 when WhatsApp was acquired by Facebook in a deal that was estimated at $19 billion. One study estimates that today , more than 25% of males and 21% of females are active on the messaging platform.

All this because at one time, a man passionate about technology walked into a store and purchased an iPhone. He then got an idea, and truly that was all he needed to change his life forever.

IRS Announces Mid-Year Optional Vehicle Mileage Rate Increase

Thu, 16 Jun 2022 10:00:51 GMT

Article Highlights:

Mid-year Increase
Items Included in the Optional Mileage Rate
What Can Be Deducted in Addition to the Optional Mileage Rate
Switching Methods

With gas prices soaring it has been expected the IRS would increase the mileage rate that business owners can deduct for vehicle use instead of keeping a record of actual expenses. Sure enough, the IRS recently announced a 4-cent increase in the optional mileage rate for the last half of 2022.

The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the last 6 months of 2022, also up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022.

Optional Mileage Rate for 2022

The standard mileage rate for businesses is based on a study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set and has been 14 cents for over 20 years.

The standard mileage rate is determined annually by the IRS using data from a study conducted by an independent contractor of vehicle-operating expenses based on the prior year’s costs. The rate includes:

Gas,
Oil,
Lubrication,
Maintenance and Repairs,
Vehicle registration fees,
Insurance, and
Straight-line depreciation.

Not included in the standard rate, and deductible in addition to the optional rate, are:

Parking,
Tolls, and
State and local property taxes attributable to business use.

Sales tax paid when the vehicle is purchased must be capitalized into the business basis of the vehicle, so it isn’t separately deductible.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.New Paragraph

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates, which may produce a better result considering the skyrocketing fuel prices. Taxpayers can also switch from using the optional mileage rate in one year to actual expenses using straight line depreciation in the next year.

Please give this office a call if you have questions about the new rates or related to switching methods or which method you should use when putting a vehicle into service.

The Right Accounting Method for Your Business

Wed, 15 Jun 2022 10:56:59 GMT

Every small business - whether a respected local mom-and-pop retailer, a startup tech company, or an online venture — has accounting and bookkeeping responsibilities, including selecting the accounting method that works best for them. If you’re new to small business ownership, you might not even realize that there are multiple ways to keep tabs on your company’s finances.

Don’t worry, though, that’s where this guide comes in. As you keep reading, you’ll learn more about two common business accounting methods, and get helpful advice for choosing the right one for your business.

What are the most popular business accounting methods?

The two most popular business accounting methods are the cash method and the accrual method. As with anything, there are pros and cons to both tactics. Let’s take a look at what distinguishes each of them, and how to determine which is the best fit for your company’s needs.

First, you need to understand that each of the accounting methods is a way to track your incoming and outgoing money.

Fundamentally, the biggest difference between these two accounting techniques is whether you track revenues and expenses when they are actually in (or out) of hand or when they are billed. While there are many factors you’ll need to consider before choosing a method for your small business, evaluating the following will help you:

The size of your business
Your business’s future growth projections
Whether you are a sole proprietor or a corporation/publicly traded company
Whether you have (or plan to have) investors involved in your business

While most sole proprietors and small businesses have the freedom to choose the accounting method that they feel most comfortable with, companies that have investors will likely need to use the method that their investors want them to based on a vote.

It’s also worth noting that publicly traded companies earning more than $25 million in gross revenue per year are required to use the accrual accounting method.

With that understanding, let’s take a closer look at the two methods.

Cash Method

The cash method records revenue on the date that payment for goods or services is received, and expenses on the date that an invoice for goods or services is paid. This is the easiest way to keep track of cash flow. Business owners using this method are able to skip steps such as journal entries and are also able to wait to pay taxes on revenue until payment is actually received. This method is ideal for freelancers and contractors, especially if clients are slow to pay. It also works well for new business owners, who are just learning the ins and outs of bookkeeping.

Accrual Method

The accrual method records revenue at the time that a service or product is sold rather than when it is paid. This accounting option subsequently expenses on the day that a transaction is billed rather than on the day that it is paid, providing business owners with a high-level sense of their balance sheet. It also affords business finance specialists with the ability to be proactive in how they pay their bills to maximize cash flow. Though this method is more complicated, it is preferred by most accounting professionals because it provides a true sense of a business’s financial health.

Businesses that use the accrual method of accounting have the disadvantage of having to pay taxes on sales that may not have been paid, so it is essential that business owners or their accountants know the status of all incoming cash and accounts receivables. Even with this downside, accrual accoutning is typically the right method for growing businesses that are looking to expand, hire additional employees, or who are seeking financing or investors. Hybrid accounting

Hybrid accounting

represents a combination of the two methods listed above. It is most appropriately used by businesses that stock inventory, as it allows them to track the cash coming in and going out of the business for products or services on a cash basis – but to track inventory using the accrual method. Though this combination offers significant advantages, it is a complicated approach that requires assistance from an experienced bookkeeper, either in-house or from a reputable third-party financial institution.

No matter which small business bookkeeping method you eventually choose, it important that you take a thoughtful approach to making your selection. Whichever technqiue you choose will be the one that you are required to stick with for at least one year. You are not permitted to switch midstream, though you can adjust in a new tax year.

If you need assistance in choosing the right accounting method for your business, or would like to learn more about our comprehensive bookkeeping services, contact us today to set up a convenient time to discuss your needs.

Not Even Celebrities are Immune to Issues with Their Taxes

Mon, 13 Jun 2022 12:25:04 GMT

There's an old saying in life that reminds us "the only things that are certain are death and taxes." It seems that, occasionally, some celebrities seem to forget that second part.

It's true. Just because you've got the number one movie at the box office, or just because you've sold millions of albums over the course of your career, doesn't mean that Uncle Sam isn't paying attention. In fact, the IRS seems to be particularly interested in high net worth individuals like this because they A) have significant public profiles, and B) tend to bring in huge sums of money every year. It doesn't take a genius to figure out that they're watching those returns closely.

All told, there are a number of notable instances where celebrities ran into issues with their taxes - all of which we can learn a little from.

Celebrities and Taxes: A Match Made in Heaven

One notable instance of a celebrity running into problems with the IRS takes the form of the late legendary comedian George Carlin.

During the 80s, Carlin's career was at a crossroads. He was in the process of transitioning from one type of comedy to the next and was struggling. It was also around this time that he stopped filing taxes - according to a recent HBO documentary on the subject, he failed to do so for three years in a row. It wasn't long before the IRS came knocking at the door, demanding what they were owed. In the documentary, it is revealed that they even threatened to take his house away multiple times. Luckily, he was able to rectify the situation but it was certainly still scary for the funnyman.

Speaking of the 1980s, those of us who are old enough will remember that it was a period of time during which fitness guru Richard Simmons seemed to be... well, everywhere. He was on TV. He was in magazines. He couldn't have been more popular.

Flash forward to the 2000s and it was reported that he owed about $24,000 in back taxes between 2007 and 2015. It got so bad that the IRS even placed a tax lien on not only his businesses, but also his properties as well.

Next up we have O.J. Simpson, the athlete who is famous for his incredible football career (... and that other thing, but let's not get into that right now). At one point, it was revealed that Simpson hadn't actually paid any taxes since 2007 - and the amount that he owed totaled nearly $180,000.

There's no actual word on whether the money was paid, but given the plethora of other legal issues that Simpson was/is facing, it's safe to say that this one may not be high on his list of priorities.

Film actor Wesley Snipes - he of "Blade" and "Money Train" fame - also famously had a run-in with the IRS several years ago. This is kind of a weird one - Snipes claimed at the time that, because of an organization he belonged to, he didn't actually have to pay taxes at all. It seems that he thought he'd discovered some kind of loophole in the system that he was ready and willing to take advantage of.

Of course, he was wrong. According to multiple reports, it seems that Wesley Snipes never actually filed any tax returns on the money that he made between 1999 and 2006. That may seem brazen, and especially so when you consider that he made about $38 million during that period of time. He ended up spending three years in jail for not paying the $7 million in taxes that he owed and was eventually released in 2013.

In the 1990s, country singer Willie Nelson also had tax problems. At one point, he owed about $32 million and the IRS seized much of his property in order to pay for it. Allegedly, the issue stemmed from shady accounting practices on behalf of someone he hired. His accountant tried to put his money in various tax shelters that turned out to be fraudulent. Let that be a lesson to all of us: always be careful who you hire and make sure they can do what they say they can.

Last but not least we arrive at who is perhaps the most famous tax cheat of all time: Al Capone. During prohibition, Al Capone ran the mob in Chicago with an iron fist. He was making endless amounts of money through some truly nefarious tactics. In addition to wielding power, he'd made a legitimate fortune - all of which he failed to report to the IRS.

Naturally, you'd think the government would want to go after him on the whole "being a notorious gangster" thing, but that proved to be harder than it sounded. So what did they do? They went after him for the $215,000 in back taxes that he owed.

This approach proved to be so successful that they were able to put him away for 11 years, breaking his rule of the city forever.

In the end, let this be a lesson to all of us: it's not just common folks who run into trouble with the IRS every now and again, even though it may often seem like that. So the next time you get audited, or get a bill in the mail saying that you ultimately owe more than you thought you did, just remember: some of the biggest names in entertainment have been in the exact same situation that you are. It might not provide total comfort with what is going on, but it should surely help.

If you'd like to find out more about how to avoid issues with your taxes so that you don't wind up like the aforementioned celebrities, or if you just have any additional questions you'd like to discuss with an expert in a bit more detail, please don't delay - contact this office today.

June 15 is an Important Filing Deadline

Mon, 13 Jun 2022 12:04:54 GMT

Article Highlights:

Americans Living and Working Abroad
Extension Requests
Report of Foreign Bank and Financial Accounts (FBAR)
Statement of Foreign Financial Assets
Estimated Tax Payments
Estimated Safe Harbors

June 15 is the due date both for Americans living and working outside the U.S. to file their 2021 federal income tax returns and for the second estimated tax payment for 2022. Here are some important details for both.

Americans Living and Working Abroad - U.S. citizens and resident aliens (i.e., green card holders), and those with dual citizenship, living and working outside the U.S. must file their 2021 federal income tax returns by June 15.

A taxpayer qualifies for the June 15 filing deadline if both their tax home and residence are outside the U.S. and Puerto Rico, or they were serving in the military outside the U.S. and Puerto Rico on the regular due date of their return. A statement should be included with the return that indicates which of the two situations applies.

Taxpayers who can't meet the June 15 deadline can request an extension of time to file giving them until October 17 to file and avoid the late filing penalties. Taxpayers should file their extension requests electronically to avoid arguments with the IRS over whether the extension was filed on time. The other option is to paper file for an extension using Form 4868 , checking box 8, that you are “out of the country.” Be aware the extension – whether filed electronically or on paper – is only for filing and not an extension to pay your tax liability. To be valid the extension must include a reasonable estimate of your tax liability and payment to avoid late payment penalties. Please contact this office for assistance in completing and filing an extension.

U.S. Citizens Living Abroad May Also Need to File an FBAR - Generally, U.S. citizens and resident aliens with a foreign bank or financial account need to file Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This reporting requirement is separate from, and in addition to, any reporting required either on Form 1040, Schedule B or Form 8938. The FBAR isn't filed with the IRS but is filed electronically using the Bank Secrecy Act (BSA) filing system .

Taxpayers need to file an FBAR if they had an interest in, or signature or other authority over one or more foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2021. Because of this low threshold, taxpayers with any foreign assets should check to see if the FBAR reporting requirement applies to them as the penalties for failure to file an FBAR are extreme. Although the FBAR due date in 2022 was April 18, FinCEN grants an automatic extension, to October 17, to anyone who missed that original deadline.

In addition to filing an FBAR, certain taxpayers may also need to file Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. The 8938 is attached to the taxpayer’s individual income tax return, but if the taxpayer isn’t required to file an income tax return, then the 8938 isn’t required either.

Estimated Tax Payments – The next 2022 estimated tax payment is also due on June 15th. Unlike employees, who have income, Social Security, and Medicare taxes withheld from their wages, self-employed individuals must prepay their taxes by making quarterly estimated tax payments. These are referred to as estimated tax payments because the self-employed individual must estimate his or her net earnings for the year and pay taxes on a quarterly basis according to that estimate. Failure to do so will result in interest penalties.

The self-employed are not the only ones who are subject to estimated tax requirements, which also apply to anyone who has income that is not subject to withholding taxes and even to those whose taxes are not sufficiently withheld. Thus, if you have income from stock sales, property sales, investments, alimony from a pre-2019 divorce, partnerships, S-corporations, inherited pension plans, or other sources that are not subject to withholding, you may also be required to pay either estimated taxes or an underpayment penalty. Others subject to making estimated payments are individuals who must pay special taxes such as the 3.8% tax on net investment income or the employment tax on household employees.

Although these payments are called “quarterly” estimates, the periods they cover do not usually coincide with a calendar quarter.

* If the due date falls on a Saturday, Sunday, or holiday, the payment is due on the next business day.

An underestimate penalty does not apply if the tax due on a return (after withholding and refundable credits) is less than $1,000; this is the “de minimis amount due” exception. When the tax due is $1,000 or more, underpayment penalties are assessed.

These underpayment penalties are determined on a quarterly basis, so an underpayment in an earlier quarter cannot be made up for in a later quarter; however, an overpayment in an earlier quarter is applied to the following quarter.

The amount of an estimated tax installment payment is determined by estimating one fourth of the taxpayer’s tax for the entire year. When the income is seasonal, sporadic, or the result of a windfall, the IRS provides a special form, and the underpayment penalty is based on actual income for the period.

For individuals who do not want to take the time to estimate their quarterly taxes but who still want to avoid the underpayment penalty, Uncle Sam also provides safe-harbor estimates. However, even these can be tricky. Generally, a taxpayer can avoid an underpayment penalty if his or her withholding and estimated payments are equal to or greater than:

90% of the current year’s tax liability or
100% of the prior year’s tax liability.

However, these safe harbors do not apply if the prior year’s adjusted gross income is over $150,000, in which case, the safe harbors are:

90% of the current year’s tax liability or
110% of the prior year’s tax liability.

Sometimes, individuals who have withholding on some (but not all) of their sources of income will increase that withholding to compensate for the additional income sources that have no withholding. Although this may work, withholding adjustments are not as precise as quarterly payments and should be used with caution.

This office can assist you in filing your individual tax return and FBAR, estimating “quarterly” payments, adjusting withholding, and setting up safe-harbor payments. Please call for assistance.

Video Tips: Leave-Based Donation to Ukranian Relief

Sun, 12 Jun 2022 12:30:59 GMT

The U.S. tax code provides businesses an opportunity to let their employees donate their unused vacation, sick, or personal leave to qualified charities for Ukrainian Relief. If you or your employers are considering this, there are some tax implications that you should be aware of.

To All the Recent Grads – Some Real-World Financial Advice

Fri, 10 Jun 2022 12:39:38 GMT

You’ve just gotten your college diploma. Congratulations!

Graduating is an enormous accomplishment well worth celebrating, and with the added complication of the global pandemic, your experience was more challenging than most. But now that the last parties are over and you’ve packed up your dorm room or apartment, it’s time to get ready for the next phase of your life: a full-time, professional job. The job market is hot, so finding a position with real potential is highly probable, but it’s important that you know what to do once you start in your new position. We’ve assembled some invaluable advice – both financial and professional — to help you in your journey.

Financial Advice First

You’ve been managing money for yourself for the last few years, but there’s a big difference between working with the money you’ve earned from part-time jobs or internships (or you’ve been gifted from a budget provided by your parents) and knowing how to manage a weekly salary – especially if you’re making a significant amount. You may be tempted to skip returning to your parents’ home, to rent an apartment and buy a car and some work clothes and begin making your way entirely on your own, but that’s not always the smartest thing for you to do financially. Consider the following tips for money management:

As much as you may want to live independently, if you can live with your family long enough to give yourself a bit of savings, you’ll be better off in the long run. It will help you to afford the first and last month’s rents that landlords require, help pay for furniture and other essentials, and let you start paying down any loans that you may have.
Your company will likely offer you a selection of benefits, and the way that you approach these can make a significant difference. If you are offered a 401(k) , take advantage of it, and as much as you’d like to hold onto some of your cash, you should always contribute at least as much as your employer is willing to match. Failing to do so is literally giving away free money for your retirement. You should also think carefully about the health insurance that you’re offered. Keep in mind that you are eligible to remain on your parents’ policy until you are 26, so compare the costs and benefits before signing up.
Consider opening a retirement fund that is separate and apart from the 401(k). Retirement may seem like a lifetime away, but getting yourself into the habit of depositing into a Roth IRA is a smart thing to do. The money goes in after-tax and can be taken out when you retire tax-free. You can put away as much as $6,000 per year.
If you’ve been using your parents' credit cards to pay for things and don’t have any loans, then you also don’t have a credit history – and you need one. Take out a credit card in your own name and make sure that you pay them off every month. Take care to pay every bill in full on time.
Learn to keep a budget. Now that you have a predictable salary and take-home pay, it’s time to sit down, write down your total monthly net income and total monthly expenditures on necessities like groceries, rent, utilities, etc., and figure out how much you should be spending, how much you should be saving, how much should go to paying off debts – and stick to it!

Now the Professional Advice

Starting a new job always feels like opening a door to endless possibilities – but that’s especially true of your first job out of college. Though you’re sure to make plenty of mistakes, there are also things that you can set yourself up to do right, right off the bat. Here are some suggestions collected from multiple executives and culled from years of experience:

Don’t be too risk-averse – this is the time to take some chances. As long as your ideas have been thought out, it’s okay to make mistakes – and sometimes your fresh perspective can make a real difference and set you above the crowd.
Let your personal attributes shine. Many people enter the professional world with an idea of how they are supposed to act or who they are supposed to emulate. You were hired for your own characteristics, so be sure to be yourself.
Meet as many people as possible. Networking is an invaluable tool. Each new person that you meet should be considered a link to your future.
Remember that taking your time can be a virtue. Don’t be in such a rush to get where you’re going that you skip steps that can be valuable to your growth.
Take every opportunity to travel. Whether it is throughout the United States or internationally, you will learn a great deal from traveling as part of your job. Not only will you get greater exposure to the way that others do their work or live their lives, but you will be viewed as more open to interesting or diverse assignments.
Don’t turn down responsibilities that are outside of your expertise. The more flexible and adaptive you are, the more you will learn, and the more opportunities that you will be given.
Remember that every job teaches you something. Even a job that you despise has skills that you can carry or use to create a better opportunity. It may not be your dream job, but it may be a necessary step to reaching your dream job.
Be sure to listen carefully to those around you, whether they are your colleagues, your clients, or your supervisors. Being a good listener is highly valued.

As you grow in your career, you may have financial questions or need guidance from someone with more experience. Please contact our firm if you need help navigating personal finance or tax-related matters.

Tax Tips for Recently Married Taxpayers

Thu, 09 Jun 2022 12:47:15 GMT

Article Highlights:

Social Security Administration
Contractors
Internal Revenue Service
U.S. Postal Service
Withholding & Estimated Tax Payments
Health Insurance Marketplace

This is the time of year for many couples to tie the knot. When you marry, here are some post-marriage tips to help you avoid stress at tax time.

Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card at your local SSA office. The form is available on SSA’s Web site , by calling 800-772-1213, or at local offices. Your income tax refund may be delayed if it is discovered your name and SSN don’t match at the time your return is filed.
Notify Those Paying You as a Contractor – If you are a self-employed sole proprietor filing your business income and expenses on a Schedule C, and you have a different name now that you are married, notify anyone who has been issuing you a Form 1099-NEC under your Social Security number about the name change. This will prevent a mismatch with the IRS.
Notify the IRS - If you have a new address, you should notify the IRS by sending in a completed Form 8822 , Change of Address. If your state has an income tax, also notify the appropriate tax agency.
Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state tax agency correspondence can be forwarded.
Review Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket, and you may have an unpleasant surprise when we prepare your joint return for the first time. On the other hand, if only one of you works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. In either case, it may be appropriate to review your withholding (W-4 status) and estimated tax payments, if any, for the year to make sure that you are not going to be under-withheld and that you don’t set yourself up to receive bad news for the next filing season. Even if no adjustment is needed with your tax withholding, you will still need to advise your employer of your new marital status and name change, if applicable.
Notify the Marketplace – If you or your spouse have health insurance through a government Marketplace (Exchange), you must notify the Marketplace of your change in marital status. If you were included on a parent’s health insurance policy through a Marketplace, then the parent must notify the Marketplace. Failure to notify the Marketplace can create tax filing problems.

If you have any questions about the impact of your new marital status on your taxes, please give this office a call.

Best Practices for Managing Your Business Through an Economic Downturn

Wed, 08 Jun 2022 12:57:42 GMT

The United States economy is nothing if not cyclical - which can be a good thing or a bad thing depending on when, exactly, you're trying to operate a business.

According to one recent study , roughly 57% of small business owners say that they fear the U.S. economy will only get worse over the last year. Many are worried that if something doesn't change, things could get as bad as they were in April 2020. Keep in mind that many of these small business owners are still very much feeling the impact of the onset of the COVID-19 pandemic that took place during that period of time.

But the key difference here is that nobody really saw the Coronavirus - or its long-lasting damage - coming at the time. Indeed, it took virtually everyone by surprise. Now, people have a chance to prepare themselves to hopefully mitigate as much risk from another such event as possible.

Your Business and the Economy: What You Need to Know

By far, the most important step that you can take to help protect and manage your business during an economic downturn involves paying more attention to your cash flow than ever.

Cash flow was always one of the biggest reasons why small businesses prematurely shutter their doors and the risk is even greater during the unpredictability of a downturn.

Therefore, to keep your business as healthy as possible, you need to do whatever it takes to bring in more income than you're spending on expenses each month. This isn't something you're going to be able to do overnight - it's not like flipping a light switch. You need to talk to your financial professional today to see what you can cut, if necessary, to help create a stable foundation from which to work from.

Along the same lines, if yours is a business that keeps an inventory on hand, you'll want to take care to start reviewing your inventory management practices sooner rather than later.

Inventory is one of the biggest overhead costs for every organization and many see it as a "necessary evil." But what they need to understand is that it doesn't need to be nearly as large of a burden as some allow it to become.

Gather your team and see what you can do to reduce the amount of inventory you have on-site. Go over your analytics and historical reporting to make sure that you're not producing more products than you're actually selling. Oftentimes reducing the amount of inventory also allows you to reduce your warehousing costs as well because you're no longer paying for products that are just sitting in a warehouse somewhere waiting to be sold.

In the run-up to any economic downturn, it is also important to double down on that which you do better than anyone else. As businesses continue to grow, they often add new products and services in the name of "diversification." If the economy were verifiably strong, that would be a relatively decent time for experimentation. An economic downturn is not that time. Instead, focus on everything you do best and let the rest fall by the wayside for the time being. Remember that you're not necessarily trying to grow bigger during this period - you're trying to do what you have to in order to survive.

Finally, consider attempting to win over the customers of your competition now before things get particularly tricky in the marketplace. Figure out which of your competitors are most successful and pay attention to what they are doing. Do they have a particularly compelling value proposition? Do they know their audience better than you know yours?

Likewise, are there any gaps that you can identify that are potentially able to be taken advantage of? If you start winning over new customers today, you'll increase the chances that they will be there for you when you truly need them tomorrow.

In the end, it's simply not possible to avoid an economic downturn altogether. They've happened before and they will certainly happen again. But what you can do is make sure that you're prepared for this inevitability, which is what these best practices are all about.

If you'd like to find out more information about what your small business can do to protect itself in the event of another economic downturn, or if you just have any additional questions that you'd like to go over with someone in a bit more detail, please don't hesitate to contact this office today.

Tips for Students Planning to Work During the Summer

Tue, 07 Jun 2022 13:06:14 GMT

Article Highlights:

Form W-4
Watch Out for Payroll Surprises
Tips
Odd Jobs
Self-Employment Tax
Working for Parents
ROTC Students
Newspaper Delivery
Retirement Contributions

As the summer break from school approaches, many students are looking for part-time summer employment. Both parents and students should be aware of the tax issues that need to be considered when working a summer job. Here is a rundown of some of the more common issues:

Completing Form W-4 – The W-4 form is used by employers to determine the amount of tax that will be withheld from an employee’s paycheck. Students with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student with income only from summer and part-time employment, and who is claimed as a dependent of someone else, can earn as much as $12,950 (the standard deduction amount for 2022) without being liable for income tax. However, if the student has investment income, the tax determination becomes more complicated because, as he or she is a dependent of another, special rules apply.
Watch Out for Payroll Surprises – Some employers may attempt to avoid their payroll tax liabilities by paying the student in cash and incorrectly treating them as an independent contractor, thus leaving the student with the responsibility of paying both the employee’s and employer’s payroll tax liability (see self-employment tax below). If a potential employer intends to do that, they will generally ask the student to complete a Form W-9 rather than a W-4 or simply ask for their Social Security Number (SSN) without requesting a W-4.
Tips – A student who works as a waiter or a camp counselor may receive tips as part of their summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. This reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and Medicare taxes) and income taxes on these reported tips, then includes the tips and wages on the employee’s W-2.
Odd Jobs – Many students do odd jobs over the summer and are paid in cash. Just because the payment is in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see next). These earnings include income from odd jobs like dog walking, babysitting, and lawn mowing.
Self-Employment Tax – When a student works as an employee, the employer withholds Social Security tax and Medicare tax from the employee’s pay, matches the amount dollar for dollar, and remits the combined amount to the government. On the other hand, a student who is self-employed is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings are $400 or more. This tax pays for future benefits under the Social Security system and Medicare Part A. Even if the student is not liable for income tax, this 15.3% tax may apply to a student’s odd jobs.
Working for Parents – A child under the age of 18 working in a business solely owned by his or her parents is not subject to payroll taxes. This saves the child from having to pay the 7.65% payroll taxes and also provides the parent with relief from payroll taxes. The payroll tax exception won’t apply if the parent’s business is set up as a corporation.
ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:
They are in the business of delivering newspapers;
All of their pay for these services directly relates to sales rather than to the number of hours worked; and
They perform the delivery services under a written contract which states that they will not be treated as an employee for federal tax purposes.
Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.
Retirement Plan Contributions – Putting away money for retirement is probably the last thing a student will want to spend their summer earnings on. However, having earned income opens up the opportunity to make traditional and Roth IRA contributions.

If you are a student or the parent of a student with questions about these or other issues associated with student employment, please call this office for assistance.

Do You Understand Tax Lingo?

Thu, 02 Jun 2022 13:51:12 GMT

Article Highlights

Filing status
Adjusted gross income (AGI)
Taxable income
Marginal tax rate
Alternative minimum tax (AMT)
Tax Credits
Underpayment of estimated tax penalty

When discussing taxes, reading tax-related articles or trying to decipher tax form instructions, one needs to understand the lingo and acronyms used by tax professionals and authors to be able to grasp what they are saying. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms.

Filing Status - Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you qualify for the more beneficial head of household status. A special status applies for some widows and widowers.

Head of household is the most complicated filing status to qualify for and is frequently overlooked, as well as often being incorrectly claimed. Generally, to qualify for the head of household status the taxpayer must be unmarried AND:
pay more than one half of the cost of maintaining his or her home, a household that was the principal place of abode for more than one half of the year of a qualifying child or certain dependent relatives, or
pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.

A married taxpayer may be considered unmarried for the purpose of qualifying for head of household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.

Surviving spouse (also referred to as qualifying widow or widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. Joint rates are used. In the year the spouse passed away, the surviving spouse may file jointly with the deceased spouse if the survivor has not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return, which would then also require the surviving spouse to use the married separate status for that year.

Adjusted Gross Income (AGI) - AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before the standard or itemized deductions). The most common adjustments are penalties paid for early withdrawal from a savings account, and deductions for contributing to a traditional IRA or self-employment retirement plan. Many tax benefits and allowances, such as credits, certain adjustments, and some deductions are limited by a taxpayer’s AGI.
Modified AGI (MAGI) - Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited.
Taxable Income - Taxable income is AGI less deductions (either standard or itemized). Your taxable income is what your regular tax is based upon using a tax rate schedule specific to your filing status. The IRS publishes tax tables that are based on the tax rate schedules and that simplify the tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999.
Marginal Tax Rate (Tax Bracket) - Not all of your income is taxed at the same rate. The amount equal to your standard or itemized deductions is not taxed at all. The next increment is taxed at 10%, then 12%, 22%, etc., until you reach the maximum tax rate, which is currently 37%. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 24% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $240 in federal tax ($1,000 x 24%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate using the table below.

Keep in mind when using this table that the marginal rates are step functions and that the taxable incomes shown in the filing-status column are the top value for that marginal rate range.

2022 MARGINAL TAX RATES

TAXABLE INCOME BY FILING STATUS

* Also used by taxpayers filing as surviving spouse

Taxpayer & Dependent Exemptions - Prior to changes made by tax reform legislation, you were allowed to claim a personal exemption for yourself, your spouse (if filing jointly), and each individual who qualifies as your dependent. The deductible exemption amount was adjusted for inflation annually; the amount for 2022 was supposed to be $4,400. However, the tax reform didn’t quite repeal the exemption deduction – it just suspended the deduction for exemptions for 2018 through 2025. Although there’s currently no exemption deduction, the $4,400 amount is used other place in the tax law.
Dependents - To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you provide (pay for) over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.

Qualified Child - A qualified child is one who meets the following tests:

(1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;

(2) Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;

(3) Is younger than the taxpayer;

(4) Did not provide over half of his or her own support for the tax year;

(5) Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and

(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).

Deductions - A taxpayer generally can choose to itemize deductions or use the standard deduction. The standard deductions, which are adjusted for inflation annually, are illustrated below for 2022.

To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you provide (pay for) over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.

Itemized deductions generally include:

(1) Medical expenses, limited to those that exceed 7.5% of your AGI.

(2) Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes, but limited to a total of $10,000 for the year.

(3) Interest on qualified home acquisition debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses). The deduction for interest paid on a home mortgage may be limited, depending on the amount of the loan.

(4) Charitable contributions, generally limited to 60% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI.

(5) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.

Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that has often taken taxpayers by surprise, although due to the changes made by the tax reform legislation fewer taxpayers are being hit with AMT. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. However, even taxpayers whose only “tax shelter” is having a large number of dependents or paying high state income or property taxes were being affected by the AMT. Your tax must be computed by the regular method and also by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.
The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.
Itemized deductions:
§ Taxes are not allowed at all for the AMT.
Some Home Acquisition Debt Interest. Interest paid on non-conventional homes such as motor homes and boats is not allowed as an AMT deduction.
Nontaxable interest from private activity bonds is tax free for regular tax purposes, but some is taxable for the AMT.
Statutory stock options (incentive stock options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.
Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.

A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers.

AMT EXEMPTIONS & PHASE OUT - 2022

AMT TAX RATES—2022

(1) $103,050 for married taxpayers filing separately

Your tax will be whichever is the higher of the tax computed the regular way and by the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom-line tax and raise a question of possible AMT.

Tax Tip: If you were subject to the AMT in the prior year, you itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be taxable in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not included in the subsequent year’s income.

Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are some commonly encountered credits that are based simply on the number or type of your dependents or your income. These are outlined below.
Child Tax Credit - The child tax credit for 2022 is $2,000 per child. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer’s earned income exceeds a threshold ($2,500 for 2022), but not more than $1,500, is refundable. The credit begins to phase out at incomes (MAGI) of $400,000 for married joint filers and $200,000 for other filing status. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the threshold.

Dependent Credit – A nonrefundable credit s available to taxpayers with a dependent who isn’t a qualifying child. The dependent credit is $500. A qualifying child, the taxpayer, and if married, the spouse are not eligible for this credit. A child who isn’t a qualifying child but who qualifies as a dependent under the dependent relative rules would qualify the taxpayer to claim this credit.

Earned Income Credit - This is a refundable credit for a lower-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $10,300 (for 2022) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.

2022 EIC PHASE-OUT RANGE

Withholding and Estimated Taxes - Our “pay-as-you-earn” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-earn” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:

1) 90% of the current year’s tax liability; or

2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability.

If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.

Please call if this office can be of assistance with your tax planning needs.

401(K) CONTRIBUTION LIMITS

Wed, 01 Jun 2022 14:06:18 GMT

Many employers offer what are commonly referred to as 401(k) plans, named after the tax code section that created the plans. These plans allow employees to defer part of their earnings for retirement. Some employers offer matching contributions that increase the attractiveness of the programs.

The value of 401(k) plans is enhanced even further by increasing the general contribution limit and allowing individuals over age 50 to make additional contributions. Where an employer’s plan permits, individuals can contribute amounts that are not excluded from income to a 401(k) plan in a manner similar to Roth IRA contributions.

Catch-up contributions are exempt from the regular dollar limits on deferrals provided that all 401(k) plan participants are permitted to make catch-up contributions. The table below summarizes the inflation adjusted limits for 401(k) plans for 2015 through 2022. If you have additional questions about participating in your employer’s 401(k) plan, please call this office.

401(k) Contribution Limits

You May be Able to Donate Your Unused Employee Vacation, Sick, or Personal Leave to Ukranian Relief

Tue, 31 May 2022 14:14:49 GMT

Article Highlights:

Forgoing Vacation, Sick, or Personal Leave in Exchange for Ukrainian Relief
Program Duration
Employee and Employer Tax Implications
IRS Notice 2022-28

There is a little-known disaster provision of the tax code that, where if an employer has adopted a leave-based donation program, the employees can forgo paid vacation, sick, or personal leave in exchange for their employer making equivalent cash payments to qualified charitable organizations. This does not necessarily mean the employee also forfeits the time off; it will not be paid time off to the extent it is converted to leave-based donation payments.

Employer leave-based donation payments made by an employer before January 1, 2023, to a qualified U.S. charitable organization to aid victims of the further Russian invasion of Ukraine will not be treated as gross income or wages (or compensation, as applicable) of the employees of the employer. Thus, the employee will not be taxed on the vacation, sick, or personal leave pay given up, but since it is not taxable the employee cannot also deduct it as a charitable contribution.

Employers can deduct the contribution and avoid the employer share of payroll taxes that would otherwise be due on paid employee vacation, sick, or personal leave. From the employee’s viewpoint, they also avoid their share of payroll taxes as well as the income taxes they would have had to pay on the forgone income.

This opens a tremendous opportunity for employees to be able to donate to Ukrainian relief efforts. Employees wishing to participate need to check with their employer to see if the employer is participating in this voluntary program. Employers wishing to participate can refer to IRS Notice 2022-28 or call this office for additional information.

Video Tips: How to Distinguish Hobby vs. Business for Tax Purposes

Mon, 30 May 2022 14:21:30 GMT

If you are considering earning money from your hobby, it's important to understand the tax implications. According to the IRS, any income generated from a hobby must be reported on your tax return, but it is not eligible for deductions like business expenses. So how does the IRS determine if your activity is considered a hobby or a business? Watch this video for a brief overview.

Forgot Something on Your Tax Return? It’s Not Too Late to Amend the Return

Thu, 26 May 2022 14:29:49 GMT

Article Highlights

Overlooked or Late Information
Three Year Refund Statute
Multiple Amendments
Amending State Return

If you discover that you forgot something on your tax return, you can amend that return after it has been filed. The need to amend can include a number of issues:

Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation.
Overlooking an item of income or receiving a late or corrected 1099.
Forgetting about a deductible expense.
Forgetting about an expense that would qualify for a tax credit.

These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2021 return or prior year returns.

Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return.

If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. For example, the statute of limitations for the 2021 return will generally expire on the April filing due date for 2025. Some states have a longer statute.
Generally, you do not need to file an amended return to correct math errors. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms.
If you are filing to claim an additional refund, we should wait until you have received your original refund before filing Form 1040X.
If you owe additional tax, file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
When amending multiple paper-filed returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed.
If the changes involve a new schedule or form that wasn’t part of the original return, it must be completed and included with the amended return. And if there are changed forms, they must be included as well. In addition, it may be appropriate to include documentation related to the changes to avoid subsequent correspondence from the IRS or state agency.
A detailed explanation of the changes must also be included. This is required to explain to the government’s processing staff the reason for the amendment. An insufficient explanation can lead to additional correspondence and delays.
Depending on why an amended federal return is required, it may be necessary to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, we will need to amend the state return as well as the federal.

An amended return can be more complicated than the original, so please contact this office for assistance in preparing your amended returns.

Is Your Will or Trust Up-to-Date?

Tue, 24 May 2022 14:38:27 GMT

Article Highlights:

Estate Tax Exclusion
Why a Will or Trust?
Life-Changing Circumstances
Beneficiaries

When was the last time you or your attorney reviewed or updated your will or trust? If it was some time ago before the passage of substantial tax law changes over the past few years, your documents may be out of date. Among the many changes was a substantial revision to the estate tax exclusion.

No doubt your will or trust was prepared with not just estate taxes in mind but so that your assets will be distributed after your death according to your wishes. However, certain events besides the tax laws being revised can cause these documents to become outdated.

Life’s ever-changing circumstances make estate planning an ongoing process. If you don’t keep your will or trust up to date, your money and assets could end up in the wrong hands. That’s why a periodic review of your will or trust is an essential part of estate planning. Here is a partial list of occurrences that could cause your will or trust to be outdated:

Your marital status has changed.
Your heirs’ marital status has changed.
You have relocated to another state.
You’ve had or adopted children.
Your children are no longer minors.
Your children are now mature enough to handle their own financial matters.
Your assets have significantly changed in value.
You have sold or acquired a major asset or assets.
Your personal representative (executor, trustee) has changed.
You wish to delete or add heirs.
Your health status has changed.
Estate laws have changed.

Are your named beneficiaries up to date on your life insurance policies, IRA accounts, and pension plans? For example, did you forget to remove your ex-spouse or a deceased relative as your beneficiary?

You should never overlook or put off these issues because once you pass on, it will be too late to make changes.

If you have questions about how your changed circumstances may impact your estate taxes, please give this office a call.

Understanding What Innocent Spouse Relief Is, and Whether You Need It

Mon, 23 May 2022 14:51:05 GMT

When you got married, you and your spouse pledged your love for each other and promised to stand together through good times and bad, sickness and health. But what happens if your spouse turns out to be a tax cheat, and you signed a joint tax return without realizing it. Can you be held responsible?

Finding out that your spouse has dragged you into their tax evasion is a twofold problem. There’s the emotional aspect that surrounds your relationship and your marriage, and the more pragmatic issue of whether their actions make you subject to fines or penalties, as well as whether you’ll have to pay for their taxes. Though we have no advice for you on the former, there’s good news on the latter. You’re probably eligible for what is known as Innocent Spouse Relief.

Filing Joint Taxes and Innocent Spouse Relief

Most married couples file their taxes jointly. There are plenty of reasons for doing so, including several important incentives for doing so that the government offers. But when you sign a joint income tax return, it makes both you and your spouse equally responsible for the taxes that are due, as well as any fines, penalties, and interest that may accrue. That responsibility is joint – meaning that you owe it together – but it is also able to be collected severally – which means that each individual may be expected to pay the whole.

Joint tax returns are signed by both spouses, and the signature is a pledge that the taxes are accurate. When the IRS finds that is not the case, it has no interest in or ability to establish which spouse is behind the error, or in deciding who should make up the difference. Both spouses are responsible for paying their tax liability, and it is up legally up to them to make it happen. If the shortfall and any related penalties or fines aren’t paid, then both can be pursued legally and financially, together or separately. In fact, the courts have gone so far in support of the IRS’ pursuit of either spouse that they have determined that the agency is not required to abide by divorce decrees and other legally binding agreements meant to divert the agency away from one or the other spouse.

Still, the agency has acknowledged that their equal opportunity pursuit of both signors of a joint tax return is not necessarily appropriate when one of the partners was unaware of their spouse’s wrongdoing. That’s where Innocent Spouse Relief comes in. It specifically grants liability relief to an innocent spouse for any unpaid taxes, as well as associated interest and penalties, for income or wrongdoing about which they were unaware. If there are portions of the tax return that are correct and legitimate, then the co-signer of the return is still responsible and can be pursued for those related taxes and fees.

If you find that your spouse committed some form of tax evasion on your joint tax return and you want to see whether you qualify for Innocent Spouse Relief, here are the basic criteria:

Having filed a joint tax return with your spouse
The IRS has indicated that the tax liability on your joint tax return is greater than the amount reflected on the form
The shortfall in the amount reflected on your tax return was a direct result of an action by your spouse
You are able to demonstrate a lack of knowledge about the shortfall on the tax return and had no reason to suspect that such a thing had occurred (the IRS refers to this as an absence of either “reason to know” or “actual knowledge”)
The IRS agrees that it would reflect a level of “unfairness” to hold you responsible for the shortfall created by your spouse.

So how does the IRS establish – or how do you disprove — that you had knowledge of your spouse’s tax evasion?

It’s all a matter of timing. If the IRS has reason to believe that you knew about the issue when the return was filed (and when you signed), then you cannot be considered innocent. In fact, you would be deemed an accomplice. Of course, proving what somebody knew or didn’t know is a big challenge, so the government only holds itself to the standard of proving that there was “reason to know.” There are a few considerations that go into that test, including:

What type of tax deficiency is involved and the amount as compared to other list items in the tax return
The couple’s finances
The educational background and business experience of the spouse who is claiming innocence
How much each spouse was actively engaged in the specific issue that the tax deficiency involved
Whether, in a way that is considered reasonable or that would be expected, the spouse claiming innocence questioned the specific items involved in the deficiency on the return when signing it
Whether the deficiency made that year’s return significantly different from previous years’ returns

The basic element that these considerations are proving or disproving is whether the spouse claiming innocence had a reason to know or suspect that there was something amiss on the return at the time that they signed it. And since knowledge is hard to prove, courts limit their decision that knowledge existed to situations where the IRS is able to provide significant evidence that the spouse claiming innocence actually did know about the wrongdoing. Without strong proof, the innocence plea is generally upheld.

How Would You Prove Yourself to Be Deserving of Innocent Spouse Relief?

If you have filed a joint return that has been found to be evasive and you want to prove yourself eligible for innocent spouse relief, you need to meet three specific criteria. They are:

Belief that the discrepancy was a result of a mistake discovered after the tax return was filed
Have evidence that you didn’t know about the discrepancy
Show that you believe that after all the information is presented to the court, it will be evident that you shouldn’t be held responsible

Each of these points goes back to whether you had reason to know about the shortfall on your tax return. In some cases, the understated taxes at issue are a result of incorrect calculations – simple math errors or mistakes made regarding credits or tax basis on an asset. But in other cases, it is a matter of unreported income, either from a side business, from cash transactions, or from investments.

If you want to request innocent spouse relief you need to do so within two years of the time that you become aware that the IRS tries to collect the amount that is owed. That two years can be interpreted in a number of ways, including you having become aware of the mistake on the return and suggesting to your spouse that you owe more money; or by having received notification from the IRS that there is a problem with the joint return. It can also be a lawsuit filed against you by the government indicating that you have joint liability or an intent to levy your property. Either way, the application is submitted using IRS Form 9968, Request for Innocent Spouse Relief. You can also qualify for Innocent Spouse Relief if the IRS files a claim saying as much in court if there is a court proceeding such as a bankruptcy filing that you are involved in.

One thing that is important for anybody filing for innocent spouse relief to be aware of is that you cannot do so without your spouse being notified of your filing. This is even true if you are in the midst of a divorce or have been subjected to domestic violence. There is no way to avoid your spouse being involved in the process.

The idea of your spouse including you in their wrongdoing — and possibly subjecting you to action by the IRS — is enough to put any marriage to a significant test. While you may want to seek marriage counseling, or legal action, with regards to how purposeful tax discrepancies impact your relationship, the question of how it impacts your finances is an entirely different story, and one that requires consulting with a tax expert. For information on your options and how you should proceed, contact our office today to set up a time for a conversation.

Video Tips: Cash Flow Solution for Seniors

Sun, 22 May 2022 14:56:15 GMT

With the increasing inflation rate, senior retirees may have a hard time maintaining a positive cash flow for their living expenses. If you are in such a situation, a reverse mortgage may be a good solution for you. Watch this video to find out if you should consider a reverse mortgage.

June 2022 Business Due Dates

Sun, 22 May 2022 08:54:43 GMT

June 15 - Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare, and withheld income tax for May 2022. This is also the due date for the non-payroll withholding deposit for May 2022 if the monthly deposit rule applies.

June 15 - Corporations

Deposit the second installment of estimated income tax for 2022 for calendar year corporations.

June 2022 Individual Due Dates

Sun, 22 May 2022 08:48:30 GMT

June 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

June 15 - Estimated Tax Payment Due

This is the last day to timely make your second quarter estimated tax installment payment for the 2022 tax year. Our tax system is a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include:

Payroll withholding for employees;
Pension withholding for retirees; and
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors:

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

June 15 - Taxpayers Living Abroad

If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15 is the filing due date for your 2021 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 or 1040-SR by October 17. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below).

Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date.

Combat Zone - For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking action with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of:

The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or
The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area.

In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation.

It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement, which allows you to pay your taxes over a period of up to 72 months.

Please contact this office for assistance with an extension request or an installment agreement.

How QuickBooks Online Helps You Track Mileage

Sat, 21 May 2022 09:17:04 GMT

If you drive even a little for business, it’s easy to let mileage costs slide. After all, it’s a pain to keep track of your tax-deductible mileage in a little notebook and do all the calculations required. If you do rack up a lot of business miles, you probably forget to track some trips and end up losing money.

QuickBooks Online offers a much better way. Its Mileage tools include simple fill-in-the-blank records that allow you to document individual trips. You can either enter the starting point and destination and let the site calculate your mileage and deduction or enter the number of miles yourself.

If you use QuickBooks Online’s mobile app, it can track your miles automatically as you drive (as long as you have the correct settings turned on). Here’s a look at how all of this works.

Setting Up

To get started, click the Mileage link in QuickBooks Online’s toolbar. The screen that opens will eventually display a table that contains information about your trips, but you need to do a little setup first. Click the down arrow next to Add Trip in the upper right corner and select Manage vehicles . A panel will slide out from the right. Click Add vehicle .

You’ll need to supply information about your vehicles before you can start entering trips.

You’ll need to supply the vehicle’s year, make, and model. Do you own or lease it, and on what date was the vehicle purchased or leased and put into service? Do you want to have your annual mileage calculated by entering odometer readings or have QuickBooks Online track your business miles driven automatically? When you’re done making your selections and entering data, click Save .

Entering Trip Data

You can download trips as CSV files or import them from Mile IQ, but you’re probably more likely to enter them manually. Click Add Trip in the upper right corner. In the pane that opens, you’ll enter the date of the trip and either the total miles or start and end point. You’ll select the business purpose and vehicle and indicate whether it was a round trip. When you’re done, click Save . The trip will appear in the table on the opening screen, and your current possible total deduction will be in the upper left corner, along with your total business miles and total miles.

If you want to designate a trip as personal, click the box in front of the trip in that table. In the black horizontal box that appears, click the icon that looks like a little person, then click Apply . Now, the trip will appear in the Personal column and will not count toward your business tax-deductible mileage.

When you select a trip in the Mileage table, you can mark it as personal so it’s not included in your business tax-deductible miles.

Personal Trips Can Count, Too

If you use your vehicle(s) for personal as well as business purposes, tracking some of those miles can also mean a tax deduction. For tax year 2022, you can deduct 18 cents per mile for your travel to and from medical appointments. Note: Medical mileage is only deductible if medical exceeds a certain percent of AGI. Be sure to check with the IRS yearly tax code, as they update the mileage amounts annually.

And if you do volunteer work for a qualified charitable organization, the miles you drive in service of it can be deducted at the rate of 14 cents per mile. You can also claim the cost of parking and tolls, as long as you weren’t reimbursed for any of these expenses. Obviously, the IRS wants you to keep careful records of your charitable mileage, and QuickBooks Online can provide them.

QuickBooks Online doesn’t track these deductions, but you’ll at least have a record of the miles driven.

Auto-Track Your Miles

The easiest way to track your mileage in QuickBooks Online is by using its mobile app. You can launch this and have it record your mileage automatically as you’re driving. Versions are available for both Android and iOS, and they’re different from each other. They also have more features than the browser-based version of QuickBooks Online, like maps, rules, and easier designation of trips as business or personal.

The iOS version of Mileage in the QuickBooks Online app

In both versions, you’ll need to click the menu in the lower right corner after you’ve opened the QuickBooks Online app and select Mileage . Make sure Auto-Tracking is turned on. Your phone’s location services tool must be turned on, too. There are other settings that vary between the two operating systems. You can search the help system of either app to make sure you get your settings correct if the onscreen instructions aren’t clear enough.

Of course, you won’t see the fruits of your mileage deductions until you file your 2022 taxes. But you can factor these savings in as you’re doing your tax planning during the year. Please let us help if you’re having any trouble with QuickBooks Online’s Mileage tools, or if you have questions with other elements of the site.

The Top Cash Flow Tips That Medical Practices Need To Follow

Thu, 19 May 2022 13:33:53 GMT

By far, one of the biggest issues that most organizations face is and will always be cash flow. This is especially true when it comes to medical practices, which rely more heavily on customer invoicing than most.

Getting a hold of your practice’s cash flow situation may be difficult, but it certainly isn’t impossible – provided that you’re able to keep a few key tips and tricks in mind.

Cash Flow Best Practices for Medical Organizations: Breaking Things Down

Obviously, there are a lot of factors that stand to impact the cash flow capabilities of a medical practice – which is why it’s always so important to address the situation from as many angles as possible.

Case in point: a medical provider should always be verifying the insurance status of a patient before offering services of any kind. If an emergency situation were to come up, you definitely have a duty to do whatever is in your power to help someone out. But at the same time, that doesn’t mean that you can’t verify the insurance status for every patient that walks through the door for some type of routine procedure.

Thanks to automation, this process is far easier than it has been in the past. You can have someone provide their insurance information in a matter of moments, allow the computer to verify it against what you already have on file just as quickly, and proceed with the task at hand. That way, you know immediately whether or not you’re going to get paid for what you’re doing – and how much that payment will be.

Along the same lines, you’ll also want to train your staff to request payment at the time of service whenever possible. Remember that cash flow issues don’t necessarily come about because patients won’t pay – it’s because they haven’t yet paid and that money is suddenly in flux. Therefore, if people are able to pay their bills on the date of their appointment, they should absolutely be encouraged to do so. Not only that, but you could offer some type of incentive program to help move things along – like some type of savings plan where people will be charged less if they pay up-front and in cash.

Of course, the burden for these types of payment-related issues doesn’t fall exclusively on the patients themselves. Sometimes practices will fall into the trap of failing to send out invoices until the last possible minute. You’ll have X number of patients with outstanding balances who collectively owe Y amount of money, funds that you now need as soon as possible. You can’t reasonably expect to send out an invoice on a Monday and have all of those funds by Friday, even if patients are more than willing to settle what they owe.

Therefore, you need to be sending out patient invoices as soon after the initial appointment as possible. That way, people have ample time to make preparations on their end and you have enough time to properly budget the amount of money coming into the practice.

There are other ways to address cash flow issues with medical practices that don’t have anything to do with patients at all. One of the main ways involves taking a closer look at how you’re handling your relationship with your suppliers.

Rather than paying a supplier at the exact moment you get an invoice, consider waiting to pay them on the actual due date. Remember that it’s called a “due date” for a reason. That way, those funds are still available should they be necessary elsewhere.

You could also take steps to reduce your supply inventory as much as possible. Especially as your practice continues to age, there will come a time when you know what you need and what you don’t. This will likely coincide with a period where you’re gathering more information about your patients themselves. Therefore, strategically reduce your inventory so that you’re not paying for anything more than you actually need.

In the end, cash flow is often an issue for many businesses – not just medical practices. But by following the tips outlined above, you can mitigate as much risk from this issue as possible.

With a Possible Recession Looming, You May Want To Review Your Cash Flow Process

Thu, 19 May 2022 13:25:21 GMT

If you’re a business owner who has been through a recession before, you know that smart cash flow management is absolutely crucial. If you’re a new entrepreneur who hasn’t been through an economic downturn, you may be less familiar with how quickly your finances can be affected.

To protect yourself and keep your business operating, here are the things you need to know about adjusting your cash flow process to match the economic environment.

Evaluate Your Expenses

When cash is short, it’s time to take a magnifying glass to your expenses, both to ensure that you’re being charged appropriately and to determine which of the invoices coming in should not be repeated. It’s easy to spend money when cash is coming in, but once things get tight you may need to adjust your budgetary line items and start chatting with employees about whether specific expenditures are actually needed.

You may also want to think about how spending decisions are approved, limiting authority for purchasing above certain amounts or requiring sign-off from management to ensure that you’re staying within your means and available resources. Though staff may object to losing their travel or entertainment budgets, an economic downturn should reclassify them as luxuries that can be cut back or eliminated rather than necessities. The same goes for meeting expenditures.

Other expenses can be adjusted in a way that limits the impact on your staff but still helps your bottom line. Fixed costs for transportation can be shifted from purchasing new vehicles to contracting for a fleet leasing program. Doing so keeps your capital in your bank account, where it can be put to better use when money is tight.

Vendor relationships can become strained when you find yourself having to either cancel or downgrade a contract and even more so if you’re unable to pay your bills. The best way to approach this is upfront and with honesty. The more open you are about your cash situation, the more likely you will be able to work something out in the short term and maintain or resume the relationship for the long term.

Make It Easier for Your Clients to Pay Their Bills

When you insist on issuing paper invoices and getting paid by check, you automatically slow down the process of getting paid. Make it easier for your clients to pay you by setting up an online payment option and billing them electronically. If you have clients you’ve been allowing to slide in terms of on-time payments, it’s time to have someone within our organization – preferably somebody in management – contact them directly. As for new clients, if you haven’t been conducting credit checks before providing them with goods or services, it’s time to start. It’s better to turn away business that might not get paid for than to get stuck holding an uncollectable bill.

Involve Your Employees

Though your financial challenges are ultimately yours to shoulder and solve, that doesn’t mean that your employees should not be kept in the loop about the realities of your day-to-day situation, and this is particularly true for the core group upon whom you rely most. Not only is it a good idea to talk with them and explain why you’re putting more restrictive policies in place, but in doing so you may find that they have ideas for how to boost revenue, ease cash flow, and save money. It’s the people who are on the ground who see where money is being wasted and where cost-cutting changes to staffing and expenditures can be made. Use this valuable resource!

If you are encountering cash flow challenges and would like additional guidance, contact our office today to set up a time for a consultation.

Happy Birthdays From The Irs

Tue, 17 May 2022 14:07:27 GMT

Article Highlights:

Special Tax Birthdays
Birth of a Child
o Qualifying Child
o Child Tax Credit
o Child Care Credit
Earned Income Credit
Qualifying Relative
U.S. Savings Bonds Used for Education Expenses
ABLE Account
Retirement Plan Catch-up Contributions
Retirement Plan Distributions
o Public Safety Employees
o Early Distributions
Social Security Benefits Taxation
Additional Standard Deduction
Qualified Charitable Distribution
Required Minimum Distributions
Longevity Annuity

When Congress enacts tax laws, many times whether the law applies is based on the age of the taxpayer or a taxpayer’s dependent. Reaching a certain age sometimes provides a tax benefit, while in other cases there’s a tax “penalty” – meaning that a specific type of income becomes taxable, or a credit no longer applies. Most of these age-related tax rules concern dependent children or retirement plan contributions or distributions. If you or a member of your tax family is having one of these special birthdays this year, you may be interested in knowing how your taxes will be affected, so here are some birthdays (or half-birthdays in a couple of cases) that have tax significance, listed by the age as of the birthday:

0 – “Zero” in this context means the birth of a child. In tax lingo, when you have a “qualifying child” you are entitled to claim that child as your tax dependent, which will then make you eligible to claim certain tax credits. A qualifying child is an individual who meets the following tests:

(1) Has the same principal place of abode (residence) as you for more than half of the tax year. Exceptions include the year of birth and temporary absences;

(2) Is your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals;

(3) Is younger than you are;

(4) Did not provide over half of his or her own support for the tax year;

(5) Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and

(6) Was unmarried (or if married, either did not file a joint return or filed jointly only to claim a refund).

For a newborn child, the “half the year” requirement of (1) doesn’t apply if your home was the child's home for more than half of the time he or she was alive during the year. So, in most instances, if you welcomed a baby into your family this year, even if the child was born on December 31, 2022, the child will be a qualifying child and your dependent for 2022, and you may be able to claim one or more of the following tax credits:

Child Tax Credit – The child tax credit is $2,000 per child for 2022. If the credit is not entirely used to offset your tax, the excess portion of the credit, up to the amount that your earned income exceeds a threshold ($2,500 for 2022), but not more than $1,500, is refundable. The credit begins to phase out at modified adjusted gross incomes (MAGI) of $400,000 for married joint filers and $200,000 for other filing statuses. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the threshold. See also “17” below.

Child Care Credit - If you use the services of day care providers to look after your dependent child, you may qualify for a tax credit if the expense is an “employment-related” expense, which is one that you or your spouse, if married, incur to work, or look for work. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.

The qualifying expenses for the credit are capped at $3,000 per year if you have one qualifying child, while the limit increases to $6,000 per year if you have two or more eligible children. However, the qualifying expenses are limited to your income from working and, if you are married, the expenses are limited to the lower of your or your spouse’s work income. An exception applies when one spouse has no actual income from working and that spouse is a full-time student or disabled. In that case the nonworking or student spouse is considered to have a monthly income of $250 (if there’s one qualifying child) or $500 (for two or more qualifying children).

The credit is computed as a percentage of qualifying expenses with the credit rate ranging from 35% for those with AGI of $15,000 or less to 20% if AGI exceeds $43,000. The credit will reduce your tax bill dollar for dollar, but if the credit is more than your tax, the excess credit is not refundable. See also “13” below.

Some employers provide dependent care assistance programs to help their employees with the cost of daycare. If you participate in such a plan and use payments from the plan to pay childcare expenses, the payments are excludable from your income, up to the lower of your earned income (or if you are married, the earned income of your spouse if it is lower) or $5,000 ($2,500 for married filing separate). Because reimbursement up to these limits is excludable from your income, it is treated as reimbursement for day care expenses that reduces the $3,000 or $6,000 expense limits when computing the credit. Reimbursement more than these limits is taxable to you and does not reduce qualified expenses for the credit.

Earned Income Tax Credit (EITC ) - If you have income from working either as an employee or a self-employed individual, you may qualify for this refundable credit. The credit is based on three factors: your earned income, AGI, and how many qualifying children you have. If you have investment income such as interest and dividends more than $10,300 (for 2022), you are ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.

Although the EITC is available for lower-income taxpayers without children, the credit increases substantially for those with children.

2022 EIC PHASEOUT RANGE

13 – In the year that your child turns 13, only the day care expenses you paid for the child for the part of the year when he or she was under age 13 qualify for the Child Care Credit.

17 – You can no longer claim the Child Tax Credit on your return starting for the year that your child is 17 at year’s end. So, for the year of your child’s 17th birthday, no Child Tax Credit is allowed for that child.

18 – The year in which your child has their 18th birthday is the last year that the child is considered a qualifying child, unless the child is a student and under age 24. To qualify as a student for this purpose, during some part of each of any 5 calendar months of the year, your child must be:

A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school; or
A student taking a full-time, on-farm training course given by a school described in the prior bullet, or by a state, county, or local government agency.

The 5 calendar months don’t have to be consecutive, and a full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.

If your older child isn’t a student under this definition, you might still qualify to claim the child as a dependent, but not as a qualifying child. The term for this type of dependent is “qualifying relative,” even though some individuals can qualify without being related to you. Three tests must be met before you can claim someone as your dependent if they aren’t a qualifying child:

A. Member of Household or Relationship Test – To meet the member of the household test, an individual would have to live with you all year in your household. But under the “or relationship” part of the test, your child would satisfy this test just by being your child, foster child, or stepchild, even if not living with you. Other relatives, such as your siblings, parents, grandparents, and others, could also meet this test.

B. Gross Income Test – To satisfy this test, your child (or other individual who might be a qualifying relative) can have no more than $4,400 (2022) of gross income for the year.

C. Support Test – You would need to provide more than half of the cost of the individual’s support. So, for example, if you wanted to figure whether you provided more than half of your 19-year-old non-student child’s support, compare the amount you contributed to your child’s support with the entire amount of support he or she received from all sources, including the support the child provided from their own funds.

24 – In the year that your child who is a student (as defined above) reaches age 24, the child is no longer a qualifying child for tax purposes and for you to be able to claim the child as a dependent on your tax return, tests A, B and C described above for a qualifying relative will need to be met. Losing the child as a dependent means that you would no longer be eligible to claim the higher-education credits (American Opportunity Tax Credit and Lifetime Learning Credit) based on the education expenses of that child.

24 – If you purchase U.S. Savings Bonds after reaching age 24, when you redeem the bonds and use the proceeds to pay qualified higher education expenses, such as tuition and fees, or contribute the funds to a Section 529 plan, you may be able to exclude the interest on the bonds from your gross income. However, the amount excludable may be reduced depending on your income when the bonds are redeemed.

25 – An ABLE (Achieving a Better Life Experience) account may be established by an individual if their blindness or disability occurred before age 26. Thus, only those who become blind or disabled no later than age 25 qualify for an ABLE account. Those eligible for an ABLE account are termed ABLE beneficiaries. Often the ABLE account is funded by the beneficiary’s parents or others. The total annual contributions to an ABLE account are limited to the annual gift tax exclusion amount ($16,000 for 2022), plus certain employed ABLE account beneficiaries may make an additional contribution. The contributions are not tax deductible but if the employed beneficiary contributes to the account, that individual may qualify to claim the so-called Saver’s Credit.

The idea behind ABLE accounts is to provide a way of supporting the account beneficiary in maintaining their health, independence, and quality of life. ABLE accounts shelter assets from means testing required by some government benefit programs. Distributions to the beneficiary are tax free if the funds are used for qualified expenses of the disabled individual.

25 – The youngest age at which a taxpayer with no qualifying children can qualify for the earned income credit is 25. If married and filing a joint return, only one of the spouses needs to be least age 25 at the close of the tax year. For 2021 only, the minimum age was dropped to 19 for most taxpayers.

50 – Once you reach age 50 you can make additional annual “catch-up” contributions to salary reduction plans, including 401(k) plans, provided the plan permits catch-up contributions. The allowable “catch-up” amount is indexed for inflation in $500 increments, and for 2022 is $6,500. If you contribute to an IRA, the catch-up amount for IRA owners is $1,000, and is not inflation-adjusted. Thus, the maximum contribution by a worker aged 50 or older to a 401(k) or similar plan for 2022 is $27,000 or to an IRA is $7,000.

50 – A special rule applies for public safety employees aged 50 or older: If you withdraw funds from a government defined benefit pension plan and you are a qualified public safety employee who separates from the job after age 50, the 10% early withdrawal penalty (see “59½” below) does not apply to the original distribution from the plan. However, if the funds are rolled into an IRA or a defined contribution plan, any subsequent distribution (until you reach age 59½) is subject to the 10% penalty. A public safety employee is defined for this purpose as:

Any employee of a State or political subdivision of a State who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of that State or political subdivision, or
Any Federal law enforcement officer, Federal customs and border protection officer, Federal firefighter, or any air traffic controller.

55 – Starting in the year you turn age 55, you may be able to take a distribution from a qualified retirement plan (not an IRA) and avoid an early withdrawal penalty. This exception applies only where you separate from employment (i.e., stop working for the employer that is sponsoring the plan) after reaching age 55, and won’t apply if you retire from your job before turning 55 but wait until after your 55th birthday to take the distribution from the plan. Said another way: You must be age 55 or older, and then separate from employment, for an early distribution to be excepted from the 10% penalty.

59 1/2 – A 10% tax (penalty) applies to premature (also termed early) distributions from traditional IRAs and qualified retirement plans, such as 401(k)s and others. This penalty applies to distributions made before you reach age 59½ (but see “55” above for an exception) and is 10% of the part of the distribution that you would be required to include in your income for the year of the distribution. There are several exceptions to the penalty – some available only for IRAs or only for employer plans, some for both types of retirement vehicles – that aren’t covered in this article. If you plan to make a traditional IRA or retirement plan distribution between your 59th and 60th birthdays, be sure to do it after you reach 59½. If you take the distribution too soon, you could owe the early distribution penalty.

62 – When you reach age 62 you may be eligible to receive Social Security benefits. Once you start claiming your benefits, whether at 62 or a later age, you should be aware that up to 85% of those benefits could be taxed. You may want to have the Social Security Administration withhold income tax from your monthly benefit payment or you may need to make estimated tax payments.

65 – In the year you turn 65 and each year thereafter, and if you do not itemize your deductions on your tax return, you will be entitled to an additional standard deduction amount. This amount is indexed for inflation. For 2022, this extra amount is $1,400 if you are married, whether you use the joint, married separate or qualifying widow(er) filing status, or $1,750 if you file as single or head of household. If married, and your spouse is also age 65 or older, each of you qualifies for the extra amount. There’s no need to prorate the additional amount for the year of your 65th birthday.

65 – An individual with no qualifying children cannot claim the earned income credit starting with the tax year in which they have their 65th birthday. For 2021 only, the maximum age limitation was waived.

70 1/2 - This half-birthday marks the point from which you can make a nontaxable qualified charitable distribution (QCD) from your traditional IRA of up to $100,000 per year. This distribution needs to be made directly by the IRA trustee to an eligible charitable organization for the distribution to be tax free. However, you won’t be able to claim a charitable deduction for the amount that is a QCD.

Distributions to a private foundation or a donor-advised fund aren’t eligible. If filing a joint return and both you and your spouse have an IRA, the $100,000 limitation applies to each of you. Caution: be careful on the timing since a distribution from an IRA made to a charitable organization in the year you turn 70½, but prior to the date you reach age 70½, is not a qualified charitable distribution and would therefore be taxable.

72 – To prevent an individual from investing in tax-deferred retirement plans, including a traditional IRA, but never withdrawing from the plan, the account owner is REQUIRED to take a MINIMUM (as calculated per IRS regulations) DISTRIBUTION (RMD) beginning in the year the IRA owner reaches the mandatory beginning age, which is currently 72. For the first distribution year, you are allowed to put off the distribution to as late as April 1 of the following year.

Example: Say you turn 72 in 2022 and have a traditional IRA. You have until April 1, 2023, to take the 2022 RMD from your IRA. You will also need to take the 2023 RMD by the end of 2023. So, if you delay the first distribution into the first quarter of 2023, you’ll end up with a double RMD on which to pay tax in 2023.

Distributions from your IRA don’t count toward the RMD you must take from your 401(k) or another employer plan, and vice versa.

72 – Legislation enacted in the last few years permits taxpayers with earned income to continue contributing to their IRAs regardless of their age. Previously, contributions couldn’t be made once the IRA owner became 70½, which for decades was also the age that RMDs had to begin. Even though you may make a traditional IRA contribution at age 72 or older, you will still be required to take an RMD.

So now we have a complication when you can make a traditional IRA contribution and a qualified charitable distribution (QCD) after reaching age 70½. In this scenario if you make a QCD you are required to reduce the amount of the QCD that is nontaxable by any traditional IRA contribution you made and deducted after reaching 70½, even if the IRA contribution and QCD are not in the same year.

85 – If you want to stretch out your retirement funds, you are allowed to use up to the lesser of 25% or $145,000 (2022 limit) of your retirement account to purchase a qualified longevity annuity contract (QLAC) within the account. The amount used to purchase the QLAC is subtracted from the account balance and would thus reduce the RMD from the retirement account each year until a specified time in the future, but no later than age 85, when distributions must begin from the annuity.

There isn’t space in this article to include all the details related to the numerous tax benefits and rules that apply for the birthdays listed. If you have questions or would like more information about any of them, please contact this office.

Video Tips: Tax Benefits For Military Members

Sun, 15 May 2022 14:17:40 GMT

As part of the benefits of serving the country, military members have access to tax perks that are not available to normal civilians. This can range from multiple tax exemptions to automatic extensions for tax filing season. Watch this video for details.

Important Times To Seek Assistance

Thu, 12 May 2022 14:26:10 GMT

Article Highlights:

When to seek professional assistance
Examples of times where tax saving moves can be made

Waiting for your regular appointment to discuss current tax-related issues can create problems or cause you to miss out on beneficial options that need to be timely exercised before year-end. Generally, you should call this office any time you have a substantial change in taxable income or deductions. By doing so, we can advise you about how to optimize your tax liability, avoid or minimize penalties, estimate and pre-pay required taxes, document deductions, and examine and explore tax options. You should call this office if you or your spouse:

Receive a large employee bonus or award
Become unemployed
Change employment
Take an unplanned withdrawal from an IRA or another pension plan
Retired or are contemplating retirement
Moved or otherwise changed your address
Sold or purchased a home
Exercised or are planning to exercise an employee stock option
Have significant stock gains or losses
Refinanced or plan to refinance your home mortgage
Get married
Separate from or divorce your spouse
Sell or exchange a property or business
Experience the death of a spouse during the year
Inherit property
Turn 72 during the year
Increase your family size through birth or adoption of a child
Start a business, acquire a rental property, or convert your home to a rental
Receive a substantial lawsuit settlement or award
Get lucky at a casino, lotto, or game show and receive a W-2G
Plan to donate property worth $5,000 ($500 if a vehicle) or more to a charity
Plan to gift
more than $16,000 to any one individual during the year

When Can You Dump Old Tax Records?

Tue, 10 May 2022 14:50:03 GMT

Article Highlights:

General statute is 3 years
Some states are longer
Fraud, failure to file and other issues can extend the statute
Keeping the actual return

Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed.

It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments that also apply to the state return.

In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has several exceptions:

The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return to evade tax; or (c) deliberately tries to evade tax in any other manner.
The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.

If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute.

Examples: Susan filed her 2020 tax return before the due date of April 15, 2021. She will be able to safely dispose of most of her records after April 15, 2024. On the other hand, Don filed his 2020 return on June 1, 2020. He needs to keep his records at least until June 1, 2024. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years.

Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property. You should keep certain records for longer than 3 years. These records include:

Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed to prove the amount of profit (or loss) you had on the sale. Although brokers are now required in most cases to keep purchase records and report the information to the IRS when the stock is sold, it is still a good idea for you to maintain your own records, as you the taxpayer are ultimately responsible for proving the cost to the IRS if your return is audited.
Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after the final sale.
Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.

As we become more and more a paperless society, you may wonder if you must keep the paper version of the records mentioned in this article. No, you don’t – the paper documents can be scanned and maintained on your computer or in the cloud. But if you do convert the records to electronic files, be sure to maintain a back-up that can be retrieved if you have a computer crash or cyber attack that takes over your computer.

If you have questions about what records to retain and what you can dispose of now, please give this office a call.

From Homeless To Hero: The John Paul Dejorija Story

Tue, 10 May 2022 07:37:54 GMT

According to one recent study , there are more than 500,000 people living in homelessness in the United States as of 2022. If you needed a single statistic to underline what a significant issue this really is, let it be that one.

In the distant past, one of them was a man named John Paul DeJoria. Born in 1944, he’s a businessman and entrepreneur based in the United States. He’s a noted philanthropist and, by all accounts, is a self-made billionaire. He co-founded the Paul Mitchell line of hair products and, along with the Patron Spirits Company, has certainly made quite an impact on a variety of industries.

But it wasn’t always that way.

The Journey of John Paul DeJoria

DeJoria was born in Los Angeles, California where, when he was just two years old, his parents went through a divorce. He began living with his mother who, unfortunately, wasn’t able to provide enough financial support for himself or his sibling. Not too long after that, DeJoria was sent to live in a foster home.

DeJoria was a part of the California state foster system until the age of nine when his entrepreneurial spirit first began to develop. It was then that he started selling Christmas cards and newspapers in an effort to find some way – any way – to support his family. However, things weren’t necessarily on the way up quite yet.

As is true with so many young people in this type of situation, DeJoria joined a street gang. He was an active participant for an unknown period of time while he attended night school. He only left the gang after his night school teacher urged him to – again underlining the importance of knowledgeable and compassionate educators in this country.

After finally graduating, DeJoria was still on an uncertain path. He once again made a decision that is quite common for people in these environments – he joined the United States Navy. By this time, he wanted to go to college but had no way to pay for it himself so he spent two years in the Navy in order to get there.

Once he got out of the Navy, another precarious period in his life began. He found himself needing to work a plethora of odd jobs just to stay “above water.” He sold encyclopedias door to door. He worked as a janitor. He even worked at a gas station. But alas, hard times were still ahead of him as he was at one point entirely homeless. He spent this period essentially living out of his car.

Things finally began to look up when DeJoria took a job at Redken Laboratories, which developed hair care products. While it’s true that he was fired from this job a few years later, he took the money he had saved up – along with a loan that he was able to get – and co-founded John Paul Mitchell Systems with Paul Mitchell. He was still living out of his car during this entire period, but finally, things were beginning to trend in the right direction.

Both DeJoria and Mitchell were relentless in their perseverance, going to every salon they could find to personally demonstrate the hair care products that they had developed. It’s been said that they wouldn’t leave until someone bought their innovative brand of shampoo.

Based on the modest success that they had been able to enjoy, DeJoria then purchased the brand rights to the Patron Spirits Company in 1989. To put into perspective what a big deal this truly was, the Patron Spirits Company sells an estimated two million cases of tequila every single year.

Flash forward to today and DeJoria’s company produces more than 100 different types of products. They stock salons in roughly 87 countries around the world.

All of this was the result of the hard work of a man who was born with humble beginnings, and went through a lengthy rough patch in his life but still refused to give up. DeJoria certainly experienced a lot of failure in his life, but he wouldn’t let that keep him down. Even when living in his car, he kept moving forward.

In the end, this inspiring story comes with a decidedly straightforward lesson: never stop working towards your goal because you never know when success may be right around the corner. It’s certainly a lesson that all of us can afford to stop and remember every now and again.

Corporate And LLC Structure Can Protect Sole Proprietors’ Assets

Mon, 09 May 2022 07:48:23 GMT

There are plenty of advantages to being your own boss, but that doesn’t mean that every decision is easy or straightforward. One of the first things you’ll have to decide is the type of business structure that is best for your situation. While selecting “sole proprietor” may seem like the path of least resistance, if you have personal assets at risk for your business’ debts and liabilities, it may make more sense to go with the more complicated route of electing to form as a C- or S-corporation, or even as a limited liability corporation (LLC).

What is the difference between each?

In a nutshell, if you set up as a C corporation – the preference of venture capital investors – you’ll have to pay taxes as both an individual and as a corporation. By contrast, both S corporations and LLCs have the advantage of a favorable pass-through tax treatment while still providing your personal assets with significant protection.

No matter which entity you choose, you won’t find the process costly or complicated, and if you decide to switch at a later date you can do so easily. Still, it’s important to understand that filing a Certificate of Incorporation does not entirely protect you from personal liability. In order to provide yourself and your shareholders with the highest level of personal protection make sure that you do the following:

Never use your personal name or the name of a shareholder on any official documents. Whether invoices, correspondence, or contracts, the official corporate name is the only appellation that should be used, and the word “inc.” or “corp.” should be included where corporate. This is the best way to ensure separate entity recognition. The same is true whenever signing on the company’s behalf. Only use the corporate name and include your title, as shown below:

CORPORATION NAME By: ___________________________________
Name and official title of the authorized signer
Maintain entirely separate bank accounts for your personal funds and your corporate funds, as well as separate taxes. Corporate tax liabilities should be paid from corporate accounts and personal taxes from personal accounts; the same is true for shareholders.
Assuming that you have corporate bylaws and other formalities, make sure that you follow all of them to a tee. This may include ensuring that meeting minutes are recorded, that the Board of Directors holds regular meetings, and that stock is issued.

The clearer and cleaner the line between the organization and the individual, the higher the level of personal protection, so make sure that there is a separation between corporate and individual transactions.

If you have questions about what type of entity is right for you we can help. Contact us today for more information.

What Every Employee Needs To Know About 401(K) Savings

Thu, 05 May 2022 08:07:36 GMT

Are you familiar with 401(k) retirement funds?

More and more employers are offering 401(k) plans as an employee benefit, and if you have the option and are not currently taking advantage of it, it may be time to rethink your savings strategy. Not only do these popular plans offer the advantage of using pre-tax dollars (and thus lowering your taxable income each year), but they are also a simple way to ensure that you’re putting away money regularly, without having to give it a thought once you’ve set up the plan.

Employers can sign you up automatically in the 401(k) plan that they offer, but even if you have to opt into a plan, once you’ve done so the amount that you’ve elected will automatically be deducted from your paycheck and deposited into your retirement savings account. All you have to do is decide how much you want to set aside each week. The answer to that question is entirely up to you and should be based on what your goals are, as well as variables like your living expenses and your age.

The closer you are to retirement age, the less time you have to save so you may want to bump up the amount that you deposit. Because the money that you invest will compound, the sooner you start investing the better. To give you an idea of how money can grow, consider the difference between investing $3,000 a year at an 8% annual return for 30 years – which would add up to $340,856 – versus only saving for 20 years, which would leave you with just $137,752. You also need to keep in mind that there is an annual maximum amount that you are permitted to contribute. Fortunately, that number increases each year. For 2022, the limit is $20,500.

You’ll also want to consider whether your employer offers a match, and if so how much that match is. One of the advantages of the 401(k) type of account is that employers can match all or a portion of your contribution, but you need to make sure that you understand exactly how your individual program works. Some employers will only offer a match up to a certain point, and others will only match if you opt for a minimum percentage of your income. Most experts encourage employees to make sure that they are fully taking advantage of whatever match their employer is willing to contribute.

To give you a sense of how much the average American has in their 401(k) account, consider the results of a recent survey conducted by Vanguard. It showed that those between the ages of 45 and 54 have an average 401(k) balance of $161,079 (median $56,722), while those who are between the ages of 55 and 64 have saved an average of $232,379 (median $84,714). The group that is closest to retirement – those who are 65 and older – do not have that much more than the group closest to them in age: they have an average 401(k) balance of $255,151 with a median of $82,297.

When thinking about your retirement and how you’ll fund your lifestyle, one of the most important questions you need to answer is exactly how you’re hoping to spend your golden years. If you plan to spend your time at home with family, you will need less than someone who plans world travel.

If you don’t have access to a 401(k) account, a Roth IRA is another good option. Though the contributions that you make come from after-tax dollars, you are able to withdraw them and their earnings tax-free at any point after you turn 59 ½. The annual limit that you can contribute to a Roth IRA is currently only $6,000, which is much lower than the $20,500 allowed each year for the 401(k) accounts.

It’s never too early to start saving for retirement, and there are plenty of good options available. If you need guidance on how best to save, contact us today to set up a time to discuss your situation.

Summer Employment For Your Child

Thu, 05 May 2022 07:58:30 GMT

Article Highlights

Higher Standard Deduction
IRA Options
Self-Employed Parent
Employing Your Child
Tax Benefits

Summer is almost here, and your children may be looking for a summer job. The standard deduction for single individuals increased from $12,550 in 2021 to $12,950 in 2022, meaning your child can now make up to $12,950 from working without paying any income tax on their earnings.

In addition, they can contribute the lesser of $6,000 or their earned income to an IRA. If they contribute to a traditional IRA, they could earn up to $18,950 tax free, by combining the standard deduction and the maximum allowed deductible contribution to an IRA for 2022 of $6,000. However, looking forward to the future, a Roth IRA with its tax-free accumulation and distributions would be a better choice. But the contributions to a Roth IRA are not deductible.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you have the financial resources, you could gift them the funds to make the IRA contribution, giving them a great start and hopefully a continuing incentive to save for retirement.

With vacation time just around the corner and employees heading out for their summer vacations, if you are self-employed, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.

Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,000 for the year. You reduce your income by $16,000, which saves you $3,840 of income tax (24% of $16,000), and your child has a taxable income of $3,050, $16,000 less the $12,950 standard deduction, on which the tax is $305 (10% of $3,050).

If the business is unincorporated and the wages are paid to a child under age 18, the pay will not be subject to FICA (Social Security and Medicare taxes) since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either.

Example: Using the same information as the previous example, and assuming your business profits are $130,000, by paying your child $16,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $429 (2.9% of $16,000 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($147,000 for 2022) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there's no extra cost to your business if you're paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings - Referring to our original example, if the child had a made a traditional IRA contribution of $6,000 the taxable income and the tax would zero. So, it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $305 savings. Of course, some children will not be thinking about retirement at their young age and may object to contributing to an IRA. If that is the case, perhaps you as the parent, or even the grandparents, can make a gift of the IRA contribution, which can grow to big bucks by the time the child reaches retirement age.

If you have questions related to your child’s employment or hiring your child in your business, please give this office a call.

Alert: Tax-Exempt Organization Information Returns Due BY MAY 16, 2022

Tue, 03 May 2022 08:39:10 GMT

Article Highlights:

Informational Return Requirements
Due Date
Electronic Filing Requirement
Filing Extension

Even though organizations like charities and foundations may be tax-exempt, the IRS still requires them to file certain information every year. For many of these exempt organizations, the deadline to file their 2021 information return is Monday, May 16, 2022.

In addition, tax-exempt organizations must file their forms electronically which makes compliance with reporting requirements easier.

If an organization can’t make the May deadline, a 6-month automatic extension can be filed by May 16, 2022.

If this office can be of assistance filing an information return and/or an extension, please call before the due date.

Vacation Home Rentals: How The Income Is Taxed

Tue, 03 May 2022 08:30:30 GMT

Article Highlights:

Home never rented
Home rented for fewer than 15 days
Home rented for at least 15 days with minor personal use
Home rented for at least 15 days with major personal use
Vacation home sales

If you have a second home in a resort area, or if you have been considering acquiring a second home or vacation home, and with summer just around the corner, you may have questions about how rental income is taxed for a part-time vacation-home rental. The applicable rental rules include some interesting twists that you should know about before you begin renting. Although some individuals prefer to never rent out their homes, others find such rentals to be a helpful way of covering the cost of the home. For a home that is rented out part time, one of three rules must be considered, based on the length of the rental:

Home Rented for Fewer Than 15 Days – If a property is rented out for fewer than 15 days in a year, the property is treated as if it were not rented out at all. The rental income is tax-free, and the interest and taxes paid on the home are still deductible as part of itemized deductions and within the usual limitations. In this situation, however, any directly related rental expenses (such as agent fees, utilities, and cleaning charges) are not deductible. This rule can allow for significant tax-free income, particularly when a home is rented as a filming location or during a major sports event such as the Super Bowl.
Home Rented For At Least 15 Days with Minor Personal Use – In this scenario, the home is rented for at least 15 days, and the owners’ personal use of the home does not exceed the greater of 15 days or 10% of the rental time. The home’s use is then allocated as both a rental home and a second home. For example, if a home is used 5% of the time for personal use, then 5% of the interest and taxes on that home are treated as home interest and taxes; these costs may be deductible as itemized deductions. The other 95% of the interest and taxes, as well as 95% of the insurance, utilities, and allowable depreciation, count as rental expenses (in addition to 100% of the direct rental expenses). If the rental income less the expenses result in a loss, the loss is limited to $25,000 per year for a taxpayer with adjusted gross income (AGI) of $100,000 or less and is ratably phased out when AGI is between $100,000 and $150,000. Thus, if a taxpayer’s income exceeds $150,000, the rental loss cannot be deducted; it is carried forward until the home is sold or until there is rental profit in a future year or the taxpayer has gains from other passive activities that can be used to offset the loss.
Home Rented For At Least 15 Days with Major Personal Use – In this scenario, a home is rented for at least 15 days, but the owner’s personal use exceeds the greater of 14 days or 10% of the rental time. With such major personal use, no rental-related tax loss is allowed. For example, consider a home that has personal use 20% of the time and is a rental for the remaining 80%. The rental income is first reduced by 80% of the combined taxes and interest. If the owner still makes a profit after deducting the interest and taxes, then direct rental expenses and certain other expenses (such as the rental-prorated portion of the utilities, insurance, and repairs) are deducted, up to the amount of the remaining income. If there is still a profit, the owner can take a deduction for depreciation, but this is also limited to the remaining profit. As a result, no loss is allowed, and any remaining profit is taxable. The interest and taxes from the personal use (20% in this example) are deducted as itemized deductions, which are subject to the normal interest and tax limitations.

Vacation Home Sales – A vacation-home rental is considered a personal-use property. Gains from the sales of such properties are taxable, and losses are generally not deductible.

Unlike primary homes, second homes do not qualify for the home-gain exclusion. Any gain from a second home is taxable unless it served as the taxpayer’s primary residence for two of the five years immediately preceding the sale and was not rented during that two-year period. In the latter scenario, the taxpayer does qualify for the home-gain exclusion, if he or she has not used that exclusion for another property in the prior two years. As a result, the home-gain exclusion can offset an amount of gain that exceeds the depreciation previously claimed on the home; this amount is limited to $250,000 for an individual or $500,000 for a married couple filing jointly (if the spouse also qualifies).

There are complicated tax rules related to the home-gain exclusion for homes that are acquired in a tax-deferred exchange or converted from rentals to primary residences. Homeowners may require careful planning to utilize the home-gain exclusion in such cases.

As an additional note, when a property is rented for short-term stays or when significant personal services (such as maid services) are provided to guests, the taxpayer likely will be considered a business operator rather than just an individual who is renting a home. If so, the reporting requirements will differ from those outlined above.

As with all tax rules, there are certain exceptions to be aware of. Please call this office to discuss your situation in detail.

Saver's Credit Can Help You Save For Retirement

Mon, 02 May 2022 10:06:23 GMT

Article Highlights:

Benefits
Eligible Taxpayers
Rules for Students, Dependents of Others and Individuals Under the Age of 18
Due Date for Contributions

Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit.

The saver’s credit, also called the retirement savings credit, helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans.

Credits for 2022 are determined from the tables shown below and are based upon both filing status and income (AGI).

2022 PHASE-OUTS

Modified Adjusted Gross Income*

* Modified AGI is determined without regard to the foreign earned income exclusion (also applies to US possessions) and foreign housing exclusion or deduction.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples if both spouses contribute to a plan), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits, and may in fact be zero for some taxpayers.

The amount of a taxpayer’s saver’s credit is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs.

Example – Eric and Heather, ages 32 and 30, are married and filing a joint return. In 2022, Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for 2022 was $42,000. The credit is computed as follows:

The saver’s credit supplements the other tax benefits available to people who set money aside for retirement. Generally, except for Roth IRA contributions, workers’ contributions to retirement plans are tax deductible, either in the form of a deduction on their tax return (traditional IRAs and certain self-employed retirement plans) or through a reduction of wages that would otherwise be taxable (such as pre-tax contributions to a 401(k), 403(b), etc.). So, in addition to the saver’s credit, contributions to retirement plans provide a tax deduction for traditional IRAs or income reductions for certain other plans, which lowers an individual’s tax before the credit is applied. The credit itself can only be used to reduce taxes (income and alternative minimum taxes only) to zero, and any amount in excess of a taxpayer’s tax liability is lost.

Other special rules that apply to the saver’s credit include the following:

Article Highlights:

Eligible taxpayers must be at least 18 years of age.
Anyone claimed as a dependent on someone else’s return cannot take the credit.
A full-time student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a full-time student.

The credit is provided to encourage taxpayers to save for retirement. To prevent taxpayers from taking distributions from existing retirement savings and re-depositing them to claim the credit, qualifying retirement contributions used to figure the credit are reduced by any retirement plan distributions taken during a “testing period.” The testing period includes the prior two tax years, the current year, and the subsequent tax year before the due date (including extensions) for filing the taxpayer's return for the tax year of the credit.

As you can see, qualifying for and using this credit involves following a complicated set of rules, but the credit can be very beneficial. If you are not sure you can afford to fund your retirement plan, contributions to an IRA or a self-employed retirement plan (SEP) can be made after the close of the year, allowing you time to determine the tax benefit of the saver’s credit and your overall tax refund before you make a contribution to one of those plans. For example, IRA contributions for 2022 can be made up to April 18, 2023, while SEP contributions can be made until October 16, 2023 if your return is on extension.

If you have questions about how this tax benefit might apply in your situation, please give this office a call.

Video Tips: Wondering When Your Tax Refund is Coming?

Sun, 01 May 2022 10:15:17 GMT

Filing your taxes can be a daunting task, but once you have completed and submitted your tax return, you may be eager to find out when your refund will arrive. Luckily, the IRS offers a free tool called Where's My Refund that allows you to check the status of your refund at any time.

Don't Ignore Household Employee Payroll Tax Rules

Thu, 28 Apr 2022 10:27:11 GMT

Article Highlights:

Household Employees
Tax Avoidance
Filing 1099s
Correct Procedures
W-2s, Payroll Taxes and Reporting
Overtime
Hourly Pay or Salary
Separate Payrolls

If you hire a domestic worker to provide services in or around your home, you probably have a tax liability that you don’t know about – or one that you do know about but are ignoring. Either situation can come back to bite you. When the worker is your employee, your liability includes both withholding and paying payroll taxes as well as issuing a W-2 after the close of the year.

Sure, it is a lot easier simply to pay your worker in cash so as to avoid federal and state payroll taxes – and all the paperwork that goes with them. Your domestic worker will likely be fully cooperative with a cash deal because he or she can also avoid paying taxes. However, if the IRS or your state employment department finds out about these payments, the result could be very unpleasant for you.

Not everyone who performs services in or around your home is classified as an employee. For instance, a plumber or electrician who makes repairs in your home will generally be a licensed contractor; the government does not classify contractors as employees.

On the other hand, the IRS has conclusively ruled that nannies, housekeepers, senior caregivers, some gardeners and various other domestic workers are employees of the people for whom they work. It makes no difference if you have a written contract with the employee; similarly, the number of hours worked and the amount paid do not matter.

You are probably thinking, “Wait a minute” – perhaps - everyone you know pays in cash, and none of them has paid payroll taxes or issued a W-2 for a household employee. However, if a worker gets injured on your property or if you dismiss the worker under less-than-amicable circumstances, it’s a pretty sure bet that your household employee will be the first one to throw you under the bus by reporting you to the state labor board or by filing for unemployment compensation.

Some individuals try to circumvent the payroll issue by treating a household employee as an independent contractor, incorrectly issuing the household employee a Form 1099-NEC.

Here are the correct actions you should take for domestic employees:

Obtain a Federal Employer Identification Number (FEIN), which you will use in lieu of your Social Security Number when filing the required reporting forms. Note: If, as the owner of a sole proprietorship business, you already have a FEIN, you should use that number instead of requesting a separate one as a household employer.
Obtain a state ID number for unemployment insurance and state tax withholdings.
Withhold Social Security and Medicare taxes from the employee’s pay if it exceeds the annual threshold ($2,400 for 2022).
Withhold income tax from the employee if requested by the worker and if you agree to do so.
File state employment tax returns as required – generally quarterly (although beware that some states require monthly returns) – and make the required deposits for state employment taxes.
Prepare a W-2 for the employee and a W-3 transmittal; file them by the end of January.
File Schedule H with your federal individual income tax return and pay all the federal payroll and withholding taxes (i.e., the federal taxes that you withheld from the employee’s pay, plus your matching share of Social Security and Medicare taxes plus federal unemployment tax, which is entirely your responsibility). Limited exception: If you operate a sole proprietorship with employees, you may include the payroll taxes of your household workers with those of the business’s employees, but you cannot take a business deduction for those taxes. Generally, it is better to keep the personal and business reporting separate.

Some additional issues to consider are as follows:

Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay after working 40 hours in a week. Live-in employees are an exception to this rule in most states.

Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.

Separate Payrolls – If you own a business with a payroll, you may be tempted to include your household employees on the company’s payroll. The payments to the household employees are personal expenses, however, and are not allowable deductions for a business. Thus, you must maintain a separate payroll for household employees; in other words, you must use personal funds to pay household workers instead of paying them from a business account.

Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When hiring a household employee who works on a regular basis, you and the employee each must complete Form I-9 (Employment Eligibility Verification). You will need to examine the documents that the employee presents to establish the employee’s identity and employment eligibility.

Other Issues – Special situations not covered in this overview include how to handle workers hired through an agency, how to gross up wages if you choose to pay an employee’s share of Social Security and Medicare taxes, and how to treat noncash wages.

Please call this office if you would like assistance with your household employee tax and reporting requirements or with any special issues that apply to your state.

Best Accounting Tips For Auto Repairs Shops

Tue, 26 Apr 2022 10:54:47 GMT

If you own or manage an auto repair shop, then accounting and bookkeeping are likely pretty low on your list of favorite past times. Unfortunately, tracking revenue and expenses and other financial aspects of your business is absolutely essential to your success.

Though you’d rather be focusing on your clients and their vehicles, keeping the following items top of mind and up-to-date will help ensure that your business continues to move forward without hitting any potholes!

How Best to Manage Inventory

Quick deliveries and immediate access to warehouses mean that you can continue to operate efficiently, even without keeping inventory on hand. This is important for small shops that have little-to-no storage space. But if you run a bigger operation and have the space, you may be able to boost your profits by taking advantage of economies of scale and ordering multiple popular items at a lower price.

One way or another, if you keep track of the items you use every day – like clamps, hoses, and filters – you can be much smarter about your ordering habits, and buy at lower rates. Of course, if you operate a shop that specializes in a particular type of car whose parts require longer lead times, then keeping inventory on hand and making sure that you don’t get caught without popular items in stock is very important.

Keep Your Management Tools Current

The days of keeping ledger books with pencil and paper are long gone. Today there are so many management tools available that help you to operate with far fewer mistakes, and with far greater effectiveness. If you’re a small shop you don’t need anything fancy – something as simple as QuickBooks Online can probably work for you. But there are also specialty software programs that have been specifically designed for the auto repair industry, and they have many features that can boost your business's profitability. Top features to look for include:

Estimating tools
Vehicle maintenance history
Parts ordering and technical service bulletins
Auto Repair job guide database
Scheduling Integration with accounting and marketing apps

Determining what level of technology is most appropriate for your shop requires some investigation but can lead to improved processes and ease of transferring financial information to your accountant and other professionals integral to the operation of your business.

Return and Core Processing

Auto repair shops have certain unique practices and processes that are unlike those of other businesses. They frequently have to return parts that are either over-ordered or defective, and each company to which items get returned has its own methods for managing these returns. Creating a well-organized way of addressing this will save time, trouble, and confusion, and enable all paperwork to be managed in a way that reduces wasted time and effort. The same is true of the deposits referred to as cores, that need to be credited. By setting up a specific form for each vendor that adheres to their process you will be able to make sure that you adhere to their process and that the appropriate credits appear on your statements.

Tracking Trends

Whether you prepare your own financial report or have a professional do it for you, it’s important that you review your paperwork regularly so that you can get a sense of shifts in costs, expenses, busy seasons, and slack seasons. The more you review and track changes, the more you will be able to spot trends or anomalies that may be cause for concern.

We know that you did not choose to run an auto repair shop because of your love for numbers. If you are comfortable managing your shop’s accounting and bookkeeping needs, then the items above are where you should focus special attention. If you would like professional support and assistance, contact us today to set up a time to talk.

Video Tips: Thinking About Bunching Your Tax Deductions?

Sat, 23 Apr 2022 11:02:09 GMT

Are you a taxpayer whose total of itemized deductions is close to the standard deduction amount for your filing status? If so, “bunching” your tax deduction may be a good choice for you. Watch this video to learn more about tax bunching and how you can do proactive planning to maximize the benefits.

Why Proactive Planning Is More Important Than You Realize

Thu, 21 Apr 2022 12:14:12 GMT

There's an old saying that reminds us "if you fail to plan, you plan to fail." Whoever coined that phrase was talking about the world of small business accounting whether they realized it or not.

Financial and tax literacy aren't just an important part of running a business. They're literally the foundation upon which everything else is built. Tax literacy helps to make sure that you're not only taking care of your obligations but that you're not paying more money than you should ultimately have to. Financial literacy helps to avoid problems like cash flow issues which could cause even a seemingly successful business to close prematurely.

These are also important concepts to know for individuals, too. It helps avoid problems like not budgeting properly, they can help you understand the true impact of inflation and more. All of this is in the name of avoiding common problems that typically hold people back.

But the thing to understand is that these are not skills that you're born with - you have to be proactive about learning them. You also want to make sure that you have the right partner by your side to help make this process as easy as possible.

The Power of a Well-Laid Plan

One of the major reasons why planning is so crucial in this context is because it helps avoid one of the single biggest problems that both businesses and individuals often face: not budgeting properly.

Indeed, the lack of a sound (and realistic) budget is often one of the major contributors to money problems for most people. When no semblance of a plan is in place, it's far too easy to overspend. It's also likely that you're not paying nearly as much attention to your finances as you should be. This in turn leads to a significant amount of financial stress, which isn't something that you can just get rid of overnight.

What people don't realize is that by coming up with a plan and creating that budget, it can actually put them closer to their goals - not farther away from them. Yes, it may take a bit of additional time to make that big purchase, but you're not going to overspend. You're not going to use funds that were allocated for something more important. You can also see the progress you've made and how far you have left to go, which can help create a much-needed perspective on the entire situation.

Another way in which financial and tax literacy - along with planning - can help both businesses and individuals comes down to avoiding the dreaded trap of "living paycheck to paycheck." It's something that far too many private citizens know all about, and it can even rear its ugly head for business owners, too, albeit in a slightly different context.

For individuals, it's safe to say that they're up against a number of hurdles in addition to a lack of financial literacy. The current job market is nothing if not rough. Economic uncertainty abounds, especially given everything going on right now with the war in Ukraine.

But at the same time, you have to start somewhere - and that "somewhere" involves gaining the knowledge you need to take control of your finances. Not everyone has the opportunity to earn extra income - like by picking up a second job or by moving to a new position that pays more.

Instead, try prioritizing your interests in a way that better aligns with the funds you do have available. Sure, private citizens may want to travel more or purchase a larger home, but your plan may illustrate to you that it just isn't in the cards right now.

The same is true of businesses - you may want to aggressively expand into a new market, but doing so without some type of plan in place is little more than a recipe for disaster.

In the end, financial and tax literacy are two of the most important elements of our society that people just aren't paying enough attention to. But by making an effort to understand your situation and the world around you, you'll find yourself in a much better financial position than the one you were in when you started.

If you'd like to find out more information about why proactive planning is far more important than you may realize, or if you just have any additional questions that you'd like to go over with someone in a bit more detail, please don't hesitate to contact us today.

The Ever-Changing Role Of Tax And Accounting Professionals In The Modern Era

Wed, 20 Apr 2022 12:24:49 GMT

To say that there is a lot going on in the world right now is truly a bit of an understatement.

Starting a few years ago with the onset of the still ongoing COVID-19 pandemic, the role of the accounting professionals in the context of a small business began to change. It's truly become a role that acts as a sounding board for solid decision-making, as is true with that of the virtual CFO.

In the early days of the pandemic, businesses of all shapes and sizes needed help navigating the complexities of PPP and EIDL loans. Now, another matter is impacting organizations around the world: the current war in Ukraine and political turmoil. This, coupled with tight labor markets and supply chain issues, has created a perfect storm in the worst possible way for many.

But throughout this, and despite the fact that their roles have evolved significantly, the tax and accounting community remains more important than ever. This is true for a wide range of different reasons, all of which are worth a closer look.

The State of Advisors Today

To get a better understanding of just what an important role accounting firms are playing these days, consider it all within the context of the war in Ukraine or China Covid lockdowns.

Yes, it's true that the war and the lockdowns are thousands of miles away from the United States. But the economic stress that it is already causing has been felt all across the globe. Small and even mid-sized businesses have already been through the wringer over the last few years - many are scared that they won't be able to survive what may be on the horizon.

That is where virtual CFO and accountancy firms can come into play. Rather than just providing a standard service (like tax preparation or bookkeeping), they can reach out to clients and listen to their specific situations and make precise recommendations about how to stay safe moving forward.

No, they won't be able to truly eliminate the uncertainty that we're all experiencing. But they will be able to help business leaders understand it and navigate it, thus helping them come through on the other side all the better because of it.

Truly, the biggest way in which the role of the accounting expert in the world of SMBs has changed is that they're now tasked with fully understanding the human impact of it all. This, too, is something that we saw begin with the onset of the COVID-19 pandemic when organizations were overwhelmed by news reports and weren't sure how to proceed.

Accounting professionals were able to help many of those organizations avoid things like cash flow emergencies, burnout, and anxiousness and they're more than prepared to do the same thing again here, too.

But really, one of the most important ways in which the role of the accountancy firm has changed in recent memory is that they now have to be more proactive and nimble than ever. Advisors can no longer wait for clients to reach out to them with questions or concerns - there's a chance that may not actually happen. Instead, they need to take it upon themselves to reach out and answer questions, address concerns, and offer expert advice on things like tax planning or entity selection.

All of this also helps to underline the importance for small businesses of finding the right accounting firm partner in the first place. One that understands your organization, believes in where you're going, and can help use their financial expertise to help get you there. Even if you're a smaller organization, many firms offer CFO-like services that can help make sure you always have the expert advice you need when you need it the most.

That way, even if things grow even more uncertain in the future, you still have an advocate by your side every step of the way. If you want to see how our firm can help you with new services and offerings, feel free to contact us today.

May 2022 Business Due Dates

Tue, 19 Apr 2022 13:26:15 GMT

May 2 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the first quarter of 2022. Deposit or pay any undeposited tax under the accuracy of deposit rules. 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 May 10 to file the return.

May 2 - Federal Unemployment Tax

Deposit the tax owed through March if it is more than $500.

May 10 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the first quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.

May 16 - Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, May 16 is the due date for you to make your deposit of Social Security, Medicare, and withheld income tax for April 2022. This is also the due date for the non-payroll withholding deposit for April 2022 if the monthly deposit rule applies.

May 2022 Individual Due Dates

Tue, 19 Apr 2022 13:04:45 GMT

May 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

May 31 - Final Due Date for IRA Trustees to Issue Form 5498

Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2021. The FMV of an IRA on the last day of the prior year (Dec 31, 2021) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 72 or older during 2022.

Why Employee Classification Is Of Paramount Importance

Tue, 19 Apr 2022 12:55:51 GMT

Not too long ago in Orlando, Florida , a federal investigation uncovered a situation where 22 workers were denied overtime by a Florida-based equipment rental company. The company was paying flat salaries to certain employees, regardless of how many hours they worked in a given week. It was revealed that they were doing this in an attempt to skirt the overtime requirement of the Fair Labor and Standards Act.

The rental company quickly learned that just because you pay someone a salary doesn't mean you can avoid these types of laws. The government recovered $122,000 in back wages and damages for those employees as a result of this improper classification of their employment status.

Why Employee Classification Matters

Situations like these highlight the importance of classifying employees correctly from the start. Whenever this topic comes up, most people think about the differences between independent contractors and actual workers employed by a business. But as you can see from the example above, there are many other parts to this discussion as well.

Ultimately, it all comes down to the difference between salary and hourly pay employees. Salaried employees are typically those who receive a specific wage, with the understanding that they are going to keep up with all of their stated responsibilities. Sometimes, this means working more than 40 hours a week in exchange for that salary.

Hourly employees are treated a bit differently, however. Here, the expectation is that they will work a standard 40 hours per week, every week, except for any vacation time they may have accrued. In the event that a project or responsibility takes them over 40 hours per week, they are entitled to time and a half for each hour they go beyond.

There are a few major reasons why someone might prefer a salaried position over an hourly one. No, they aren't going to receive overtime pay like their hourly employees - but they do have access to certain benefits that their counterparts don't.

A salaried employee gets a check for the same amount of money each payday. This makes it far easier to budget than if their hours were uncertain. Provided that they keep up with their duties, that number will not change throughout the year. Being salaried also comes with a certain sense of security because while employers may cut someone's hours, that salary is still more or less locked into place.

Hourly employees are equally as straightforward but in a different way. In an hourly position, you are paid for all of the hours you work - no more, no less. Overtime and things like holiday pay are certainly a bonus and can help people earn extra income.

Being an hourly employee does also lack the job security that a salaried position comes with. You may not outright lose your position, but an employer could significantly cut back on hours - impacting your take-home pay as well.

There are, however, certain situations where salaried employees will get overtime - as that organization in Florida recently had to learn the hard way. Unless a salaried employee is completing a task that is exempted, they must receive overtime pay if they are covered by the FLSA. According to the FLSA , some job categories that are considered exempt include those operating in professional capacities, in administrative roles, executives, outside sales personnel, and computer-related positions.

In the end, it's more important than ever to properly classify the employment status of your workers - if only to avoid a potentially catastrophic situation later on (like via a run-in with the federal government).

Owe The Irs Money? How Long Do They Have To Collect?

Tue, 19 Apr 2022 12:43:46 GMT

Article Highlights:

Statute of Limitations
Filing Before April Due Date
Filing After April Due Date
Extension
Amended Returns
Three-year Statute
Understatement Exceeds 25%
No Filing or Fraud
Ten-year Collection Period
Tax Records
State Statutes of Limitation

Have you ever wondered how long the IRS has to question and assess additional tax on your tax returns? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait – as in all things taxes, it is not that clean cut. Here are some complications:

You file before the April due date – If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you file your 2021 return on February 15, 2022, or April 15, 2022, the statute does not start running until April 18, 2022 (that’s not a typo). The due date for 2021 returns was delayed from April 15 to April 18 because of a holiday in the District of Columbia (Emancipation Day) and a weekend, and the April 18th date applies even if you don’t live in DC. But there’s a further exception for residents of Massachusetts and Maine, the due date for 2021 returns is April 19, 2022, because of a holiday observed in both of those states. So, for residents in these two states, the statute of limitations for 2021 returns begins on the 19th.

You may recall that due to the Covid-19 pandemic, the IRS extended the original due date to May 17, 2021 for 2020 returns and to July 15, 2020 for 2019 returns. As a result, the statute of limitations for refunds expires May 17, 2024 for 2020 returns and July 15, 2023 for 2019 returns.

You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer’s delinquency, or under a filing extension granted by IRS. For example, say your 2021 return is on extension until October 17, 2022, and you file on September 1, 2022. The statute of limitations for further assessments by the IRS will end on September 2, 2025. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations.

If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return.

You file an amended tax return – If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax.

You understated your income by more than 25% - When a taxpayer underreports their gross income by more than 25%, the three-year statute of limitations is increased to six years.

In determining if more than 25% of income has been omitted, capital gains and losses aren’t netted; only gains are taken into account. These “omissions” don’t include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services.

You file three years late – Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $450 or more minimum late filing penalty (the amount is adjusted for inflation each year). No refunds are issued three years after the filing due date.

You haven’t filed at all – In situations where no tax return has been filed or there’s fraud (the willful intent to evade tax), there is no time limit for the IRS to assess the tax or additional tax or to take court action.

10-year collection period – Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period.

Discarding tax records - Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don’t want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost.

And a word of caution about discarding those tax records – to limit your exposure to ID theft, be sure to dispose of the documents safely and securely, such as by shredding paper files, or if the records are stored on your computer delete them, or by destroying the hard drive when you take the device out of service.

State statute of limitation – Most, but not all, states follow the federal 3-year statute of limitations and 10-year collection period rules. Contact this office if you need further information about your state’s statute of limitations.

If you are behind on filing your returns and would like to get caught up, please give this office a call. If you discovered you omitted something from your original return and would like to file an amended return, we can help with that as well.

Too Many Transactions In Quickbooks Oneline? Create Rules

Mon, 18 Apr 2022 13:58:42 GMT

One of the cardinal rules of accounting is this: Go through your new transactions every day. If you wait until there are too many of them, you’re likely to give them short shrift. You may miss problems, just as you might skip categorizing some of them because it simply takes too long.

But correct categorization is essential. Your income taxes and reports will not be accurate if you fail to assign the right category to all of your transactions. QuickBooks Online makes this easy.

The site also provides a way for you to accelerate the process by automating it. It allows you to create Rules . That is, if a transaction contains a specific piece of information, a name or an amount, QuickBooks Online allows you to indicate how it should be categorized. This kind of automation will save you time and may even prevent errors – as long as you use it carefully. Here’s how it works.

Defining Your Rules

We’ll use an easy example to explain how QuickBooks Online’s Rules work. Let’s say your shipping costs have started to increase lately, and you want to make sure you’re seeing any UPS transactions that go above a specified dollar amount, and that they’re categorized accurately. Hover your mouse over Transactions in the toolbar and click on Banking (assuming you’re downloading your bank transactions). Select an account to work with by clicking on it, and make sure the For review bar is highlighted.

Click on a transaction to open it. (If you’ve never explored what you can do with a downloaded transaction, study this box carefully while you’re there, and contact us with any questions.) On the bottom line, you’ll see a link labeled. Create a rule . Click on it, and a panel slides out from the right, as pictured below:

The upper half of the Create rule panel

This portion of the Create rule panel is fairly self-explanatory. Give your rule a descriptive name (we entered UPS 25 Plus ), and indicate whether it should be applied to Money in or Money out . If you want to select a specific bank account or card, click the down arrow in the field to the right and select it. Otherwise, choose All bank accounts . Next, decide whether a transaction has to meet Any of the conditions you’re going to specify or All of them. In this case, we want All .

Now you have to describe the conditions under which a transaction will be affected. We want transactions whose Description Contains The UPS Store . We also want to identify purchases from The UPS Store whose total is more than $25. So you’d click + Add a condition . In the row that opens, click the down arrow in the Description field and select Amount . Click the down arrow again in the next field and choose Is greater than . The final field in the row should contain 25.00 .

You could keep adding conditions, but that’s all we need for this rule. You can click Test rule if you want to find out how many transactions in your For review list would meet your specifications.

Next, you want to Assign attributes to the transactions selected. Your options here are Transaction type , Category , Payee , Tags , Class , and Memo . The first two are required and the third is recommended. The last three are optional. If you want QuickBooks Online to automatically confirm transactions this rule applies to , click the Auto-confirm button so it’s showing green. If you choose this option, your matching transactions will be modified to meet your criteria and moved directly into the Categorized queue. You won’t see them in For review . So consider this carefully .

When you’re done here, click Save .

The lower half of the Create rule screen

Warning: QuickBooks Online allows you to create new categories directly from this window. But accurate categorization is so critical that we’d rather you schedule a session with us to go over your list of categories and make any modifications necessary.

To recap: Any expense over $25 that comes into your For review queue whose Description reads T he UPS Store will be automatically categorized and moved into the Categorized queue.

QuickBooks Online’s Rules can save you time, but if they’re not created correctly, you may have errors in your company file without even knowing it. We recommend that you let us help you set these up from the start to avoid this. If you’re new to downloading transactions onto the site, you may also want to consult with us.

Video Tips: The Significance Of Releasing A Child's Dependency

Sun, 17 Apr 2022 14:07:15 GMT

If you are a custodial parent, you may release a child’s dependency to the non-custodial parent for tax purposes. But are you fully aware of the effects it will have on both your and the other parent's tax returns? This video will give you a quick explanation on the ramifications of releasing a child's dependency.

The Story Behind The Success At Chief

Thu, 14 Apr 2022 08:00:00 GMT

People are no longer shocked by women in the C-Suite. As female empowerment in the workforce has steadily climbed over the 20th and 21st centuries, women continue to knock down barriers. The path blazed by female fighter pilots, doctors, and politicians over the last hundred years is now courageously followed by women as they rise through corporations, law and the highest levels of government.

Chief , a women-led company, is doing its level best to keep that torch ablaze. Started in 2019, this private network offered women in the C-Suite a much-needed breath of fresh air – and the breath became a wind that blows ever more strongly today.

The basic idea? Women in executive positions often find themselves overwhelmed and under-resourced, at least on a personal level. While they’re busy mentoring others and overseeing thriving companies, too many of them don’t know where to turn for their own questions.

Enter Chief founders, Carolyn Childers and Lindsay Kaplan. Both had extensive experience with executive leadership. The former worked as a senior VP for cleaning company Handy and then Soap.com; the latter a VP at the mattress giant Casper. They knew personally how draining it is to take on leadership roles without the right support.

“The idea of Chief came from a pretty personal place for Lindsay and I,” Childers told CNBC . “We were getting more and more senior in our careers and … realizing that there was no community or resources for us anymore as we were now the resource for other people.”

Thus was the idea born: a small, private network of women in the most powerful leadership roles, who could turn to one another for advice, resources, and connection. Before their launch in 2019, they hoped to get 100 women on board. They quickly realized Chief was going to go much farther than that. By the time they made the company official, they already had 200 powerful women representing the gamut of startups to Fortune 50 companies.

Likely the company would have seen a meteoric rise either way, but the pandemic gave them a serious boost. With a world in turmoil and the workplace even more stressful than usual, women needed professional resources even more.

"There was this moment in time when nobody had a playbook," Kaplan told Inc.com . "We're all leaders trying to navigate our teams through a pandemic and social unrest … and it was a community that leaders really needed to turn to."

Over time, Chief built that playbook: coaching sessions, workshops, networking events, mentorship matches. It was a hole that needed filling, and Chief has done so with aplomb.

Today, the company has numerous feathers in its cap. It boasts clubhouses in New York City, Los Angeles, and Chicago. It has secured more than $20 million in Series A funding, the company’s first foray into venture capital financing. And it has more than 2,000 members … with another 8,000 on the waitlist. Membership hails from Disney, Chanel, Pfizer, and The New York Times. Together, women have created a resource that represents their experience and bolsters their options – and showcases what is possible for a younger generation.

"We never set out to be a billion-dollar company," said Childers to Inc.com, but that’s exactly what happened. It’s a meaningful statement about the power women can bring to bear, as well as what can happen when we believe in what was for so long regarded as “the weaker sex.” As Childers sums it up, “we're excited about hitting this milestone, because it shows that investment in women is a good investment."

A very good investment indeed.

You May Qualify For A Small Business Home Office Deduction

Thu, 14 Apr 2022 07:44:34 GMT

Article Highlights:

Qualifications
Actual Expense Method
Simplified Method
Home Office Expenses for Renters vs. Homeowners
Deduction Limitation
How Moving Affects the Home-Office Deduction
Other Issues

If you are a small business owner and use part of your home for business, you may be able to take the so-called office-in-home tax deduction. This deduction reduces both income and self-employment taxes. While the term “home office” is used to describe when a taxpayer uses their home for a business purpose, the space used may not be an office but may still qualify for the deduction. One of the following must apply for you to be able to deduct home office expenses. The home office:

Must be your main place of business. OR
Must be a place of business where, in the normal course of your business, you meet patients, clients or customers (just telephone contact with clients isn’t enough to meet this test). OR
Must be in a separate structure that is not attached to your home, and you use it in connection with your business. OR
Must be a place where you store inventory or samples. This place must be the sole, fixed location of your business. OR
Under certain circumstances, must be where you provide day-care services.

Generally, except when used to store inventory, an office area must be used on a regular and continuing basis and be exclusively restricted to the trade or business (i.e., no personal use).

Two Methods – There are two methods to determine the amount of a home-office deduction: the actual expense method and the simplified method.

Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office, which is generally based on square footage. The non-business portions of home mortgage interest and real property taxes continue to be deductible on Schedule A if you itemize deductions. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted. Unlike the simplified method (discussed next), the business-use part of the home is not limited to 300 square feet.
Simplified Method – The simplified method allows for a deduction equal to $5 per square foot of the home used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500. You may elect to take the simplified method or the actual expense method (also referred to as the regular method) on an annual basis. Thus, you may freely switch between the two methods each year.

Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used. Prorated rent or home interest and taxes are not additionally deductible either, although 100% of home interest and taxes, within the normal Schedule A limitations, are deductible if you itemize deductions.

To determine the average square footage when using the simplified method, no more than 300 square feet for any month can ever be used, even if you have multiple businesses for which you use space in your home. If there are multiple businesses, a reasonable method to allocate between businesses is used. Zero is used for months when there was no business use or when the business was not operating for a full year. Don’t count any month when the business use was less than 15 days.

Example: Sandra begins using 400 square feet of her home for business on July 20, 2022, and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for 2022 is 125 square feet (300 x 5 months = 1,500/12 = 125).

Home Office Expenses – There are differences as to which prorated home expenses are deductible by renters and homeowners when computing the actual expense method, as illustrated in the table below.

Note that the principal payments made on a home loan are not eligible expenses. Instead, homeowners claim a deduction for depreciation on the office portion of the home’s basis.

Home Office Deduction Limitation – Even if you qualify for a home-office deduction, your deduction is limited to the business activity’s gross income, which for this purpose is defined as the activity’s gross income, reduced by the home expenses that would be deductible if there were no business use (e.g., mortgage interest, property taxes, certain casualty losses), and the business expenses unrelated to the home’s use. When using the actual expense method, the disallowed amount will be carried over to the next year subject to the same limitations. However, there’s no carryover when using the simplified method.

Rent vs. Own: What Happens If You Move or Sell the Home?

Rent – When you pay rent for your home that you use partly for business, move, and then use space at the new location as a home office, for the year of the move, you’ll need to figure out the deduction separately for each home office based on the specific expenses and business use area of each home. If you don’t use space at your new living quarters for business purposes, then your home-office deduction for the year of the move will need to factor in just the expenses for the time you lived in the first home.

Own – If you own the home and sell it after having lived in it for any two of the five years prior to the sale date, you can exclude up to $250,000 of gain ($500,000 for a married couple). However, you cannot exclude the part of any gain to the extent of depreciation you claimed for the home after May 6, 1997. For gain exclusion purposes, it makes a difference whether the home office was within the home itself or in a separate structure on the same property. If within the same structure, the exclusion will apply to the entire gain from the home (other than the depreciation component). If the office was within a separate structure, then the sale must be treated as two sales – one for the home and one for the office – and the gain from the office portion cannot be excluded.

Additional Issues That May Apply – As with everything tax, there are always special rules.

Multiple Businesses – If there are multiple businesses, only one method may be used for the year – either the regular or simplified.
Mixed-Use Property – If you have a qualified business use of a home and a rental use of the same home, you cannot use the simplified method for the rental use.
Taxpayers Sharing a Home – If you share a home (for example, with roommates or a spouse, regardless of filing status), and if otherwise eligible, each occupant of the home may use the simplified method but not for a qualified business use of the same portion of the home.
As an example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the simplified method for a qualified business use of the same home, for up to 300 square feet of different portions of the home.
Depreciation Rate When Switching Methods
– When the simplified method is used and you subsequently switch to the actual expense method, there are no special adjustments, and the depreciation is determined in the normal manner.

Business use of the home is deducted on a self-employed individual’s business schedule. So, for example, if you are a sole proprietor who reports your business income and expenses on Schedule C, that’s the form where the home office deduction will be claimed.

Just for the record, please note that from tax years 2018 through 2025, employees who use part of their home for work purposes are not able to deduct office in home expenses, even if they would otherwise meet one of the eligibility requirements discussed above. These expenses fall under the miscellaneous itemized deductions category subject to a 2% of AGI reduction that was suspended by the 2017 tax reform bill.

If you have concerns or questions about how the home-office deduction applies to your specific circumstances, please give this office a call.

Seek Tax Advisor Recommendations Before Selling An Investment Property

Tue, 12 Apr 2022 08:36:14 GMT

The real estate market is red hot, and plenty of folks nearing retirement and holding investment property see now as an excellent time to offload their real estate assets and reap the profits. If you’re one of them, then - tempting as it may be - make sure that you talk to your tax advisor before making that move.

Purchasing rental properties has become an extremely popular investment strategy. In fact, experts say that those nearing and past retirement age have accumulated about $6.4 million in net worth tied to those holdings. As attractive as that income is, it can also create responsibilities around rent collection and property management that lose their appeal pretty quickly. It’s no wonder that, between those responsibilities and skyrocketing valuations, many people are looking to get out.

While a sale now makes perfect sense, it’s important to go about it the right way to minimize the tax implications. There are a variety of tax-planning strategies that will provide you with significant benefits. These include:

A 1031 exchange – This option would mean exchanging the property that is currently owned and deferring the capital gains by identifying the replacement within 45 days and completing the exchange within 180 days.
Investment in an Opportunity Zone – This option allows investment property owners to sell their property and then roll their gain on it into the Opportunity Zone Fund. Doing so provides tax-deferred growth over the next four years.
Transfer the property to a charitable remainder trust before it is sold. This process exempts the gain from capital gains tax and allows it to be reinvested, with the original owner receiving the income during their lifetime, and the balance transferring to the charity after they die.
Holding off on selling until a low-income year. As tempting as it may be to take advantage of the current market, it may make more sense to hold off until after retirement, when your income is lower and the tax hit may not be as extreme.

What’s most important is that rather than jumping into a sale based on your impulse to maximize your profit, you give consideration to the tax implications and take a measured approach that will provide the greatest long-term benefits – or at the very least minimize the tax consequences that would inevitably follow significant gains. Even your Medicare costs can be affected by a big gain, so careful planning is a must.

If you own an investment property and are considering selling, take the time to check with our experienced tax advisors. We’ll provide you with guidance on how best to leverage your position.

Tax Issues That Aries When Converting A Home Into A Rental

Tue, 12 Apr 2022 08:24:44 GMT

Article Highlights:

Reason for Conversion
Basis
Depreciation
Cash Flow versus Tax Profit or Loss
Passive Losses
Home Gain Exclusion
Other Tax Issues
Becoming a Landlord

With the current substantial appreciation in home values and demand for housing exceeding the available inventory, along with low home mortgage interest rates, more and more homeowners are converting their existing homes into rentals when they buy a new home. Other reasons individuals may make the conversion include maximizing the tax benefits for an elderly person who can no longer live alone by delaying the sale of that person’s home; and to ensure that a home provides value when its owner takes a temporary job assignment in a different location. Some homeowners even mistakenly think that, when a home has declined in value, converting it into a rental can allow them to deduct that loss. Regardless of why an individual considers making a conversion, several tax matters come into play when making that decision.

Basis – The basis of the converted property is a good place to start examining these conversion-related tax issues. The basis is the starting value that is used to calculate gains or losses for tax purposes. The basis is also used to determine the amount of depreciation that can be claimed for property used in the rental activity. Generally, for depreciation purposes, a property’s depreciable basis on the date of the conversion is the lower of its adjusted basis (the original cost, plus the costs of any improvements, minus any deducted casualty losses) or its fair market value (FMV).

Example #1: A home’s original purchase cost was $250,000; the homeowner later added a room at a cost of $50,000. At the time of the conversion, there had been no casualty losses, so the home’s adjusted basis is $300,000 ($250,000 + $50,000). By comparison, the property’s FMV is $350,000, so the depreciable basis for the rental is the lower of the two amounts: $300,000.

Example #2: If, on the date of the conversion, a home has the same adjusted basis as in Example #1, but its FMV is only $225,000, then the depreciable basis used for the rental is equal to $225,000, as that is the lower of the two amounts.

When a home’s FMV is less than its adjusted basis on the date of conversion, as in Example #2, the rental has dual bases:

(1) If the rental is subsequently sold for a loss, the basis for loss is the FMV on the date of the home’s conversion. Because losses from the sale of personal-use properties (such as homes) are not deductible, this rule prevents homeowners whose homes have declined in value from converting them into rentals in order to claim tax losses.

(2) If the rental home is subsequently sold for a profit, the basis for the gain is the property’s adjusted basis.

Depreciation – Depreciation is an allowance that both accounts for wear and tear and provides a systematic way for the owner to recover the initial investment in the property. This is necessary because tax law doesn’t allow homeowners to deduct the entire cost of a residential rental at one time. Despite this statutory allowance for the depreciation of residential rentals, real properties have historically appreciated rather than depreciated, so this allowance typically provides a significant tax advantage (i.e., a write-off). Here is how to determine the depreciation for a residential rental: First, reduce the basis by the value of the surrounding land (as land is not depreciable) to get the value of the improvements to the home (i.e., the structure); then, multiply that value by .03636 (the annual depreciation rate). In the conversion year, the resulting amount has to be prorated by the number of months used as a rental. Generally, the value of the land is based on a property-tax statement. For example, if a property-tax statement values an entire property at $240,000 and its land at $80,000, then 1/3 of the basis ($80,000 / $240,000) is allocated to land; the remaining 2/3 is allocated to improvements. Thus, if the basis is $300,000, then the depreciable improvements are valued at $200,000 (2/3 × $300,000), and the annual depreciation deduction is $7,272 (.03636 × $200,000).

Rental Cash Flow versus Taxable Profit or Loss – Cash flow is the net amount after subtracting expenses from rental income, and the taxable profit or loss is the rental income minus any allowable tax deductions. Of course, higher cash flow is always better, but it is particularly important to avoid having a rental with a negative cash flow. The following example compares cash flow to taxable income.

The major difference between cash flow and taxable income is that cash flow includes the deduction for the entire mortgage payment (not just the interest) but does not include the deduction for depreciation. In the above example, the rental has $1,600 in positive cash flow for the year but also has a passive loss (tax write-off) of $3,372.

Passive Losses – Losses from residential rental real estate are classified as passive and can only offset passive income; deductions from passive losses are also limited to $25,000 per year for most taxpayers with adjusted gross incomes (AGIs) of $100,000 or less. This limit is then ratably phased out for AGIs up to $150,000. Thus, taxpayers’ ability to benefit from a tax write-off on a rental is dependent upon their AGIs. The good news is that the passive losses in excess of this limit carry over to future years and can be used to offset other passive income in those years; in addition, any unused carryforward amount and any passive losses in the sale year are deductible in full once the rental is sold.

Home Gain Exclusion – IRC Section 121 allows homeowners to exclude up to $250,000 of gains from a home sale if they owned and used that home (as their primary residence) for at least 2 of the 5 years prior to the sale date. The amount that can be excluded jumps to $500,000 for married couples who are filing jointly – provided that both have used the property as a primary residence for 2 out of the prior 5 years and at least one has owned the property for 2 out of the prior 5 years. This is a very important consideration because, once a home is converted into a rental, the homeowner(s) will lose the ability to exclude gains after 3 years (because at that point, it is no longer possible to meet the 2-out-of-5-years qualifications).

Even when a homeowner sells a rental property after its conversion but before the exclusion period expires, any depreciation that was claimed during the rental period must be recaptured as taxable income.

Other Tax Considerations – This article has covered only some of the tax issues affecting rental property. Others include the qualified business income deduction available for trade or business owners which generally include landlords, requirements to issue 1099 forms to service providers, and special rules for real estate professionals. If you have a “homeowner’s exemption” on your home for real estate tax purposes, in most jurisdictions when you convert the home to a rental you will no longer be eligible for this exemption, so you should expect to pay higher property taxes.

Being a landlord will come with some problems, such as repairs and maintenance, and of course, making sure you rent to responsible tenants. For those that do not wish to deal with landlord responsibilities, management firms are generally available for a fee, which counts as a rental expense for tax purposes.

The benefits of renting include cash income, tax write-offs, and most of all, long- term appreciation of the property. But not all circumstances warrant converting a home to a rental versus selling it. Please contact this office for assistance with the financial and tax aspects and the pros and cons of converting.

Video Tips: Tax Deadline Is Here - Do You Need An Extension?

Thu, 07 Apr 2022 09:04:21 GMT

If a taxpayer cannot file their tax return by the April due date, they can file for an extension of time. If you need help getting an extension, contact us today.

Working Abroad Has Huge U.S. Tax Benefits

Thu, 07 Apr 2022 08:57:52 GMT

Article Highlights:

Tax-Free Income from Working Abroad
Foreign Earned Income and Housing Exclusions
Foreign Self-Employment Income
Claiming or Revoking the Exclusion

U.S. citizens and resident aliens are taxed on their worldwide income, whether they live in the U.S. or in another country. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs.

This exclusion applies to both employees and self-employed individuals. In addition to the excludable income, this can also be an attractive option to individuals who wish to travel the world. Today’s digital world allows individuals, armed with their computer and a Wi-Fi connection, to work from anywhere.

So, for example, if you would like to be a digital wanderer and your employer approves or you are self-employed, you can travel the world while earning income from your employer or your self-employment clients. Some employers may nix the idea because they don’t want their business to be entangled in foreign taxes, and you should check into what your tax filing responsibility will be with any foreign country where you are thinking of working.

You will still have to file a U.S. 1040 tax return and report your income the same way as if you were living and working in the U.S., except if you meet certain requirements, you will be able to exclude some or all of your foreign earnings from income tax.

To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:

Have foreign earned income (income received for working in a foreign country, including payroll disbursements from a U.S. employer and self-employment income);
Have a tax home in a foreign country; and
Meet either the bona fide residence test or the physical presence test.

The foreign earned income exclusion amount is adjusted annually for inflation. For 2022, the maximum is up to $112,000 per qualifying person. If you are married and both you and your spouse (1) work abroad and (2) meet either the bona fide residence test or the physical presence test, each of you can choose the foreign earned income exclusion. Together, you can exclude as much as $224,000 for the 2022 tax year, but if one of you uses less than 100% of their exclusion, the unused amount cannot be transferred to the other spouse.

In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct a foreign housing amount from their foreign earned income. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is generally limited to 30% of the maximum foreign earned income exclusion. The housing amount limitation is $33,600 for the 2022 tax year. However, the limit will vary depending on where the qualifying individual’s foreign tax home is located and the number of qualifying days in the tax year. The foreign earned income exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion.

Before you become overly excited about working from some exotic foreign locale, foreign earned income does not include the following amounts:

Pay received as a military or civilian employee of the U.S. Government or any of its agencies.
Pay for services conducted in international waters (not a foreign country).
Pay in specific combat zones, as designated by a Presidential Executive Order, that is excludable from income.
Payments received after the end of the tax year when the services were performed to earn the income.
The value of meals and lodging that are excluded from income because they were furnished for the employer’s convenience.
Pension or annuity payments, including Social Security benefits.

A qualifying individual may also claim the foreign earned income exclusion on foreign-earned self-employment income. The excluded amount will reduce the individual’s regular income tax but will not reduce his or her self-employment tax. Also, the foreign housing deduction—instead of a foreign housing exclusion—may be claimed.

A qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions. In other words, the exclusion is “off the bottom,” not “off the top.”

Once the foreign earned income exclusion is chosen, a foreign tax credit—or a deduction for foreign income taxes—cannot be claimed on the income that can be excluded. If a foreign tax credit or tax deduction is claimed for any of the foreign taxes on the excluded income, the foreign earned income exclusion may be considered revoked.

Other issues:

Earned income credit – Once the foreign earned income exclusion is claimed, the earned income tax credit cannot be claimed for that year.

Timing of election – Generally, a qualifying individual must initially choose the foreign earned income exclusion with one of the following income tax returns:

A return filed by the due date (including any extensions);
A return amending a timely filed return;
An amended return, which generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid; or
A return filed within 1 year from the original due date of the return (determined without regard to any extensions).

A qualifying individual can revoke an election to claim the foreign earned income exclusion for any year. This is done by attaching a statement to the tax return revoking one or more previously made choices. The statement must specify which choice(s) are being revoked, as the election to exclude foreign earned income and the election to exclude foreign housing amounts must be revoked separately. If an election is revoked, and if the qualifying individual again wishes to choose the same exclusion within 5 years, he or she must apply for approval by requesting a ruling from the IRS.

State Tax – If your U.S. state of residence when departing the U.S. is one with state income tax, you may be required to report all of the foreign income on the state tax return, unless there is an exception.

If you are considering foreign employment or traveling abroad while working, before you make your final decision, please call our office to learn more about the foreign earned income and housing allowance exclusions, or about how to meet the bona fide residence or physical presence tests.

Electric Vehicle Credits Phasing Out

Tue, 05 Apr 2022 09:22:18 GMT

Article Highlights:

Tax Credit
Credit Phase-Out
Determining the Credit
Off-Road Vehicles and Golf Carts
Allocation Between Business and Personal Use
Credit Reduces Basis
Business Standard Mileage

If you are considering purchasing an electric vehicle and expect to receive a federal tax credit along with the purchase, you better do your homework first. There is a phaseout that is based on a manufacturer’s sales of electric vehicles that impacts the credit available to the purchasers of the vehicles.

Many of the more popular manufacturers have been phased out of the credit, including Tesla and General Motors.

Here Is How That Phaseout Works - The credit phases out for manufacturers beginning in the second calendar quarter following that in which a manufacturer sells its 200,000th plug-in electric drive motor vehicle for use in the U.S. The applicable percentage phase-out is:

Article Highlights:

50% for the first two calendar quarters of the phaseout period,
25% for the third and fourth calendar quarters of the phaseout period, and
0% for each later calendar quarter.

Example: Here is how the phaseout worked for Tesla, Inc., one of the more popular electric vehicles, once it sold its 200,000th vehicle back in 2018. The 200,000th vehicle was sold in the third quarter of 2018. Thus, a phase out of the tax credit available for purchasers of Tesla plug-in electric vehicles was triggered beginning Jan. 1, 2019. That meant the maximum credit available for the purchase of a Tesla, which was $7,500 before 2019, began to phase out and the maximum credits for 2019 were as follows for vehicles purchased:

Jan 1, 2019 through June 30, 2019: $3,750 (50% of $7,500).
July 1, 2019 through Dec 31, 2019: $1,875 (25% of $7,500).
After 2019, Tesla vehicles no longer qualify for the credit.

This same phase-out scenario illustrated for Tesla will apply to any other manufacturer once it sells 200,000 electric vehicles.

While the credit for many popular models is beginning to phase out or has phased out already, some manufacturers are just beginning to offer electric vehicles and there are also new electric vehicle manufacturers coming online, so you still have multiple choices for an electric vehicle that comes with a tax credit.

Here are some things you should be aware of before making your decision to purchase an electric vehicle.

Not All Electric Vehicles Qualify for the Full Credit – The credit is not a flat $7,500; it is actually made up of two elements, a $2,500 per vehicle credit plus an additional $417 for each kilowatt-hour of capacity in excess of 5-kilowatt hours, but not in excess of $5,000, resulting in an overall credit of up to $7,500.

The amount of credit available for any qualifying vehicle, listed by manufacturer, is available on the IRS website. Although most salespeople will know the amount of credit that is available for the vehicle you are interested in purchasing, you sometimes run into an overzealous one that might mislead you a bit. So, it is good practice to double check for yourself and that is quite easy to do on the IRS Website.

The following requirements must be met to qualify for the credit.

You must be the owner of the vehicle. If the vehicle is leased, only the lessor and not the lessee, is entitled to the credit.
You placed the vehicle in service during your tax year.
The vehicle is manufactured primarily for use on public streets, roads, and highways.
The original use of the vehicle began with you.
You use the vehicle primarily in the United States.

Credit for Multiple Vehicles – The credit is a per vehicle credit, thus if you purchase multiple plug-in electric drive motor vehicles you can claim the credit for each one.

Off-Road Vehicles & Golf Carts - Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for the credit.

Allocation Between Business and Personal Use – If you use a qualified plug-in electric drive motor vehicle both personally and in your business, the credit is divided (allocated) between personal use and business use and creates two separate credits, with the tax treatment of the two being quite different.

Personal Credit – The personal portion of the credit is non-refundable, meaning the personal portion of the credit can only offset your tax liability and any excess not used in the year of purchase is lost. Thus, you need to be mindful of just how much benefit the credit provides and not necessarily expect to benefit from the full amount of credit for the vehicle.
Business Credit – The business use portion of the credit, on the other hand, becomes a business credit and any unused portion for the current year can be carried back to the prior tax year where it can offset tax liability in that year and result in a refund. If there is still unused credit it can carry forward for up to 20 years to offset future tax liabilities.

Credit Reduces Basis – For both the personal and business credit, the basis of the vehicle is reduced dollar for dollar by the amount of the credit. For a taxpayer claiming just the personal credit, this only becomes an issue when the vehicle is subsequently sold, since when determining the gain or loss on the sale, the cost of the vehicle is reduced by the amount of any credit claimed. If the sale of a personal vehicle results in a loss, no loss is deductible, but if there’s a gain, the gain is taxable. This has rarely been an issue in the past since vehicles were seldom subsequently sold for a profit. However, recently the used car market has been turned on its head, with many used cars selling for as much or more than the original cost, which could result in a taxable capital gain for the seller. For a vehicle used for business, the credit reduces the depreciable basis of the vehicle. Also, no credit is allowed for any portion of a business vehicle expensed under Sec 179.

Business Standard Mileage – If a taxpayer uses a vehicle for business, they can choose between deducting actual expenses such as fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. The IRS does not distinguish between fuel powered cars and electric cars, and both are allowed to use the same standard amount, even though the rate includes fuel costs. The business mileage rate for 2022 is 58.5 cents per mile, up from 56 cents per mile for 2021.

What the Future Holds - President Biden’s Build Back Better Act included a new round of electric vehicle credits. But that Act appears to be dead in the water and whether Congress will authorize those credits in a separate bill is yet to be seen.

Call this office to determine how much benefit you will derive from the plug-in electric drive motor vehicle credit based upon your specific use of the vehicle, whether it is personal, business or a combination of the two.

Video Tips: Time Is Almost Up To Claim Your 2018 Tax Refund

Sat, 02 Apr 2022 09:29:22 GMT

The statute of limitations for claiming refunds expires on April 18, 2022, for 2018 returns. If you still want to claim your 2018 refund or make an amendment to your return, time is running out.

Are Damage Awards Taxable?

Thu, 31 Mar 2022 09:39:55 GMT

Article Highlights:

Physical Injury
Wrongful Death
Emotional Distress
Employment Discrimination
Sexual Harassment
Human Trafficking Restitution
Wrongful Incarceration
Damages Related to Business Interests
Legal Expenses

Frequent questions that arise are: Are amounts received from settlement of lawsuits and other legal remedies taxable? Are the legal fees paid in connection with these payments tax deductible? The tax code specifies that all income is taxable from whatever source derived, unless exempted by the Internal Revenue Code. The tax code does provide an exclusion from income for certain damage awards but not for others. The companion issue to damage awards is the deductibility of the legal fees associated with the damage awards and settlements. This article looks at a variety of situations and the tax ramifications.

Physical Injury - Damages received on account of personal physical injuries or physical sickness are excludable from income whether recovery is by suit or agreement, or the amounts are received as a lump sum or in periodic payments.

When a legal action originates with a physical injury or physical sickness, then all damages (other than punitive) are treated as payments due to physical injury or physical sickness whether the recipient of the damages is the injured party.

Wrongful Death – Is considered physical injury or physical sickness for purposes of the income exclusion. In addition, where state law provides that only punitive damages can be awarded in wrongful death suits, punitive damages are excludable.

Emotional Distress - Emotional distress isn’t considered physical injury or physical sickness for purposes of the income exclusion. However, the tax code allows the exclusion of damages received for emotional distress to the extent not more than the amount paid for medical care related to emotional distress.

Employment Discrimination - No exclusion is allowed for damages received in a suit involving employment discrimination or injury to reputation, which is accompanied by a claim of emotional distress. However, the exclusion would apply to a claim of emotional distress, which was related to a physical injury or physical sickness.

Sexual Harassment Damages and Settlements - Tax reform put restrictions on business deductions related to sexual harassment damages and settlements as well as impacting the taxability of any award or settlement.

Impact on a Business - No business deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.
Impact on an Award Recipient – Damages for sexual harassment and gender discrimination are not excludable and thus are fully taxable. The issue of sexual harassment qualifying as excludable physical injury or sickness has been in court on several occasions – always with the same result (it’s taxable).

Human Trafficking Restitution Payments - A defendant convicted of a human trafficking offense is required to make restitution payments to the victim. These payments are excludable from the victim’s gross income for federal income tax purposes. The payments may be to compensate the victim for costs of medical services, physical and occupational therapy or rehabilitation, transportation, temporary housing, childcare expenses, lost income, attorneys’ fees and other costs and losses the victim suffers because of the offense.

Wrongful Incarceration - Compensation received for a wrongful incarceration is not taxable. A wrongfully incarcerated individual is defined as either:

(1) an individual who was convicted of a criminal offense under Federal or state law, who served all or part of a sentence of imprisonment relating to such offense, and who was pardoned, granted clemency, or granted amnesty because of actual innocence of the offense; or

(2) an individual for whom the conviction for such offense was reversed or vacated and for whom the indictment, information, or other accusatory instrument for such offense was dismissed or who was found not guilty at a new trial after the conviction was reversed or vacated.

Damages Related to Business Interests – Generally damages related to business interests are income to the business except for damages related to injury to property. The damages are not taxable to the extent the basis of the property is reduced.

Legal Expenses – Unfortunately in most cases the legal fees end up not being deductible. The reason for that is when they are deductible, they are a tier 2 miscellaneous itemized deduction. But the current tax law has suspended all tier 2 miscellaneous deductions through 2025, so the bottom line, with some exceptions explained later, is that the legal fees are not deductible.

Example: Melinda, was injured in an automobile accident and engaged a legal firm to handle her claim with the insurance company. The legal firm’s fee was 40% of the insurance company settlement.

The insurance company paid $100,000. The legal firm got $40,000 and Melinda got $60,000. However, since the legal fees are not deductible Melinda ends up paying taxes on the entire $100,000 settlement. However, there are exceptions. Legal fees related to a taxpayer’s business or rental are deductible as a business expense. If the action was related to property, the expenses would be added to the property’s basis. An above-the-line deduction (meaning it is deductible as an adjustment to gross income, not an itemized deduction) is allowed for attorneys' fees and costs paid by, or on behalf of, a taxpayer in connection with a claim of unlawful discrimination, certain claims against the federal government, or a private cause of action under the Medicare Secondary Payer statute. This deduction is claimed on Form 1040, Schedule 1, line 24h (2021 version).

As you can see, determining what damage awards are taxable and whether the associated legal expenses are deductible is complicated, and even if allowed, a deduction may not provide any tax benefit. As every circumstance is unique, you are encouraged to call this office to determine what the tax ramifications might be in your situation.

Foreign Income And Tax Reporting Issues

Tue, 29 Mar 2022 10:06:06 GMT

Article Highlights:

Non-Resident Alien Spouse
Foreign Rentals
Foreign Pensions
Foreign Income Exclusion
FBAR
Statement of Specified Foreign Financial Assets
Credit of Foreign Tax Paid
Canadian Registered Retirement Savings & Income Plans
Reporting Receipt of Foreign Gifts or Bequests
Reporting Ownership or Transactions with Foreign Trusts
Annual Information Return for Foreign Trust with U.S. Owner
Ownership or Voting Power in Foreign Corporation

We have a worldwide economy and with that comes a variety of tax issues. Some of these may be relevant to you. The following issues, some of which you may not be aware of, apply to individuals. In addition, some are subject to severe penalties when not complied with.

Non-Resident Alien Spouse

It is becoming more frequent that a U.S. citizen or U.S. resident alien is married to a nonresident alien. In this circumstance the couple has filing options for U.S. tax purposes. Generally, a U.S. citizen or a U.S. resident alien (sometimes referred to as a green card holder) who is married to a nonresident alien must file their U.S. tax return using the filing status Married Filing Separate. This filing status has higher tax rates and certain limitations that do not apply to other filing statuses. The nonresident alien spouse would have to file a nonresident U.S. tax return on any U.S. source income.

However, tax law allows a person who is a nonresident alien at the end of the taxable year, and who is married to a U.S. citizen, or a U.S. resident alien, to be treated as a U.S. resident for income tax purposes and file a Married Filing Joint return, if both spouses so elect. In doing so both spouses must agree to subject their worldwide income for the taxable year to U.S. taxation.

Once made, and as long as one of the spouses is a U.S. citizen or resident alien, the election applies for the election year and all future years until it is terminated. If the election is terminated, neither spouse is eligible to make the election for any subsequent tax year.

Making this election requires a careful analysis of the tax ramifications of combining incomes, not only for the current year but all future years. Also, the couple could be subject to an FBAR filing requirement discussed later.

Foreign Rentals

Generally, foreign rental property is reported on the U.S. tax return in the same manner as a domestic rental. However, there are some differences in rental depreciation. For residential property, if the property were in the U.S. the depreciable recovery period would be 27.5 years but for a foreign rental the recovery period would be 30 years straight line. Similarly, for commercial rentals 40 years instead of 39.5.

The passive loss rules apply to a foreign rental in the same manner as a domestic rental so any consolidated net losses are limited to $25,000 but this limit is reduced (phases out) for taxpayers with an adjusted gross income (AGI) between $100,000 and $150,000.

If the landlord hires a non-resident alien in the foreign country to perform services related to the foreign rental activity, there are no U.S. reporting or withholding requirements. However, the foreign person providing those services should complete Form W-8BEN and return it to the landlord as proof that the individual is not subject to U.S. taxation.

Last, but not least, if a foreign bank account is maintained to receive rental income and disperse rental expense payments, and the owner of the property has signature or other authority over the account, then there may be an FBAR reporting requirement discussed later.

Foreign Pensions

A foreign pension or annuity distribution is a payment from a pension plan or retirement annuity received from a source outside the United States such as a:

foreign employer;
trust established by a foreign employer;
foreign government or one of its agencies (including a foreign social security pension);
foreign insurance company;
foreign trust or other foreign entity designated to pay the annuity.

Just as with domestic pensions or annuities, the taxable amount generally is the gross distribution minus the cost (investment in the contract) unless there is a tax treaty provision covering the taxation of the pension.

Another issue is whether the pension is taxable to the U.S., the individual’s country of residence, other country or the pension’s country of origin. This is commonly determined by the tax treaty between the U.S. and the country of origin. Generally, most tax treaties allow the country of residence to tax the pension or annuity under its domestic laws. This is true unless a special treaty provision specifically amends that treatment.

The following are some commonly encountered treaty provisions:

Canada - Canadian Old Age Security (OAS) pensions and Canada/Quebec Pension Plan (CPP/QPP) benefits received by U.S. residents are treated for tax purposes as if they were U.S. Social Security payments. U.S Social Security benefits received by a Canadian resident are taxable to Canada. Beneficiaries of a Canadian RRSP, RRIF, Registered Pension Plan, or deferred profit-sharing plan are taxable to the U.S. if the recipient is a U.S. Resident.
United Kingdom - UK pensions received by a U.S. resident are taxable to the U.S. and U.S. pensions received by a resident of the UK are taxable to the UK. Each country can only tax the amount that would have been taxed in the other country.

CAUTION: These treaty provisions are with the U.S. Federal government and not with the individual states. Consult the individual state’s rules.

Foreign Income Exclusion

U.S. citizens and resident aliens are taxed on their worldwide income, whether they live inside or outside of the U.S. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs.

To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:

Have foreign earned income (income received for working in a foreign country, including payroll disbursements from a U.S. employer and self-employment income);
Have a tax home in a foreign country; and
Meet either the bona fide residence test or the physical presence test.

The foreign earned income exclusion amount is adjusted annually for inflation. For 2021, the maximum is $108,700 ($112,000 for 2022) per qualifying person. If the taxpayers are married and both spouses (1) work abroad and (2) meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $217,400 for the 2021 tax year ($224,000 for 2022), but if one spouse uses less than 100% of his or her exclusion, the unused amount cannot be transferred to the other spouse.

Generally, to qualify, most individuals use the physical presence test which requires the taxpayer to be physically present in a foreign country for 330 full days during a consecutive 12-month period (not a calendar year). Where the 330-day period overlaps two years the exclusion is prorated for each year.

Foreign Account Reporting Requirements (FBAR)

All United States entities (including citizens and resident aliens as well as corporations, partnerships, and trusts) with financial interests in or authority over one or more foreign financial accounts (e.g., bank accounts and securities) need to report these relationships to the U.S. Treasury if the aggregate value of those accounts exceeds $10,000 at any time during the year. Failure to file the required forms can result in severe penalties.

The U.S. government wants this information for a couple of pretty obvious reasons. One, foreign financial institutions may not have the same reporting requirements as U.S.-based financial institutions. For example, they probably won’t issue the 1099 forms to report interest, dividends and sales of stock. By requiring those in the U.S. to divulge their foreign account holdings, the IRS can more easily cross-check to see if foreign income is being reported on the individual’s tax return. The second (and probably more significant) reason is that the information in the report can be used to identify or trace funds used for illegal purposes or to identify unreported income maintained or generated overseas.

This reporting requirement is not included with a tax return but is a separate filing with the U.S. Treasury’s Financial Crimes Enforcement Network . The due date of the report is the same as the April filing date for individual tax returns, April 18, 2022, for 2021 returns (except for residents of Maine and Massachusetts where the due date is April 19, 2022), and there is an automatic extension to the October individual extended due date, October 17, 2022, for 2021 returns.

A civil penalty of up to $10,000 may be imposed for a non-willful failure to report; the penalty for a willful violation is the greater of $100,000 or 50% of the account’s balance at the time of the violation. Both the $10,000 and $100,000 amounts are subject to inflation adjustment, which, as of January 24, 2022, brings them to $14,489 and $144,886, respectively. A willful violation is also subject to criminal prosecution, which can result in a fine of up to $250,000 and jail time of up to five years.

CAUTION: On Schedule B of the Form 1040 tax return, you must state whether you have a financial interest in or signature authority over one or more foreign financial accounts. If you answer yes but don’t file the FBAR, your failure to file may be considered willful, which could subject you to the larger fine and jail time.

You may have an FBAR requirement and not even realize it. For instance, say that you have relatives in a foreign country who have put your name on their bank account in case of an emergency; if the value of that account exceeds $10,000 at any time during the year, you will need to file the FBAR. The same would be true if your name was added to several of your foreign relatives’ smaller-value accounts that add up to more than $10,000 at any time during the year. As another example, if you gamble at an online casino that is located in a foreign country and your account exceeds the $10,000 limit at any time during the year, you will need to file the FBAR.

Statement of Specified Foreign Financial Assets

You may also have to file IRS Form 8938, which is similar to the FBAR but applies to a wider range of foreign assets and has a higher dollar threshold. This form is filed with your income tax return. If you are married and filing jointly, you must file Form 8938 if the value of your foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, these thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of the amounts above. The penalty for failing to file Form 8938 is $10,000 per year; if the failure continues for more than 90 days after the IRS provides notice of your failure to file, the penalty can be as high $50,000.

Credit for Foreign Tax Paid

With the worldwide economy we are all living in, more and more individuals are making investments in foreign countries, and may pay a foreign tax on their foreign earnings. These earnings are also taxable to the U.S. To compensate for potentially being taxed twice on the same income, the U.S. allows a tax credit, or an itemized deduction if the taxpayer itemizes their deductions, for the foreign income taxes paid. CAUTION: if you are a partner in a partnership or a shareholder in an S corporation you should contact your managing partner or shareholder before filing a Form 1116 to claim a foreign tax credit. Filing the Form 1116 on your 1040 or 1040-SR can have ramifications related to the filing of the partnership or S corporation tax returns.

Reporting Receipt of Foreign Gifts or Bequests

Foreign gifts or bequests received by a U.S. person, other than an exempt organization, must be reported to the federal government on Form 3520 if the gift exceeds $100,000 from a nonresident alien individual or a foreign estate, including foreign persons related to that nonresident alien individual or foreign estate.

In addition, amounts more than $16,815 for 2021 ($16,649 in 2020 and $17,339 for 2022) from foreign corporations or foreign partnerships, including foreign persons related to such foreign corporations or foreign partnerships, that are treated as gifts must be reported on the Form 3520.

Reporting Ownership or Transactions with Foreign Trust

Form 3520 is also used to report ownership in a foreign trust or transactions carried out with a foreign trust. Failure to file Form 3520 or providing incomplete or incorrect information can be subject to some severe penalties.

Annual Information Return for Foreign Trust with U.S. Owner

A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements. Each U.S. person treated as an owner of any portion of a foreign trust is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.

Ownership or Voting Power in Foreign Corporation

Generally, a U.S. citizen or resident alien (or one who files a joint return with a U.S. citizen or resident alien) who owns a 10% or more interest in a foreign corporation or commands control over more than 50% of the voting power in a foreign corporation must file Form 5471.

Please contact this office if any of the discussed issues might apply to you so we can help you take advantage of the benefits and comply with the reporting requirements.

Video Tips: Claiming Your Child As A Dependent After A Divorce

Fri, 25 Mar 2022 11:11:03 GMT

When divorced or separated parents have young children it often becomes argumentative as to who claims them. The IRS actually has rules that answer that question. This video will give you a quick explanation of this tax issue. If you need a detailed answer for your specific situation, please give us a call.

You May Need To File Estimated Tax Payments

Thu, 24 Mar 2022 09:00:49 GMT

Article Highlights:

Employees
Self-Employed Individuals
Quarterly Payments
Underpayment Penalty
Safe Harbor Payments

Estimated tax payments are not just for the self-employed. They are for anyone whose withholding and tax credits are significantly less than their projected tax liability, and if used properly, can protect a taxpayer from underpayment penalties.

Employees who will have income, Social Security, and Medicare taxes withheld from their wages generally do not need to make estimated tax payments. On the other hand, self-employed individuals must prepay their taxes by making quarterly estimated tax payments. These are referred to as estimated tax payments because the self-employed individual must estimate his or her net earnings for the year and pay taxes on a quarterly basis according to that estimate. Failure to do so will result in interest penalties.

The self-employed are not the only ones who are subject to estimated tax requirements – anyone who has income on which there’s no income tax withheld, and even those whose taxes are not sufficiently withheld, may need to make estimated payments. Thus, if you have income from stock sales, property sales, investments, alimony, partnerships, S-corporations, inherited pension plans, or other sources where no tax was withheld, you may also be required to pay either estimated taxes or run the risk of an underpayment penalty. Others subject to making estimated payments are individuals who must pay special taxes such as the 3.8% tax on net investment income or the employment tax on household employees.

Although these payments are called “quarterly” estimates, the periods they cover do not usually coincide with a calendar quarter. For 2022 the dates are:

*If the due date falls on a Saturday, Sunday, or holiday, the payment is due on the next business day. For taxpayers in Maine and Massachusetts, the first 2022 estimate payment is due on April 19, 2022.

An underestimated penalty does not apply if the tax due on a return (after withholding and refundable credits) is less than $1,000; this is the “de minimis amount due” exception. When the tax due is $1,000 or more, underpayment penalties may be assessed.

The underpayment penalties are determined on a quarterly basis, so an underpayment in an earlier quarter cannot be made up for in a later quarter’s payment. However, withholding is treated as being paid ratably throughout the year. Thus, increasing withholding in the later part of the year can help make up for underpayments in earlier periods in the year. Contrarily, an overpayment in an earlier quarter is applied to the following quarter.

The amount of an estimated payment is determined by estimating one-fourth of the taxpayer’s tax for the entire year; the projected tax is paid in four installments. When the income is seasonal, sporadic, or the result of a windfall, the IRS provides a special form, and the underpayment penalty is based on actual income for the period.

For individuals who do not want to take the time to estimate their quarterly taxes but who still want to avoid the underpayment penalty, Uncle Sam also provides safe-harbor estimates. However, even these can be tricky. Generally, taxpayers can avoid an underpayment penalty if their withholding and estimated payments are equal to or greater than

90% of the current year’s tax liability or
100% of the prior year’s tax liability.

However, these safe harbors do not apply if the prior year’s adjusted gross income is over $150,000, in which case, the safe harbors are

90% of the current year’s tax liability or
110% of the prior year’s tax liability.

Thus, a true safe harbor, regardless to the current year’s tax liability would be withholding and estimated tax payments equal to or greater than 110% of the prior year’s tax liability.

This office can assist you in estimating payments, adjusting withholding, and setting up safe-harbor payments. Please call for assistance.

Getting Started with Reports in QuickBooks Online

Wed, 23 Mar 2022 09:27:12 GMT

You can do a lot of your accounting work in QuickBooks Online by generating reports. You can maintain your customer and vendor profiles. Create and send transactions like invoices and sales receipts, and record payments. Enter and pay bills. Create time records and coordinate projects. Track your mileage and, if you have employees, process payroll.

These activities help you document your daily financial workflow. But if you’re not using QuickBooks Online’s reports, you can’t know how individual elements of your business like sales and purchases are doing. And you don’t know how all of those individual pieces fit together to create a comprehensive picture of how your business is performing.

QuickBooks Online’s reports are plentiful. They’re customizable. They’re easy to create. And they’re critical to your understanding of your company’s financial state. They answer the small questions, like, How many widgets do I need to order?, and the larger, all-encompassing questions like, Will my business make a profit this year?

Getting the Lay of the Land

Let’s look at how reports are organized in QuickBooks Online. Click Reports in the toolbar. You’ll see they are divided into three areas that you can access by clicking the labeled tabs. Standard refers to the comprehensive list of reports that QuickBooks Online offers, displayed in related groups. Custom reports are reports that you’ve customized and saved so you can use the same format later. And Management reports are very flexible, specialized reports that can be used by company owners and managers.

A partial view of the list of QuickBooks Online’s Standard reports

Standard Reports

The Standard Reports area is where you’ll do most—if not all—of your reporting work. The list of available reports is divided into 10 categories. You’re most likely to spend most of your time in just a few of them, including:

Favorites. You’ll be able to designate reports that you run often as Favorites and access them here, at the top of the list.
Who owes you. These are your receivables reports. You’ll come here when you need to know, for example, who is behind on making payments to you, how much individual customers owe you, and what billable charges and time haven’t been billed.
Sales and customers. What’s selling and what’s not? What have individual customers been buying? Which customers have accumulated billable time?
What you owe. These are your payables reports. They tell you, for example, which bills you haven’t paid, the total amount of your unpaid bills (grouped by days past due), and your balances with individual vendors.
Expenses and vendors. What have I purchased (grouped by vendor, product, or class)? What expenses have individual vendors incurred? Do I have any open purchase orders?

The Business Overview contains advanced financial reports that we can run and analyze for you. The same goes for the For my accountant reports. Sales tax , Employees , and Payroll will be important to you if they’re applicable for your company.

Working with Individual Reports

Each individual report in QuickBooks Online has three related task options.

To open any report, you just click its title. If you want more information before you do that, just hover your cursor over the label. Click the question mark to see a brief description of the report. If you want to make the report a Favorite , click the star so it turns green. And clicking the three vertical dots opens the Customize link.

When you click the Customize link, a vertical panel slides out from the right, and the actual report is behind it, grayed out. Customization options vary from report to report. Some are quite complex, and others offer fewer options. The Sales by Customer Detail report, for example, provides a number of ways for you to modify the content of your report so it represents exactly the “slice” of data you want. So you can indicate your preferences in areas like:

Report period
Accounting method (cash or accrual)
Rows/columns (you can select which columns should appear and in what order, and group them by Account, Customer, Day , etc.)
Filter (choose the data group you want represented from several options, including Transaction Type, Product/Service , Payment Method, and Sales Rep )

Once you’ve run the report, you can click Save customization in the upper right corner and complete the fields in the window that opens. Your modification options will then be available when you click Custom reports , so you can run it again anytime with fresh data.

You can customize QuickBooks Online’s reports in a variety of ways.

We’ll go into more depth about report customization in a future issue. For now, we encourage you to explore QuickBooks Online’s reports and their modification options so that you’re familiar with them and can put them to use anytime. Let us know if you have any questions about the site’s reports, or if you need help making your use of QuickBooks Online more effective and productive.

The Tax-Filing Deadline Is Drawing Near

Tue, 22 Mar 2022 09:36:52 GMT

Article Highlights:

Extensions
Balance-Due Payments
Contributions to Roth or Traditional IRAs
Individual Refund Claims for the 2018 Tax Year
Missing Information

As a reminder to those who have not yet filed their 2021 tax returns, April 18, is the due date to either file a return (and pay the taxes owed) or file for an automatic extension (and pay an estimate of the taxes owed). The due date is April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia – even if you don’t live in DC. If you live in Maine or Massachusetts, the filing due date is April 19, 2022, because of the Patriots' Day holiday in those states.

Caution should be exercised when preparing the extension application, which is IRS Form 4868. Even though this form is described as “automatic,” the extension is automatically granted only if it includes a reasonable estimate of the 2021 tax liability and only if that anticipated liability is paid along with the extension application. It is not uncommon for taxpayers to enter zero as the estimated tax liability without figuring the actual estimated amount. These taxpayers risk the IRS classifying their forms as having been improperly completed, which in turn makes the extensions invalid. If you need an extension, please contact this office so that we can prepare a valid extension for you.

The extension must be filed in a timely manner; at this office, we can file your extension electronically before the due date and have any amount owed withdrawn from your bank account. Because the IRS is so backed up opening mail, we do not recommend the payment be made by mail. But if you do decide on mailing an extension, be advised that the envelope with the extension form must be postmarked on or before the April 18 due date. However, there are inherent risks associated with dropping an extension form in a mailbox; for instance, the envelope might not be postmarked in a timely fashion. Thus, those who have estimated tax due should mail their extension forms using registered or certified mail so as not to risk late-filing penalties.

In addition, the April 18 deadline also applies to the following:

Balance-Due Payments for the 2021 Tax Year – Be aware that Form 4868 is an extension to file, NOT an extension to pay. The IRS will assess late-payment penalties (with interest) on any balance due, even when the extension has been granted. Taxpayers who anticipate having a balance due need to estimate this amount and include payment for that balance, either along with the extension request (as indicated above) or electronically by this firm or through the IRS website.
Contributions to a Roth or Traditional IRA for the 2021 Tax Year – April 18, 2022, is the last day for 2021 contributions to either a Roth or a traditional IRA. Form 4868 does not provide an extension for making IRA contributions.
Individual Estimated Tax Payments for the First Quarter of 2022 – The first installment of the 2022 estimated tax payment is due on April 18, 2022. If you make estimated tax payments and did not file the first installment on or before April 18, 2022, then that payment is late, and you should file it as soon as possible to mitigate any penalties.
Individual Refund Claims for the 2018 Tax Year – The regular three-year statute of limitations expires for the 2018 tax return on April 18 of this year. Thus, no refund will be granted for a 2018 return (original or amended) that is filed after April 18, 2022. Taxpayers could risk missing out on the refundable Earned Income Tax Credit, the refundable American Opportunity Tax Credit for college tuition, and the refundable child credit for the 2018 tax year if they do not file before the statute of limitations ends. Caution: The statute does not apply to balances due for unfiled 2018 returns.

If your 2021 return is still pending because of missing information, please forward that information to this office as quickly as possible so that we can ensure that your return meets the April 18 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed in time if you wait until the last minute. If you know that the missing information will not be available before the April 18 deadline, then please let us know as soon as possible so that we can prepare an extension request.

If you have not yet completed your returns, please call this office right away so that we can schedule an appointment and/or file an extension for you.

Toss Your Paystub Every Week? Maybe It’s Time To Take a Closer Look

Mon, 21 Mar 2022 09:56:29 GMT

What you do with your paystub often depends on how you get paid. If you have direct deposit there’s a good chance that you just rip the entire thing up without a glance, confident in the fact that the money is in your bank account and all is good in your world. If you deposit your check, you probably rip off the bottom without a glance and toss it on your way into the bank or at the drive-through window. But the fact that you’ve been paid doesn’t mean that the information on your paystub isn’t important. There are good reasons for taking a closer look at the information that’s provided, and for understanding what it all means.

The most important reason to double-check your paystub is to make sure that you’re being paid correctly and that the right amount of money is being withheld on your behalf by your employer. You know better than anybody what your income is supposed to be, and mistakes do happen, but you won’t know if you don’t check. Plenty of people have found out the hard way – at tax time – that their employer hasn’t been withholding the amount that they wanted them to, and they end up with a shortfall that they have to make up.

Another good reason for looking at your paystub is to understand exactly where your money is going and what it is funding. We all remember the shock of receiving our first paycheck and finding out that it came to far less than what we thought it would be based on our salary or hourly wages. We were told it was taxes … but do you know what that really means? The information provided below should provide a better understanding of what those deductions from your gross income are, and where they are going.

Breakdown of Paystub Information:

Unfortunately, there is no one set format for paystubs. In fact, some states don’t even require employers to provide their employees with the specifics of where their money is going each week. For those who do receive paper records of their withholding amounts and more, here’s what you’re likely to find, and what it means.

Wages – This is one of the most important pieces of information on your paystub. Whether you are paid a salary or an hourly basis, the wage portion of your paystub will provide you with what the gross amount is that you’re being paid, what portion of those wages are taxable, and what your net income/check amount is. Most stubs will reflect both the wages for the pay period and the year-to-date totals.
Taxes – Every citizen is obligated to pay a portion of their income to the federal government, as well as any applicable state and local taxes. This money is used to pay for both services and administrative costs. Deductions will also be taken for the FICA tax that pays into the Social Security Administration and Medicare. Though the taxpayer may not currently be benefiting from these programs, the idea is that everybody will be eventually, and those who are working pay for those who no longer are.
Non-Taxed Deductions – Most paystubs will also reflect deductions taken from your pay for items that are not taxable. This may include contributions to a 401(k) retirement account or money that you direct into other pre-tax accounts.
Benefits – If you receive benefits such as health insurance, life insurance, sick time, and vacation time, your employer may provide information on your paystub about how much they pay on your behalf, or how much you have elected to pay for options such as a specific level of insurance coverage.
Additional Deductions – You may also see deductions taken for other items that you have requested, such as Health Savings Account contributions, parking passes, childcare expenses, and more. All of these line items should be for selections that you have agreed to. If you do not recognize an expense, it’s a good idea to check with your Human Resources department and ask them to identify it.

Knowing what you’re earning and where your money goes is just the first step to economic stability and understanding. For additional help and guidance, contact our office today.

The 2022 IRS Interest Rate Hike Will Go Live April 1st

Mon, 21 Mar 2022 09:44:39 GMT

If you are required to pay quarterly estimated income tax, an upcoming change in interest rates being imposed by the IRS may have a direct impact on you. Effective April 1st, 2022, corporations and self-employed filers who submit quarterly estimated taxes will see a hike in the interest rates that the agency charges for both overpayments and underpayments.

The new rates will be:

4% for underpayments;
6% for large corporate underpayments
4% for overpayments (3% in the case of a corporation)
1.5% for the portion of a corporate overpayment exceeding $10,000

Though these changes will not affect you if you calculate your liability correctly and pay on time each quarter, those taxpayers who have an outstanding balance or who are otherwise out of compliance with their tax obligation need to remember that the longer they take to address the situation, the more their obligation will grow as their liabilities accrue interest at a rate of 3%.

If you have questions on how the new rates will affect you, feel free to contact us today.

April 2022 Individual Due Dates

Sun, 20 Mar 2022 10:08:52 GMT

April 11 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 11. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

April 18 - Taxpayers with Foreign Financial Interests

A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114. The form must be filed electronically; paper forms are not allowed. The form must be filed with the Treasury Department (not the IRS) no later than April 18, 2022 for 2021. An extension of time to file of up to 6 months is automatically allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2021. Contact our office for additional information and assistance filing the form.

April 18 - Individual Tax Returns Due

Although April 15 is on a Friday in 2022, and individual income tax returns would normally be due that day, because the Washington, D.C. Emancipation Day holiday is observed on Friday, April 15, the due date is pushed to Monday, April 18. If you live in Maine or Massachusetts, you may file by April 19 (because April 18 is Patriots’ Day).

File a 2021 income tax return (Form 1040 or 1040-SR) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.

Caution: The extension gives you until October 17, 2022, to file your 2021 1040 or 1040-SR return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 18 due date.

April 18 - Estimated Tax Payment Due (Individuals)

It’s time to make your first quarter estimated tax installment payment for the 2022 tax year. Our tax system is a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include:

Payroll withholding for employees;
Pension withholding for retirees; and
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

April 18 - Last Day to Make Contributions

Last day to make contributions to Traditional and Roth IRAs for tax year 2021.

April 2022 Business Due Dates

Sat, 19 Mar 2022 10:24:19 GMT

April 18 - Last Day to Establish a Keogh Account for 2021

If you are self-employed, April 18, 2022, is the last day to establish a Keogh Retirement Account if you plan to contribute for 2021. However, last day can be extended until October 17, 2022, with a valid six-month extension of time to file your individual 2021 tax return.

April 18 - Household Employer Return Due

If you paid cash wages of $2,300 or more in 2021 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040 or 1040-SR), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2020 or 2021 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.

April 18 - Farmers and Fishermen

If you were unable to comply with the March 1, 2022, filing and payment deadline the IRS will wave estimated tax penalties as long as you file and pay your 2021 taxes by April 18, 2022. April 19 if you live in Maine or Massachusetts because April 18 is Patriots’ Day a legal holiday in those states., and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.

April 18 - C-Corporations

File a 2021 calendar year income tax return (Form 1120) and pay any tax due. If you need an automatic 6 -month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns

April 18 - Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in March.

April 18 - Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in March.

April 18 - C-Corporations

The first installment of 2022 estimated tax of a calendar year corporation is due.

April 18 - Fiduciary Returns

Last day to file a 2021 calendar year fiduciary return (Form 1041, U.S. Income Tax Return of Estates and Trusts) or file an extension.

Video Tips: Tax Things You Need to Know about Inheritances

Sat, 19 Mar 2022 10:14:43 GMT

Inheritances can come in different forms–some are taxable while some are not. Tax treatments for different types of inherited securities can vary and lead to unexpected results without proper planning. Watch this video for a quick view of how your inheritances can be taxed.

There's a Lot You Can Get Wrong With Business Budgeting... But It's Still an Invaluable Practice

Fri, 18 Mar 2022 10:31:59 GMT

According to one recent study , only about two-thirds of all businesses that open today will survive two years in operation. Roughly half of them will last approximately five years. When you get to 10 years out, that number drops to one-third, according to the Bureau of Labor Statistics.

Fascinatingly, a massive 82% of all organizations that end up failing do so for essentially the same reason: cash flow issues. Cash flow doesn't just refer to the total amount of money coming into an account. It also refers to the timing of that money, among other factors.

Invoices don't get paid when they should be. Loan payments come due before the cash is in an account. All of these things take their toll, and businesses of all sizes pay the price because of it.

That, in essence, is why business budgeting is so important. You need to be aware of what is going on in the short term, yes, but the long term is far more important. Obviously, you have goals that you've set for yourself that you're trying to accomplish, whether it's expanding to a new location, purchasing new equipment, or hiring more employees. But you need to make sure that you're financially in a position to do that, and business budgeting is how you do it.

The Importance of Business Budgeting

Of course, people can make a number of mistakes when it comes to business budgeting that can be truly detrimental in the long run. Case in point: simply assuming that last year's budget is applicable to this year, which is rarely the case.

Never forget that last year's budget was based on an entirely different set of circumstances than what you are currently facing. In the best of times, businesses are supposed to grow and evolve -- they're naturally going to need more money to do it. Not only that, but consider if you had attempted to use 2019's budget as a basis for your 2020 projections, and then something wholly unexpected like the COVID-19 pandemic hits. It would throw everything into chaos in a way that would make it difficult to pivot from moving forward.

The same concept is true whenever there is an unexpected change in consumer purchasing behavior, something that has happened before and will absolutely happen again whether you like it or not. For example, say there is a company that makes products that somehow significantly underpredicted the demand they would see for the holiday season. The reason for this might be as simple as a manager wanting to set a budget goal that he or she knew they would be able to hit. But once that budget was set, it created a ripple effect throughout the entire company; demand was based on that sales forecast, production was operating off of it and more. A significant amount of money is left on the table, all because that manager fell into some of the worst practices of business budgeting there are.

Another big mistake that a lot of small businesses in particular make involves not basing their budget on anything practical, meaning they're not using the data in front of them to make more accurate estimates for what is to come. Simply estimating expenses versus income based on gut instinct and "intuition" will likely lead to going way over budget in the new year.

Instead, what you need to be doing is looking back at that historical data to see what trends and patterns you can uncover. When were the busy periods of the year as opposed to when work slowed down? What are your current goals, and what do you need to accomplish them? These are the types of questions you need to be asking yourself for the best possible results.

One practice to get in the habit of when setting a budget involves listing out three key things: your projected sales for the upcoming year, any fixed expenses that you have such as rent for an office or equipment and things of that nature, and variable expenses. Then, you can contextualize things and begin to get a sense of how much you need to accomplish exactly what you want.

Finally, another major mistake that a lot of organizations make involves forgetting to take the money they're making and reinvesting it where it matters most -- in the business itself. Again, the goal of any organization is to grow -- you always want to push yourself and be more successful and reach more people. When a company is under budget, there is often the urge to take those excess funds and set them aside.

To be clear, using that money to pay down things like business loans or to create some type of "rainy day" emergency fund isn't a bad idea. But with proper business budgeting, you can take that money and put it back into other areas of the organization where it can do the most good.

On at least a monthly basis, organizational leaders should be seeing how much in the way of leftover funds that they have, and they should be thinking long and hard about what they can afford to put back into the business itself. That way, you're not missing out on key growth opportunities and are instead capitalizing on them at every opportunity.

In the end, business budgeting is an important part of running any organization, but it's safe to say there is a lot that can go wrong with an incorrect approach. You need to understand the situation you're in, where you are, and where you're trying to be next year or even five years from now. Only then will you be able to glean as much valuable information from this process as possible, thus allowing you to make the best decision possible at the moment.

Want to Make the Inc. 5000 Annual List of the Fastest-Growing Companies? Here's How

Thu, 17 Mar 2022 11:01:56 GMT

Originally launched in 1979 and based out of Manhattan, Inc. is one of the most famous magazines in existence that celebrates what it means to be an entrepreneur. The print edition has an estimated circulation of about 1.4 million copies, while the online page - the appropriately titled Inc.com - is said to receive about 33 million views monthly.

All of this is important because entrepreneurs are truly the key to our economy. According to one recent study , there were about 31.7 million small businesses in the United States as of 2020 - making up a massive 99.9% of all organizations in existence. Over the years, one of the things that Inc. has become famous for is their Inc. 5000 list - a yearly collection of some excellent growth stories that are designed to serve as inspiration for everyone else trying to follow a similar path.

Of course, the question remains: how do you go about getting yourself onto the Inc. 5000 annual list of the fastest-growing companies in the country? By keeping a few key things in mind.

Cracking the Inc. 5000 List: An Overview

The good news is that making the Inc. 5000 list isn't necessarily as difficult as some might think. It's actually something that you can apply for, which you can do by visiting the official website at www.inc.com/inc5000/apply .

Keep in mind, however, that you need to meet a number of important requirements to even be considered. First, your company needs to be privately owned and, obviously, it must be based in the United States. It also needs to be totally independent - you can't be a subsidiary or a separate division of another, larger company.

Showing that you were able to grow using your own resources is very important in order to maintain the spirit of the list itself.

Next, you must have started earning revenue by at least March 31 of your first year of operation. Again, the emphasis here is on growth and these are all important benchmarks to illustrate that.

You must have had revenue of no less than $100,000 during your first year in operation, and had revenue of no less than $2 million by year four. Your revenue in year four must exceed your total revenue in year one. Also, keep in mind that revenue must be under a single LLC or corporation.

Should all of those things describe your company, you're free to apply whenever you'd like by using the aforementioned URL.

Especially for younger companies that are already on a growth path, making the Inc. 5000 list can be a massive boost. Almost immediately you get a level of national and global recognition that can propel your efforts even further. If you make the list, you get a company profile that will be housed on Inc.com. You're also exposed to potentially millions of media impressions on a regular basis.

In addition to that, the boost to brand appeal is something that cannot be overstated. Inc. broadcasts these results far and wide, including via national, local, and industry outlets. All of this gives you an opportunity to integrate a prestigious honor into your own marketing campaigns, thus amplifying your reach even further.

Over time, this has a ripple effect in the best possible way. Making the Inc. 5000 list is nothing if not impressive, which has the potential to be a great boost to employee morale. It can also be a way to attract and even retain top talent as you work to fill additional positions.

This can even lead to stronger sales momentum under the right circumstances, too. Because of the strict requirements and the objective nature of the list, making it can generate the type of credibility with potential customers that you really can't put a price on. Depending on the trajectory that your company is taking, it could even help garner the attention of investors as well.

But more than anything, one of the major benefits of making the Inc. 5000 annual list of the fastest-growing companies can be summed up in a single word: knowledge. This is an achievement that will open the door to business insights and resources that you may not otherwise have access to on your own. You'll be able to learn all of the best practices that you need to continue on your current trajectory, thus guaranteeing that the success you've seen up to this point only continues to increase as time goes on.

Can’t Pay Your Taxes? Here Are Some Payment Options

Thu, 17 Mar 2022 10:44:31 GMT

Article Highlights:

If You Can’t Pay
Family Loans
Home Equity Loans and HELOCs
Credit Card
Short-term Payment Plan
IRS Installment Agreement
Retirement Funds
Filing Extensions
Enforced Collections
Offer-in-Compromise

Although most (74% in 2020) American taxpayers receive a refund each year when they file their income tax returns, there are those who for one reason or another end up owing. Of those who owe Uncle Sam many don’t have the means to pay what they owe by the return due date (usually in April).

Generally, tax due occurs when a wage earner has under-withheld on his or her payroll or a self-employed individual failed to make adequate estimated tax payments during the year. This can be a huge problem for those who are unable to pay their liability.

It is generally in your best interest to make other arrangements to obtain the funds for paying your 2021 taxes rather than be subjected to the government’s penalties and interest for payments made after April 18, 2022. Here are a few options to consider.

Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
Home Equity Loans and HELOCs - Use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount. Unfortunately, obtaining these loans takes time, so if you anticipate that you’ll need funds from such a loan to pay your taxes that are due in April, you should get the application process started right away.
Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay a credit card discount fee (the fee charged by the credit card company), you will have to pay the fees due and pay the higher credit card interest rates.
Short-Term Payment Plan – If you can fully pay the tax owed within 180 days and owe less than $100,000 including tax, penalties, and interest, you can apply for a short-term payment plan online at the IRS website. You won’t be charged a set-up fee but will still have to pay penalties and interest until the balance owed is fully paid. Setup fees will be charged if you apply for a payment plan by phone, mail, or in-person instead of online.
IRS Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate. There is a user fee to set up the payment plan. However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement lifestyle and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.

Filing Extensions – Don’t mistake the ability to apply for an extension of time to file your tax return as also being an extension to pay any tax liability. It is not and does not grant you an extension of time to pay. The penalties and interest on the amount due will continue to apply as of the original due date of the return.

Enforced Collections - If the taxes cannot be paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:

Issuing a Notice of Levy on salary and other income, bank accounts or property (IRS can legally seize property to satisfy the tax debt)
Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes.
Issuing a Summons to the taxpayer or third parties to secure information to prepare unfiled tax returns or determine the taxpayer’s ability to pay.

Note: To collect delinquent tax debts, certain federal payments (vendor, OPM, SSA, federal salary, and federal employee travel) disbursed by the Department of the Treasury, Bureau of Fiscal Service (BFS)) may be subject to a levy through the Federal Payment Levy Program (FPLP).

Fresh Start Initiative - The IRS also has what is called the “Fresh Start” initiative to offer more flexible terms in its existing Offer-in-Compromise program which, under certain circumstances allows taxpayers to settle their tax debt for reduced amounts. This enables financially distressed taxpayers to clear up their tax problems faster than in the past. While resolving tax problems might previously have taken four or five years, taxpayers may now be able to resolve their problems in as little as two years.

If you have questions about the payment options or an offer-in-compromise, please call this office for assistance. Don’t just ignore your tax liability because that is the worst thing you can do.

The Steps to Estimate Start-Up Costs Before You Launch Your New Business

Wed, 16 Mar 2022 11:17:04 GMT

According to one recent study , start-ups created over two million jobs in the United States in 2015 alone. In fact, by 2018, there were 30.2 million such organizations operating in the country — making up a significant part of the economy.

But having an idea for a product or service and bringing that vision into reality are often two different things. It's one thing to come up with something innovative — it's another thing entirely to avoid the trials and tribulations that the business side of the equation often brings with it. That's why it's so important to estimate start-up costs before you launch your new business — it can help you avoid as many of these issues as possible.

Estimating Start-Up Costs the Right Way

By far, the most important step that you can take when it comes to estimating start-up costs involves first listing out all spending you'll need on the assets that you require for your business to function.

If you're opening a retail store, for example, obviously you're going to need things like shelves. You'll need tables, point of sale systems, light fixtures, so on and so forth. All of these are fixed costs, and they're also essential — you literally can't get by without them. Therefore, listing them out at the beginning of this process is a great way to give yourself a financial foundation for your endeavor.

The same is true if you're opening a business where you will be manufacturing products. You need raw materials from which to produce those products. You'll need to think about labor costs and all the equipment needed to bring your vision for those products into reality. All of this is essential and these are costs that you can't overlook at the beginning of this process.

Next, you'll want to think about the spending that you have to do on expenses. Remember, not everything you invest in will wind up as an asset. If push comes to shove, you can always sell a piece of heavy machinery on a factory floor or shelves in a store aisle. The same is not true for the legal expenses that you'll need to invest in to properly set up your business as an LLC or a partnership.

People also often forget about the costs required to set up a website, for example. Not only do you have to pay someone to develop it to make sure that your branding aligns seamlessly with your target audience, but you need to pay someone to maintain it. You'll need to pay monthly fees to continue to host it on your domain. These things can quickly add up.

Once you have carefully considered all of these factors, you can tackle what is perhaps the most important question of all: how much money are you going to need to get started. Never forget the old saying that "Rome wasn't built in a day." Your successful business won't be, either. Based on the above, you need to know how much money you must have in the bank to account for your expenses in those early days. This is especially true as your start-up begins to gain traction, hopefully generating enough money in sales to cover both costs and expenses moving forward.

It's a difficult process, to be sure — and it's one that many people tend to get wrong. Coming into the situation with a level head and a good idea of your goals enables you to enjoy all the benefits of this process with as few of the potential downsides as possible.

If you'd like to find out more information about all the important steps to properly estimate start-up costs before you launch your new business, or if you just have any additional questions you'd like to go over with someone in a bit more detail, please don't delay - contact us today.

SBA Extends Deferment of Principal & Interest for COVID EIDL Loans

Wed, 16 Mar 2022 11:06:32 GMT

On March 16, the U.S. Small Business Administration (SBA) announced a new program to provide additional deferment of principal and interest payments for existing the COVID Economic Injury Disaster Loan (EIDL) program for a total of 30 months from inception on all approved COVID EIDL loans. The extended deferment period will provide additional flexibility to small business owners impacted by the pandemic, especially those in hard-hit sectors managing disruption with recent variants, as well as recent supply chain and inflation challenges amid a growing economic recovery.

You May Qualify for the 20% Tax Pass-Through Deduction

Tue, 15 Mar 2022 11:33:33 GMT

Article Highlights:

Sec 199A Deduction
Qualified Business Income
Threshold
Specified Service Businesses
Limitations
Wage Limitation
Aggregating Amounts

Several years ago, when Congress changed the tax-rate structure for C corporations to a flat rate of 21% instead of the former graduated rates that topped out at 35%, they also came up with a new deduction for businesses that are not organized as C corporations. This tax break will be available only through tax year 2025 unless it is extended by Congress.

As a result, the current tax code provides a substantial tax benefit for most non-C-corporation business owners in the form of a deduction that is equal to 20% of their qualified business income (QBI). This deduction is most known as a pass-through income deduction because it applies to income from pass-through business entities such as partnerships and S corporations. This category also includes income from sole proprietorships, rentals, and farms; Real Estate Investment Trust (REIT) dividends; pass-through income from publicly traded partnerships; and cooperative dividends. The shorthand term for this deduction is the Sec 199A deduction, as 199A is the Internal Revenue Code section number for this provision. Let’s look at how this deduction works.

QBI – QBI is defined as the net amount of income, gains, deductions, and losses with respect to trades or businesses that are conducted within the United States.

QBI does not include:

Wages
Capital gains or losses,
Interest income,
Dividends or payments in lieu of dividends,
Annuity income not received in connection with a trade or business,
Gain or loss from foreign currency transactions,
Trade or business of being an employee,
Reasonable compensation from an S-corporation, or
Guaranteed payments from a partnership.

The pass-through deduction is not a business deduction; it is deducted on a taxpayer’s 1040 after the adjusted gross income is calculated. It is allowed regardless of whether the taxpayer claims the standard deduction or itemizes deductions. Since it is not a business deduction, it does not affect the computation of self-employment tax. Where QBI is less than zero, it is treated as a loss from a qualified business on the next year’s computation of QBI.

Complicated Computation - Congress ignored simplification when it created this deduction, which can be quite complicated, and which includes limitations at the entity level and for the combined deductions from all entities; furthermore, it is subject to a limitation based on the individual’s taxable income.

Thresholds & Caps – When determining the 20% of QBI deduction for each entity, the de-ductible amount may be reduced, phased-out or phased-in based on that year’s taxable income (without regard to the deduction itself). The 2021 thresholds for each limitation are $164,900 (170,050 in 2022) for individuals and $329,800 ($340,100 in 2022) for joint filers. The maximum of any phase-out or phase-in is $50,000 more than the threshold for individuals and $100,000 more for joint filers, so the maximums are $214,900 for individuals and $429,800 for joint filers ($220,050 and $440,100 for 2022). For those filing married separate, the 2021 threshold and cap amounts are $164,925 and $214,925, respectively, and for 2022, the amounts are the same as for individuals as noted above.

Specified Service Business – Special rules apply to specified service businesses, which are generally businesses that rely on the skill and reputation of the owners or employees. These include businesses focusing on health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and so on. This category specifically does not include engineering or architecture businesses and trades or businesses whose services consist of investment-type activities. For specified service businesses, if the taxable income is equal to or below the threshold, the entity’s deductible amount is the full 20% of QBI. When the taxable income is above the threshold, the deduction is pro-rata phased out between the threshold and the cap. Thus, a specified service business entity has no deduction when the taxable income exceeds $214,900 for individuals or $429,800 for joint filers ($220,050 and $440,100 for 2022) or $214,925 for 2021 and $220,050 for 2022 for married separate filers.

Wage Limitation – Before learning how the deduction is determined for other business entities, one must understand the wage limitation and how it is determined. An entity’s deduction is limited to the lesser of 20% of QBI or the wage limitation. The wage limitation is the greater of

50% of the W-2 wages from the business or
25% of the W-2 wages from the business plus 2.5% of the unadjusted basis of the business’s qualified property.

Other Businesses – Computing the deduction for other entities gets significantly more complicated depending upon the taxable income. The computations fall into three categories:

Taxable income below the threshold amount described above,
Taxable income above the threshold but less than the cap amount noted above, and
Taxable income exceeding the cap.

Income below the threshold – The entity’s deductible amount is the full 20% of QBI.

Income above the threshold but less than the cap – This is the most complicated computation because the wage limit is phased-in between the threshold and the cap; it only applies to a pro-rata portion of the deduction.

Income above the cap – The deduction is equal to the lesser of the wage limitation or 20% of QBI.

Example: A single taxpayer has a taxable income of $125,000. He runs a small car-repair business that has a net profit (QBI) of $100,000. Because his taxable income is below the threshold, his deduction for the business entity is $20,000 (20% of $100,000).

Example: A married taxpayer with a taxable income of $500,000 is a shareholder in an S corporation. The K-1 from the S corporation shows pass-through income (QBI) of $300,000. The pro-rata share of that taxpayer’s wages that were paid by the corporation is $100,000, and the pro-rata share of the taxpayer’s qualified business property is $75,000. Because the taxable income is above the cap, the deduction for this business entity is the lesser of the wage limitation or 20% of the QBI. The wage limitation is the greater of $50,000 (50% of the $100,000 in wages) or $26,875 (25% of the $100,000 in wages plus 2.5% of the $75,000 in qualified business property). Thus, the wage limitation is $50,000. This is less than $60,000 (20% of the $300,000 in QBI), so the taxpayer’s deduction for this business is limited to $50,000.

With taxable income of $500,000, this taxpayer’s marginal tax bracket is 35%. This means that the $50,000 QBI deduction will save the taxpayer $17,500 of tax.

Aggregating Amounts – Once the deductions have been determined for each of a taxpayer’s business entities, they are combined in a rather complicated computation. First, the total deduction is added to 20% of the taxpayer’s REIT dividends and all the taxpayer’s publicly traded partnership income and cooperative dividends (after limitations). The final step is to compare this combined deduction amount to 20% of the taxpayer’s adjusted taxable income (i.e., taxable income minus capital gains); the lesser of the two becomes the actual deductible amount.

As you can see, this deduction provides a great tax benefit for business owners, but it can be quite complicated. Please contact this office with your questions and for assistance in determining your deduction.

The Most Important KPIs for E-Commerce Businesses

Fri, 11 Mar 2022 11:53:20 GMT

If you’re running an e-commerce business, you are part of one of the most exciting and expansive aspects of the global economy. No matter what you’re selling – whether product or service — the challenges are constant and the competition is fierce. That’s why it’s important for you to leverage every tool at your disposal. If you’re not making good use of the data provided by your website-hosting platform, it’s time to start. If you know what you’re looking at and what you should be looking for, the information can be invaluable to your decision-making process and your success.

The most important data tools provided by your platform are known as Key Performance Indicators (KPIs). If used and interpreted properly, they can help you see what is most (and least) appealing to your customers and to quickly identify problems with your site, directing you to the quickest and most effective solutions to boost revenue.

Unfortunately, in the interest of answering every question, these online tools offer so much information that it is easy to get overwhelmed and decide to discard the whole batch, relying instead on instinct. This is a mistake. The secret to getting the most out of the data is to know which of the dozens of KPIs provided are most important, and how to use them. Any easily measurable data that reflects how close you are to attaining your bottom-line business goals and the growth stage of your business is what will be most useful, especially if it can be interpreted at a glance.

Though each business’ unique objectives and goals will be determinative, there are some KPIs that are universally valuable. They are the ones that give you a quantifiable measure of overall performance and show you where improvement is most accessible. Surveys of e-commerce professionals have indicated that the top KPIs to track are:

Conversion rate
Customer lifetime value
Customer retention rate
Average order value
Net profit
Cart abandonment rate
Number of orders

Let’s take a look at each so you understand what they are and how looking at them regularly can make a difference to your overall success.

Conversion rate

Conversion rate is considered the top indicator of success because it is an indicator of how many of the people who come to your site end up buying or in some other way engaging. From a mathematical perspective, it takes your number of visitors who purchase and divides it by the number of visitors overall.

Engagement can vary. It may be a sale or it may be a request for more information. It may be the creation of an account or signing up for a newsletter. One way or another, it is an indication that your website is accomplishing what it is supposed to and that your strategy is working.

Comparing the strategies and decisions you’ve made about your website – new products, new content, adjustments to the customer experience - to shifts in your conversion rate will provide confirmation of what has worked best.

Customer Lifetime Value

This metric is a reflection of several others combined. It measures the average order value, how many customers you’ve engaged with, and how many customers return to your site. The higher your customer lifetime value, the greater your connection with the people you are trying to reach. It means that they return to you over and over again when they have a need. It means that you have given them a positive experience. By examining shifts in this indicator you can continue to improve your site’s performance based on shifts you’ve made that make the number grow.

Customer Retention Rate

Though it is good practice to constantly look for new clients, there is tremendous value in establishing long-lasting relations with your existing client base. A recent study revealed that boosting retention by just 5% can increase profits by a minimum of 25%, and by as much as 95%. The Customer Retention Rate lets you know that the clients you’ve invested in attracting are coming back for more.

Average Order Value

There’s no mystery to what the average order value metric gauges: it’s the average amount that each customer spends on your site, each time that they visit. The usefulness of this number cannot be underestimated. As you implement new strategies to increase your revenues, the average order value will immediately inform you as to whether they are working or not, and vice versa is true as well – taking measures specifically geared towards bumping up the amount spent on each order (i.e., free shipping for orders over a certain amount, gift cards of increasing value as more is spent) will also raise revenue and profits.

Net Profit

Of all the indicators that need to be tracked, your net profit is the one that is likely to be most important to you. Revenue and conversions are great, but they are meaningless if you’re not actually making a profit. And if you know that you’re earning, you can make strategic decisions to expand and build on what your metrics have shown you work!

Cart Abandonment Rate

Anybody who has ever shopped online has put something into their cart and then left it there. Maybe you got distracted, maybe you went to compare prices and found it more cheaply somewhere else, maybe the checkout experience was simply too frustrating. Whatever it is, as an e-commerce entrepreneur yourself you need to know whether that is happening on your site, and if so – why. Cart abandonment represents opportunities and revenues lost. Once you learn that it is happening you can explore the reasons behind it. Maybe it’s your shipping costs. Maybe your payment options are confusing, or there is some kind of lag or bug that you’re not aware of. Most of the reasons behind cart abandonment are easily repaired, and once you take care of them, you’ll see your revenues increase.

Number of Orders

This metric reflects the average number of orders that each of your active customers makes on your site within a specified period of time. The higher the number the more engaged your clients are, and the more your business and revenues can grow.

Having a well-stocked tool chest is great as long as you know what everything is for and what to do with each tool. That’s just as true for hammers and drills as it is for the KPIs provided by your e-commerce business platform. If you need assistance in making good use of the data you’ve been provided, we can help. Contact us today to set up a time to chat.

Video Tips: Tax Deductions for Educator Expenses

Fri, 11 Mar 2022 11:40:27 GMT

Are you an educator teaching in kindergarten through grade 12? A part of your unreimbursed teaching expenses during the year can be deducted from your tax return. Watch this video for details so you can take advantage of this.

Tax Benefits for Child Daycare Providers and Users

Thu, 10 Mar 2022 13:58:22 GMT

Article Highlights:

Daycare Providers
Simplified Food Deduction
Special Rules for Business Use of the Provider’s Home
Home Sale Consequences
Other Expenses
Other Daycare Provider Issues
Daycare User Credit
Employer Dependent Care Benefits
Other Credit Criteria

Special tax benefits are available for those providing daycare services for children and the parents who pay for those services. This article looks at the various tax deductions daycare providers may use and the childcare tax credit that the parents may claim.

DAYCARE PROVIDERS

Daycare providers are generally self-employed individuals who provide care in their home, and like other self-employed individuals conducting a business, they are allowed to deduct business expenses, including the following:

Business Use of a Vehicle – Examples of business-related use of a personal vehicle by a daycare provider include taking the kids to the park, on field trips, or to the movies. Also eligible is mileage to purchase supplies and for other business-related travel. What’s deductible is the standard mileage rate (58.5 cents per business mile in 2022, up from 56 cents per mile in 2021) or the prorated business portion of the actual operating expenses for the vehicle. In either case, a contemporaneously prepared log detailing the business trips should be maintained.
Food – Daycare providers can deduct the cost of meals provided to the children (not including meals for their own children). Using a simplified method for the deduction does not require documenting food purchases. This does not preclude a care provider from using the actual expenses if the actual cost is higher and the provider is willing to document the expenses without including food purchased for his or her own family’s use. The simplified meal deduction amounts for 2021 are illustrated in the table below.

The rates do not include the cost of nonfood supplies (e.g., utensils), which may be deducted separately. The number of meals per day per child is limited to the amounts below. (The table uses the amounts based upon the rates for contiguous states and will be higher for Alaska and Hawaii.)

If the provider receives some form of reimbursement or subsidy, then the provider may deduct only the part of the simplified rate that exceeds the reimbursed amount.

Business Use of the Home – Self-employed individuals may take a business deduction for the business use of a portion of their home if that portion is used exclusively for business. Daycare facilities are not subject to the exclusive use requirement that applies to other home offices. However, that special rule only applies to providers who:

Are licensed, certified, registered or approved as a daycare care provider under state law;
Have a pending application for licensing, certification, registration, or approval under state law as a daycare provider that has not been denied; or
Is exempt from licensing, certification, registration, or approval under state law.

Any daycare provider not meeting one of these three requirements is still subject to the exclusive use rules, which will generally prevent them from claiming the deduction unless they use some portion of the home exclusively for daycare purposes, such as a bedroom or a storage area. The daycare facility exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial and if the educational, development, or enrichment activities are only incidental to the custodial services. The services must be provided for individuals aged 65 or older, children, or individuals who are physically or mentally incapable of caring for themselves.

When calculating the percentage of business use of the home, both the space used to operate the daycare business and the amount of time that the space is used to provide daycare, including preparation and cleaning time, are factors.

Example – Edna uses her living room, kitchen, and bathroom ten hours a day, five days a week to provide licensed daycare services. The home is 2,400 square feet, and the living room, kitchen and bathroom are a combined 1,400 square feet. The exclusive use requirement doesn’t apply. Edna’s percentage use of her home for business is determined as follows:

Once the percentage is determined, all the home expenses, including interest, real property taxes, home insurance, maintenance, utilities, and depreciation, are summed up and multiplied by the percentage to determine the deduction for the business use of the home. If the home is rented, the rent expense replaces the interest, taxes, and depreciation. After determining the deduction, it is further limited to the gross income from the daycare operation, and if limited by the gross income, there is a specific order in which the home expenses can be used (not discussed in this article).

Claiming the business use of the home deduction will also impact any future sale of the home. For taxpayers who own and use their home for two years out of the five years prior to the sale, they can generally exclude up to $250,000 ($500,000 if married filing jointly) of any resulting gain. However, any depreciation claimed or that could have been claimed after May 15, 1997, cannot be excluded and, as a result, will be taxable to the extent of any gain from the sale.

Example: A care provider is entitled to claim $1,000 per year of home depreciation, and she operates that business for ten years, claiming a total of $10,000 in depreciation. Whenever she ultimately sells her home, the $10,000 cannot be included in the excluded gain and will always be treated as a taxable capital gain, to the extent of any home sale gain.

Other Expenses – Other expenses include just about any expense that has to do with operating the daycare facility, including, for example:
Advertising
Business banking account fees
Daycare licensing
Daycare organization membership expenses
Seminars and education related to operating a daycare center
Business insurance
Games and toys
Supplies, diapers, wipes, and cleaning supplies
Phone service
Prorated Internet service
Field trip expenses
Payroll for employees

Additional important tax issues apply to daycare providers:

Self-Employment Tax – Like all self-employed taxpayers, daycare providers must pay self-employment tax, which is made up of the Social Security tax of 12.4% on the first $147,000 (2022) of profit from the business and a 2.9% Medicare tax on all the profits. Plus, there is an additional 0.9% Medicare tax on the extent to which the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. In addition, half of the self-employment tax can be deducted from gross income.

Qualified Business Income Deduction - Most business owners are allowed a deduction equal to 20% of their qualified business income (QBI). This deduction is most commonly known as the pass-through income deduction because it applies to income from business pass-through entities such as partnerships and S-corporations but also includes income from sole proprietorships reporting on Schedule C of Form 1040. It is sometimes referred to as the Section 199A deduction. The computation can be quite complicated and includes limitations on the deduction at the entity level and then again when the deductions from all entities of the taxpayer are combined and is further subject to a limitation based on the taxpayer’s taxable income. While the deduction doesn’t reduce the amount of the business income on which self-employment tax is paid, it does lower the individual’s income that is subject to income tax. In many cases, this deduction can be very beneficial for a taxpayer operating a daycare business.

Retirement Plan Contributions – Profits from a daycare business qualify for IRA contributions and self-employed retirement plans, allowing daycare providers to put away substantial amounts for their future retirement.

Medical Insurance Above-the-Line Deduction – While most taxpayers must itemize their deductions to deduct the cost of their medical insurance, self-employed taxpayers – including daycare providers, to the extent of the profits from their business – can deduct the premiums from their adjusted gross income and avoid the 7.5% of AGI medical expense haircut when itemizing deductions.

Employer Identification Number – Most daycare clients can claim a tax credit for the cost of daycare. However, to do so, they must include either the daycare provider’s Social Security number (SSN) or an employer identification number (EIN) on their tax returns. It is a best practice in this age of ID theft for an individual operating a daycare business not to give out their SSN to their clients and instead obtain and use an EIN (even if they don’t have employees).

DAYCARE USER

If you use the services of daycare providers you may qualify for a tax credit if the expense is an “employment-related” expense, i.e., it must enable you or your spouse, if married, to work or look for work, and it must be for the care of a child, stepchild, foster child, brother, sister, or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year, and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.

The age restriction does not apply if the individual is disabled (isn't physically or mentally able to care for him- or herself) and qualifies as your dependent. There are some situations when a disabled individual may qualify even if not your dependent; check with this office for details.

The child for whom you paid the care expenses must be your dependent. So, for example, if you are divorced and your ex-spouse claims your child who lives with your former spouse as a dependent, you may not claim the childcare credit even if you pay some or all of the childcare expenses. On the other hand, under a special rule for divorced or separated parents, if you are the custodial parent, even if you cannot claim the child as a dependent, you would be eligible to claim the credit for the qualified childcare expenses you paid.

The qualifying expenses are limited to your income from working and, if you are married, the expenses are limited to the lower of your or your spouse’s income from working. However, under certain conditions, when one spouse has no actual income from working and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (for two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled all year.

The qualifying expenses can’t exceed $3,000 per year if you have only one qualifying child, while the limit increases to $6,000 per year if you have two or more qualifying persons. (These amounts were substantially higher for 2021, but Congress has not extended the pandemic relief provisions that lead them to enhance the credit for 2021. The 2021 expenses are capped at $8,000 for one and $16,000 for two or more qualifying individuals.)

If there are two children, the care expenses need not be divided equally. For example, if you paid $2,500 in qualified expenses for the care of one child and $3,500 for the care of another child, the $6,000 can be used to determine the credit. The credit is computed as a percentage of qualifying expenses – in most cases, 20%. See the table below for the credit percentages based on the taxpayer’s adjusted gross income.

For 2021 only, the credit rate for most filers was 50% of the expenses. Thus, the maximum credit was $4,000 for one qualifying child and $8,000 for two or more children (or other qualifying individuals). This increase in the credit was targeted at lower-income taxpayers, so it includes a phaseout provision whereby the 50% credit rate begins to phase out when the taxpayer’s AGI reaches $125,000 (one percentage point for each $2,000 above the $125,000 threshold), but the rate isn’t reduced below 20% until the AGI reaches $400,000, at which point the credit phaseout picks up again.

AGI Adjusted Applicable Percentage (for other than 2021)

Example: Al and Janice both work, with combined earned income more than $50,000 for the year. Janice has a part-time job, from which she earns $10,000 for the year. Her work hours coincide with the school hours of their 11-year-old daughter, Susan, so while school is in session, Al and Janice incur no childcare expenses for Susan. However, during the summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their childcare credit would be $600 (20% of $3,000).

The credit will reduce your tax bill dollar for dollar. Thus, in the above example, Al and Janice would pay $600 less in taxes by virtue of the credit. However, the credit can only offset income tax and alternative minimum tax liability, and any excess is not refundable. The credit cannot be used to reduce self-employment tax, if you are self-employed, or a myriad of other taxes. Generally, the childcare credit is nonrefundable. However, for 2021, it is fully refundable if the taxpayer’s primary residence (or at least one spouse on a joint return) is in the U.S. for more than half the year.

Employer Dependent Care Benefits – Some employers provide dependent care assistance programs to help their employees with the cost of daycare. Payments under these plans used by employees to pay dependent care expenses are excludable from employees’ income, up to the lower of:

The employee’s earned income (for married employees, this is the earned income of the lower-paid spouse) or
$5,000 ($2,500 for married filing separate). (For 2021 only, these amounts were increased to $5,250 for married separate and $10,500 for other filing statuses.)

Because reimbursement up to these limits is excludable from income, the benefits the employee receives are treated as reimbursement for daycare expenses that reduce the expense limits of $3,000 for one child and $6,000 for two or more children. Reimbursement more than these limits is taxable to the employee and does not reduce qualified expenses for the credit.

Other Credit Criteria:

Age of the Child – If the qualifying child turns 13 during the year, only the care expenses paid for the child for the part of the year when he or she was under age 13 qualify.
Day Camps – Many working parents must arrange for care for their children under 13 years of age (or any age if disabled) during school vacation periods. A popular solution — with a tax benefit — is a day camp program. The cost of day camp can count as an expense toward the child and dependent care credit. But expenses for overnight camps do not qualify. Also, not eligible are expenses paid for summer school or tutoring programs.
Both Parents Working in an Unincorporated Business – When both spouses of a married couple are jointly involved in an unincorporated business, it is common, but incorrect, for all that business’s income to be reported as just one spouse’s income. As a result, they lose the benefits of the childcare credit, which requires both spouses to have income from working. However, here are a couple of ways to remedy this situation.
One option is to file a partnership return for the activity, in which case each spouse will receive a K-1 that reports his or her share of the net profit.
Another approach avoids the necessity of filing a partnership return and is probably less complicated. This is done by making a qualified joint-venture election, in which each spouse elects to file a separate Schedule C for his or her respective share of the business. This gives each spouse self-employment income for the purposes of the self-employment tax and for claiming the childcare credit.

A qualified joint venture refers to any joint venture involving the conduct of a trade or business if:

The only members of the joint venture are spouses,
Both spouses materially participate in the trade or business, and
Both spouses elect to apply this rule.

Generally, to meet the material participation requirement, each spouse will have to participate in the activity for 500 hours or more during the tax year.

However, a business owned and operated by spouses through a limited liability company (LLC) does not qualify for the qualified joint venture election.

School Expenses – Only school expenses for a child below the kindergarten level are considered qualifying expenses for this credit.
In-Home Care Providers –If the daycare is provided in a taxpayer’s home, the daycare provider is considered a household employee. If you are a household employer, you may have to withhold and pay Social Security and Medicare tax as well as pay federal unemployment tax and issue the caregiver a W-2 form. However, if the caregiver provides the services in his or her home, the caregiver would not be considered your household employee.
Records Required – To claim the credit on your tax return, you will need to provide the care provider’s name, address, and tax ID number. No credit is allowed without that information. If you have more than one child who qualifies you for the childcare credit, you must also show the expenses paid for each child, up to the $6,000 total maximum allowance. If your state allows a childcare credit, additional information, such as the care provider’s phone number, may be required.

This has been an overview of the various tax issues related to daycare from the perspectives of both the provider and the recipient of daycare services. However, as in everything taxes, many more rules and issues exist than could be included in this article. So, for information about how your state deals with the issue and questions about how the daycare will impact your taxes, please give this office a call.

Read This First Before Tapping Your Retirement Savings

Tue, 08 Mar 2022 14:08:48 GMT

Article Highlights:

Tapping Your Retirement Savings
Traditional IRAs and Qualified Retirement Plans
Simple IRAs
Early-Withdrawal Penalties
Reduction in Retirement Savings
Exceptions from the Early-Withdrawal Penalty
Roth IRAs

Your 401(k), IRA or other retirement accounts may be a tempting source for cash if you find yourself short of funds or have a major purchase you are considering. But withdrawing money from a traditional IRA or qualified retirement account before you reach age 59 1/2 may not be the best idea, as you will likely pay both income tax and a 10% early-distribution tax (also referred to as a penalty) on any previously untaxed money that you take out.

Withdrawals you make from a SIMPLE IRA before age 59 1/2, and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA, may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited.

These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.

Thus, before making any withdrawals from a traditional IRA or other retirement plans, including a 401(k) plan, a 403(b) tax-sheltered annuity plan, or a self-employed retirement plan, there are two things you should carefully consider: (1) you are taking funds, and their future appreciation, from your retirement savings which can impact your future retirement lifestyle. (2) You will be creating unnecessary taxes and penalties which will increase the amount you will need to withdraw to obtain your needed funds.

If you have decided to make a retirement account withdrawal, there are a number of exceptions to the 10% early-distribution tax; these depend on whether the money you withdraw is from an IRA or a retirement plan. However, even if you are not subject to the 10% penalty, you will still have to pay taxes on the distribution. The following exceptions may help you avoid the penalty:

Withdrawals from any retirement plan to pay medical expenses - Amounts withdrawn to pay unreimbursed medical expenses are exempt from penalty if they would be deductible on Schedule A during the year and if they exceed 7.5% of your adjusted gross income. This is true even if you claim the standard deduction and do not itemize deductions.
Withdrawals from any retirement plan as a result of a disability - You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activities because of a physical or mental condition. A physician must certify your condition.
Withdrawals up to $5,000 from any retirement plan related to birth or adoption - Distributions that are penalty-free are those you made during the one-year period beginning on the date on which your child is born or on which the legal adoption of an eligible adoptee (an individual under age 18 or who is physically or mentally incapable of self-support) is finalized. For married couples, the $5,000 limit applies to each spouse who takes a distribution from their retirement plan.
IRA withdrawals by unemployed individuals to pay medical insurance premiums - The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You also must have received unemployment compensation for at least 12 consecutive weeks during the year you made the withdrawal or the following year.
IRA withdrawals to pay higher education expenses -Withdrawals made during the year for qualified higher education expenses for yourself, your spouse, or your children or grandchildren are exempt from the early-withdrawal penalty.
IRA withdrawals to buy, build, or rebuild a first home - Generally, you are considered a first-time homebuyer for this exception if you had no present interest in a main home during the 2-year period leading up to the date the home was acquired, and the distribution must be used to buy, build, or rebuild that home. If you are married, your spouse must also meet this no-ownership requirement. This exception applies only to the first $10,000 of withdrawals used for this purpose. If married, you and your spouse can each withdraw up to $10,000 penalty-free from your respective IRA accounts.
IRA withdrawals annuitized over your lifetime - To qualify, the withdrawals must continue unchanged for a minimum of 5 years, including after you reach age 59 1/2.
Employer retirement plan withdrawals - To qualify, you must be separated from service and be age 55 or older in that year (there’s a lower limit of age 50 for qualified public-service employees such as police officers and firefighters) or, regardless of age, elect to receive the money in substantially equal periodic payments after your separation from service.

You should be aware that the information provided above is an overview of the penalty exceptions and that conditions other than those listed may need to be met before qualifying for a particular exception, and there are other exceptions not covered in this article.

You should also consider that you may be able to withdraw funds from a Roth IRA without tax or penalties depending upon certain circumstances which include whether the contributions to the Roth were regular, rollover, or conversion contributions; your age; and how long the funds have been in the Roth IRA. Generally, there is no tax when regular contributions to a Roth IRA are withdrawn.

You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both normal taxes and other penalties, which can take a significant bite out of the distribution. However, with carefully planned distributions, both the taxes and the penalties can be minimized. Please call for assistance.

Video Tips: What to Do When You Can't Pay Your Taxes

Fri, 04 Mar 2022 14:14:37 GMT

Most taxpayers will receive a refund when they file their income tax returns. But what if you end up owing the IRS and can't pay it back immediately? Watch this video for some possible solutions to minimize your tax penalties and interest.

Cash Flow Solution for Seniors

Thu, 03 Mar 2022 14:24:48 GMT

Article Highlights:

Reverse Mortgages
Reverse Mortgage Terms
When Is the Interest Deductible?
Who Deducts the Interest?
Other Options

The annual inflation rate in the U.S. accelerated to 7.5% in January of 2022, the highest since February of 1982, hitting those on fixed retirement income, namely seniors, the hardest.

On top of escalating living expenses due to inflation, some retirees are faced with a significant amount of debt and inadequate income. Some seniors that have a mortgage on their home have retirement income too low to cover the mortgage payments and have enough left over to be able to enjoy their golden years. Are there any remedies for this situation?

One possibility for those who have built up equity in their primary (main) home is to obtain a “reverse mortgage,” as this type of mortgage considers the homeowner’s equity. The loan is not due until the homeowner passes away or moves out of the home. If the homeowner dies, the heirs can pay off the debt by selling the house, and any remaining equity goes to them. If at that time the loan balance is equal to or more than the value of the home, the repayment amount is limited to the home’s worth.

If the borrower is married and dies before their spouse, the surviving spouse must begin or continue to occupy the home as their primary residence to keep the reverse mortgage, and the surviving spouse will need to establish proof of their legal right to stay in the home. If the spouse isn’t named as a borrower on the reverse mortgage, the loan may be due upon the borrower’s death, even if the spouse continues to live in the home.

Only borrowers aged 62 years and over with equity in the home can qualify for a Federal Housing Administration-backed loan of this type. Some private lenders have a different age requirement. Since the reverse mortgage must be a first trust deed, any existing loans on the home must be paid off with separate funds or with the proceeds from the reverse mortgage. The amount that can be borrowed is based upon age – the older the borrower, the larger the reverse mortgage can be and the lower the interest rate. The loan amount will also depend on the value of the home, interest rates, and the amount of equity built up. Over time, the amount of the loan will increase as the deferred interest payments, loan fees not paid up-front, and servicing fees are added to the original loan amount.

The borrower has the option of taking the loan as a lump sum, a line of credit, or fixed monthly payments. In addition, the money generally can be used for any purpose, without restrictions imposed, so long as any prior mortgage on the home has been paid off.

To determine whether the interest on a reverse mortgage is tax-deductible, these factors are considered:

Interest (regardless of type) is not deductible until paid. A reverse mortgage loan is not required to be repaid if the borrower lives in the home. Therefore, the interest on a reverse mortgage is not deductible by anyone until the loan is paid off.
Unless there is an existing acquisition loan on the property, the reverse mortgage loan would be an equity debt and interest on equity debt is not currently deductible.

So, who deducts the interest when the loan is paid off?

Debtor - If the borrower pays off the loan while still living, the borrower, if itemizing deductions, is the one who deducts the sum of the interest they would have been entitled to deduct each year had it been paid, subject to the limitations discussed in 1 & 2 above.

Estate – After the borrower passes away and their estate pays off the loan, the estate would deduct the interest on its income tax return. The amount deductible would be the sum of the interest the borrower would have been entitled to deduct each year had the borrower paid it, subject to the limitations discussed in 1 & 2 above.

Beneficiary – If the beneficiary who inherits the home pays off the mortgage, the interest would be deductible as an itemized deduction on that individual’s personal 1040 income tax return for the payoff year. The amount deductible would be the sum of the interest the borrower would have been entitled to deduct each year had they paid it, subject to the limitations discussed in 1 & 2 above. If there is more than one beneficiary who pays off the mortgage, any beneficiaries who itemize deductions on their personal 1040s would be allowed to deduct their share of the allowable interest in proportion to the amount of the loan that each has paid off.

Reverse mortgages have brought financial security to many seniors so that they can live a comfortable life. If you are a senior who is struggling with your finances, carefully explore your options, including the possibility of a reverse mortgage. However, reverse mortgages should be approached with caution and other options explored first. For instance, some reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high, especially if you don’t plan to be in your home for a long time or only need to borrow a small amount. Also, since you remain the owner of the home, you continue to be responsible for paying property taxes, insurance, utilities, maintenance, and other expenses related to the home. Failing to pay these expenses could result in the lender requiring the reverse mortgage to be repaid.

If you would like to explore your options for increasing your cash flow or have questions about reverse mortgages, please give this office a call.

Charitable Tax Deduction Peculiarities

Tue, 01 Mar 2022 14:49:30 GMT

Article Highlights:

Charity Auctions
Use of an Asset
Charity Volunteer
Away-From-Home Travel Expenses
Entertainment
Vehicle Use
Uniforms
Vehicle Donations
Valuing Non-cash Contributions
Documentation

Charitable contributions are deducted as part of a taxpayer’s itemized deductions on IRS Schedule A, except for the special 2020 and 2021 provisions that allow up to $300 ($600 for married taxpayers filing jointly for 2021) of cash donations as a deduction for non-itemizers.

Charitable contributions can take many forms, and some are unusual or misunderstood. The following includes issues that a taxpayer may encounter related to non-cash contributions.

Charity Auctions – It is not uncommon for charitable organizations to conduct charity auctions where individuals contribute items to be auctioned off that others bid on, with the proceeds going to the charity. Frequent questions arise related to the charitable income tax deduction for those contributing items for the auction and for those that were winning bidders who purchased items at the charitable auction. As with most things tax, the answers can be convoluted.

Donors – Generally a donor will be eligible for a charitable deduction equal to their basis in the item contributed, not its current fair market value (FMV).

Example 1: A donor purchased an antique vase several years ago for $400 and contributed it for a charity auction. The antique’s current fair market value is $2,000, and the high bid at the auction was $3,000. The donor is only entitled to a charity deduction of $400.

Sometimes a donor will contribute the use of property, such as use of the donor’s timeshare or vacation rental. Unfortunately, per IRS regulations, granting an individual use of property while retaining ownership does not constitute a charitable gift and no charitable deduction is permitted. Nevertheless, the donor may deduct the cost of maintaining a personally owned asset to the extent its use relates to providing services for the charity.

Purchaser – The winning bidder may claim a charitable contribution deduction only for the excess of the purchase price paid for the item over its fair market value .

Example 1 (continued): The purchaser of the antique vase would be allowed a charitable contribution deduction of $1,000, the difference between their winning bid of $3,000 and the FMV of $2,000.

Charity Volunteer – If individuals volunteer their time to a charitable organization, they probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:

Away-From-Home Travel Expenses - Away-from-home travel expenses while performing services for a charity include out-of-pocket round-trip travel costs, taxi fares, and other costs of transportation between the airport or station and hotel, plus 100% of lodging and meals. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel or if the services for a charity do not involve lobbying activities.

Entertainment - The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are allowed (but the costs of the volunteer’s own entertainment and meals are not deductible).

Vehicle Use - If the volunteer uses their car or other vehicle while performing services for a charitable organization, they may deduct their actual unreimbursed expenses that are directly attributable to the services, such as gas and oil costs but not repairs, or deduct a flat 14 cents per mile for the charitable use of their car. Parking fees and tolls are also deductible.

Uniforms - Volunteers can deduct the cost of a uniform they wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:

Depreciation - No deduction is allowed for the depreciation of a capital asset as a charitable deduction. This includes vehicles and computers.

Example 2: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing her horse or to depreciate the value of her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work.

Use of an Asset - A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he or she retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes.

To verify volunteer charitable contributions:

Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing.
Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

Donating a Vehicle to Charity – A few years back, this was a popular type of charitable donation promoted by many charities. However, vehicle donations were so abused by taxpayers claiming values higher than what the vehicles were worth that Congress had to step in. The result is several rules that, in some cases, limit the amount of the charitable deduction.

Although not as prevalent as in the past, there are still charities that solicit contributions of vehicles. For taxpayers that contribute to a charity a motor vehicle (or a boat or airplane), the deduction is limited for those vehicles with a claimed value exceeding $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.

If the charity sells the vehicle without any “significant intervening use” to substantially further the organization’s regularly conducted activities or without any major repairs, the donor’s charitable deduction can’t exceed the gross proceeds from the charity’s sale of the vehicle. Examples of qualifying significant intervening use include delivering meals to the needy or elderly every day for a year or driving 10,000 miles during a one-year period while delivering meals.

The gross proceeds limitation on a donor’s auto contribution deduction doesn’t apply if the charity sells it at a price significantly below FMV (or gives it away) to a needy individual. This exception applies only if supplying a vehicle to a needy individual directly furthers the donee’s charitable purpose of relieving the poor and distressed or the underprivileged who need a means of transportation. In this case, the fair market of the vehicle is used to determine the amount of the contribution.

Additionally, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee (charitable organization). To be contemporaneous, the acknowledgment must be obtained within 30 days of either (1) the contribution or (2) the disposition of the vehicle by the donee organization. The donor must include a copy of the acknowledgment with the tax return on which the deduction is claimed.

Acknowledgment by the donee organization must include whether the donee organization provided any goods or services in consideration of the vehicle as well as a description and a good-faith estimate of the value of any such goods or services or, if the goods or services consist solely of intangible religious benefits, a statement to that effect. Form 1098-C incorporates all the required acknowledgment elements for the donee to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane.

Valuing Non-cash Contributions - One of the most common and abused tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and has become grossly out of style, the more extensively used piece of clothing could be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and, in some cases, requires the value to be established by a qualified appraiser.

Documentation – The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”

The IRS requires the following documentation for noncash contributions based on the total value of the donation:

Deductions of Less Than $250 - A taxpayer claiming a noncash contribution with a value under $250 must keep a receipt from the charitable organization that shows:

The name of the charitable organization,
The date and location of the charitable contribution, and
A reasonably detailed description of the property.

Note: The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).

Deductions of At Least $250 But Not More Than $500 - If a taxpayer claims a deduction of at least $250 but not more than $500 for a noncash charitable contribution, he or she must keep an acknowledgment of the contribution from the qualified organization. If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution. The acknowledgment(s) must be written and must include:

The name of the charitable organization,
The date and location of the charitable contribution,
A reasonably detailed description of any property contributed (but not necessarily its value), and
Whether the qualified organization gave the taxpayer any goods or services because of the contribution (other than certain token items and membership benefits).

If the charitable organization provided goods and/or services to the taxpayer, the acknowledgment must include a description and a good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so, and in this case, the acknowledgment does not need to describe or estimate the value of the benefit.

Deductions Over $500 But Not Over $5,000 - If a taxpayer claims a deduction over $500 but not over $5,000 for a noncash charitable contribution, he or she must attach a completed Form 8283 to the income tax return and must provide the same acknowledgment and written records that are required for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include:

How the property was obtained. (For example, purchase, gift, bequest, inheritance, or exchange),
The approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and
The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more (this requirement, however, does not apply to publicly traded securities).

If you have questions related to deducting or documenting charitable contributions, please give the office a call.

Video Tips: Positive News for the 2021 Earned Income Tax Credit

Fri, 25 Feb 2022 10:07:42 GMT

The Earned Income Tax Credit has been expanded and enhanced for low-income taxpayers who file their tax returns for 2021. Could you also be eligible? Watch this video for more details.

Inheritances Enjoy a Special Tax Benefit

Thu, 24 Feb 2022 10:23:41 GMT

Article Highlights:

Stepped-Up Basis
Inherited Basis
Inheritance Basis Example
Step Down Basis
Long-Term Capital Gains Tax Rates
Jointly Owned Property
Gifting Prior to Death

You may hear people use the term “Stepped-Up Basis” that many believe is a tax provision that allows beneficiaries of an inheritance to reduce or even avoid taxes when and if they sell inherited property.

When an individual sells property, any gain from the sale of the property is taxable. The tax term “basis” is the value from which any taxable gain is measured. For personal use property or investment property the basis is generally the cost of the property. For business property the term basis is replaced with adjusted basis, which generally means the cost of the property reduced by business deductions, such as depreciation, attributable to the property.

However, for property received as a beneficiary the term inherited basis used. Tax law specifies that property received by a beneficiary as a result of an inheritance is the fair market value (FMV) of the property as of the decedent’s date of death. Since some property, such as real estate, generally appreciates over time, that means the property’s value will have increased, and the FMV on the date the decedent died will be higher than the decedent’s basis. Thus, the beneficiaries will inherit the property with a basis higher than the decedent’s, so they will have a stepped-up basis.

Example: Jack has owned a rental property for several years. He purchased it for $200,000 and over the years claimed a depreciation deduction of $24,000 up to the time of his death. Thus, his basis when he passed away was $176,000 ($200,000 - $24,000). At the time of Jack’s death, the rental had an appraised FMV of $400,000. Bill, Jack’s only beneficiary, will have a basis of $400,000, and if he immediately sells the rental for $400,000, he would not have a taxable gain. On the other hand, had Jack sold the property for $400,000 just before his death he would have had taxable gain of $224,000 ($400,000 - $176,000). (Sales expenses have been disregarded in this example.)

The example demonstrates the value of a beneficiary receiving a “stepped-up” basis. However, the actual term used in tax law is that the beneficiary receives the FMV at the date of the decedent’s death, so it is not always a stepped-up basis; there could be a step down in basis.

Another tax benefit of an inheritance is that a gain from the sale of inherited property is treated as being held long-term and gets the benefit from the lower long-term capital gain tax rates even though the property is not held by the beneficiary over one year.

Spousal Inheritances – Where spouses jointly own property a surviving spouse will sometimes only inherit half of the property since they already owned half, and thus only receive a basis adjustment on the inherited portion of a property. However, where the spouses live in a community property state, and the property is held as community property, the surviving spouse will get a basis reset to the FMV of the property for both the deceased spouse’s half they inherited and their own half.

Jointly Owned Property – Where two or more individuals own property as joint tenants and the joint tenants inherit a portion of the property from a deceased joint tenant, the beneficiary joint tenants only receive a basis adjustment on the inherited portion of the property.

In the case of inherited business property or rentals, a frequently asked question is what becomes of the accumulated depreciation on the inherited portion of jointly owned property? This is another benefit of inheritances as the accumulated depreciation goes away and the beneficiary, if using the inherited property for business purposes or as a rental, simply restarts the depreciation from scratch on the inherited portion.

Gifting Prior to Death – Another issue is that some individuals choose to gift property prior to death. This is commonly encountered by elderly parents gifting a home or rental to their children. When an individual receives a gift of property, the individual’s basis becomes the same basis as the giver’s basis. Therefore, there is no step-up in basis as previously discussed. So, unless there is some other underlying issue, generally it is not a good idea tax wise to make large gifts of property.

Example: Mom is in her 80s and her home, which she purchased for $100,000, has a current value of $300,000. She gifts the home to her only child, Joe, while she is still living. For gifts the gift recipient’s basis becomes the giver’s basis, and in Mom’s case her basis was $100,000 which becomes Joe’s basis. As a result of the gift Joe has a $200,000 built in gain when and if he sells the home. If Joe had inherited his Mom’s home, his basis would have been $300,000 plus any additional appreciation before her death.

As you can see, our tax laws are complicated when it comes to inheritances and gifts. It is generally good practice to pre-plan for inheritances and gifting. Call for a tax planning appointment if you would like assistance.

Gambling and Tax Traps

Tue, 22 Feb 2022 10:54:48 GMT

Article Highlights:

Winnings
Losses
Documentation
Charity Raffles
Social Security Income
Health Care Insurance Premium Subsidies
Medicare B & D Premiums
Online Gambling Accounts
Dependents

Although gambling may seem to be a recreational activity for many taxpayers it is not for THE government. They look at it as a source of tax revenue and as one might expect, the government takes a cut if a gambler wins. What makes matters worse, tax laws do not allow recreational gamblers to claim a loss in excess of their winnings. There are far more tax issues related to gambling than one might expect, and they may impact taxes in more ways than one might believe. Here is a rundown on the many issues:

Reporting Winnings – Taxpayers must report the full amount of their gambling winnings for the year as income on their 1040 returns. Gambling income includes, but is not limited to, winnings from lotteries, raffles, lotto tickets and scratchers, horse and dog races, and casinos, as well as the fair market value of prizes such as cars, houses, trips, or other non-cash prizes. The full amount of the winnings must be reported, not the net after subtracting losses. The exception to the last statement is that the cost of the winning ticket or winning spin on a slot machine is deductible from the gross winnings. For example, if a gambler put $1 into a slot machine and won $500, they would include $499 as the amount of their gross winnings, even if they had previously spent $50 feeding the machine.

Frequently, gamblers with winnings only expect to report those winnings included on Form W-2G. However, while that form is only issued for “Certain Gambling Winnings,” the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses, which is generally always an issue in a gambling loss audit .

If winnings at one time hit certain levels, the government requires the gambling establishment to collect an individual’s Social Security number and report their winnings to Uncle Sam on a Form W-2G. Gambling establishments will issue a Form W-2G if the winnings are:

$1,200 or more on a slot machine or from bingo.
$1,500 or more on a keno jackpot.
More than $5,000 in a poker tournament.
$600 or more from all other games, but only if the payout is at least 300 times the wager.

TAX TRAP #1 – The way the tax laws work, gambling winnings are included in a taxpayer’s adjusted gross income (AGI), while losses are an itemized deduction. Since winnings and losses can’t be netted, the full amount of the winnings ends up in a taxpayer’s adjusted gross income (AGI). The AGI is used to limit other tax benefits, as discussed later. So, the higher the AGI, the more other tax benefits may be limited.

If the winnings minus the wager exceed $5,000 and the winnings are at least 300 times the wager, the gambling establishment is required to withhold 24% of the proceeds, which they then pay over to the government. The lucky taxpayer then claims this amount, which will be included on the W-2G form in box 4, as income tax withheld on their 1040 form. Some states may also require state income tax to be withheld. Taxpayers who have big gambling winnings on which tax isn’t withheld should consider making estimated tax payments to avoid underpayment of tax penalties.

Reporting Losses – A taxpayer may deduct gambling losses suffered in the tax year as a miscellaneous itemized deduction but only to the extent of that year's gambling gains.

TAX TRAP #2 – If a taxpayer does not itemize their deductions, they can’t deduct their losses. Thus, individuals taking the standard deduction will end up paying taxes on all of their winnings, even if they had a net loss.

Documenting Losses – The next logical question is: how to document gambling losses if audited? Taxpayers shouldn’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on acceptable documentation to verify losses. They indicate that an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, this diary should contain at least the following information:

The date and the type of specific wager or wagering activity,
The name of the gambling establishment,
The address or location of the gambling establishment,
The names of other persons (if any) present with the taxpayer at the gambling establishment, and
The amounts won or lost.

Save all available documentation, including items such as losing lottery and keno tickets, checks, and casino credit slips. Also save any related documentation such as hotel bills, plane tickets, entry tickets, and other items that would document a taxpayer’s presence at a gambling location. If a taxpayer is a member of a slot club, the casino may be able to provide a record of electronic play. Affidavits from responsible gambling officials at the gambling facility may prove helpful. With regard to specific wagering transactions, winnings and losses might be further supported by:

Keno – Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.
Slot Machines – A record of all winnings by date and time that each machine was played.
Table Games – The number of the table at which the taxpayer was playing as well as casino credit card data indicating whether credit was issued in the pit or at the cashier's cage.
Bingo – A record of the number of games played, the cost of tickets purchased, and the amounts collected on winning tickets.
Racing – A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
Lotteries – A record of ticket purchase dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winning statements.

Gambling Sessions - There is a concept of gambling “sessions” where the IRS allows netting of gain and losses. However, the record-keeping requirements are so stringent that they make its application extremely limited, and it is not covered in detail in this article. The concept basically allows gamblers to net gains and losses from gambling sessions. However, a gambling session is very limited in scope. It must be the same type of uninterrupted wagering during a specific uninterrupted period of time at a specific location. Thus, if a taxpayer entered a casino and played slots for an hour, then switched to craps for the next hour, that would be two separate gambling sessions. If a taxpayer entered Casino #1 and played slots for an hour and then went to Casino #2 and continued to play slots, that would be two separate gambling activities because two locations were involved. Plus, all of that must be adequately documented.

Charity Raffles – The IRS considers raffles, bingo, lotteries, etc., to be gambling, even if the sponsor of the activity is a charitable organization. So, winnings and losses are treated the same as for any other gambling activity, and the amounts paid to buy raffle or lottery tickets or to play bingo or other games of chance are not deductible as a charitable contribution.

SIDE EFFECTS OF GAMBLING

Social Security Income – For taxpayers receiving Social Security benefits, whether those benefits are taxable depends upon the taxpayer’s income (AGI) for the year. The taxation threshold for Social Security benefits is $32,000 for married taxpayers filing jointly, $0 for married taxpayers filing separately, and $25,000 for all other filing statuses. If the sum of AGI (before including any SS income), interest income from municipal bonds, and one-half the amount of SS benefits received for the year exceeds the threshold amount, then 50–85% of the SS benefit is taxable.

TAX TRAP #3 – If an individual’s gambling winnings push their AGI for the year over the threshold amount, the gambling winnings—even if they had a net loss—can cause up to 85% of their Social Security benefits to become taxable.

Health Insurance Subsidie s – Lower-income individuals who purchase their health insurance from a government marketplace are given a subsidy in the form of a tax credit to help pay the cost of their health insurance. Most people eligible for the tax credit use it to reduce their monthly health insurance premiums. That tax credit is based upon the AGIs of all members of the family. The higher the family income, the lower the subsidy becomes.

TAX TRAP #4 – The addition of gambling income to a family’s income can result in significant reductions in the health insurance subsidy, requiring families to pay more for their health insurance coverage for the year. Additionally, if the subsidy was based upon estimated income for the year, if the family’s premiums were reduced by applying the subsidy in advance, and if they subsequently had some gambling winnings, then they could get stuck with paying back some or all of the subsidy when they file their return for the year.

Medicare B & D Premiums – If a taxpayer is covered by Medicare, the amount they are required to pay (generally withheld from their Social Security benefits) for Medicare B premiums for 2021 is normally $148.50 per month and is based on their AGI two years prior. However, if that AGI was above $88,000 $176,000 for married taxpayers filing jointly), the monthly premiums can increase to as much as $504.90. If they also have prescription drug coverage through Medicare Part D, and if their AGI exceeds the $88,000 /$176,000 threshold, the monthly surcharge for Part D coverage will range from $12.30 to $77.10. The normal monthly premium amount, the AGI thresholds, and the Part D monthly surcharge vary from year to year, and for 2022 are $170.10, $91,000/$182,000, and $12.40 respectively.

TAX TRAP #5 – The addition of gambling winnings to AGI can result in higher Medicare B & D premiums.

Online Gambling Accounts – If an individual has an online gambling account, there is a good chance that the account is with a foreign company. All U.S. persons with a financial interest or signature authority over foreign accounts with an aggregate balance of over $10,000 anytime during the prior calendar year must report those accounts to the Treasury by the April due date for filing individual tax returns or face draconian penalties.

TAX TRAP #6 – Regardless of whether an individual is a gambling winner or loser, if their online account was over $10,000 at any time during the year, they will be required to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts), commonly referred to as the FBAR. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. The $10,000 and $100,000 penalty amounts are subject to adjustment for inflation, and after January 21, 2022, are $14,489 and $144,886, respectively.

Parents As Dependents - If a taxpayer claims someone as a dependent – say, their mother – and Mom happens to hit a jackpot at the local casino, they may end up being unable to claim her as a dependent for the year if the gambling winnings push Mom’s income over the annual gross income limit for claiming her.

Other Limitations – The aforementioned are the most significant “gotchas.” Numerous other tax rules limit tax benefits based on AGI, as discussed in gotcha #1. These include medical deductions, certain casualty losses, child and dependent care credits, the Child Tax Credit, and the Earned Income Tax Credit, just to name a few.

If you have questions related to gambling winnings, losses and potential tax traps please give this office a call.

Return Being Processed Means The IRS Received Your Tax Return, But It Could Still Be Delayed.

Sun, 20 Feb 2022 11:04:01 GMT

Many taxpayers use the Where's My Refund tool and wonder what "Return being processed" means for them and their refund.

The answer: not much yet!

The prompt means that the IRS has received your return, but due to Covid-19 delays, the IRS is experiencing a considerable backlog, slowing processing times and disbursements.

Typically the IRS processes tax returns and issues refunds within 21 calendar days of receipt. The IRS even stated in January communicating the 21-day time frame.

Add in the pandemic-related tax changes and child tax credit advances, and this tax season is more complicated than ever.

Avoid filing a paper return.

Use electronic filing with direct deposit to receive your tax refund the fastest way.

If your tax refund is delayed, you have options.

You can call the IRS, but you should wait out the delays before putting yourself through this added stress. Due to the backlog, it can take 6-8 weeks to process your tax return.

The following are some of the reasons why tax returns take longer than others to process:

Your tax return includes errors, such as incorrect Recovery Rebate Credit
Your tax return Is incomplete
Your tax return needs further review in general
Your tax return Is affected by identity theft or fraud
Your tax return includes a claim filed for an Earned Income Tax Credit or an Additional Child Tax Credit
Your tax return consists of a Form 8379, Injured Spouse Allocation , which could take up to 14 weeks to process

How to contact the IRS

You may call 800-829-1040 with any Federal tax questions.

Getting through to the IRS over the phone is a challenge. According to the Taxpayer Advocate , only 1 in 9 calls to the IRS are answered. This even with a long wait time.

Not surprisingly, it is best to call right when the IRS opens eastern time or late in the day before closing.

Does the IRS owe you interest on late refunds?

Even with the delays, the IRS owes you interest on your money. The IRS has administrative time (typically 45 days) to issue your refund without paying interest on it.

You have until April 18 to file your taxes for this year. If you don't receive a refund within 45 days after the deadline, then interest may be owed by Uncle Sam.

Video Tips: Don't Miss Out on Lucrative Tax Benefits

Sat, 19 Feb 2022 11:08:51 GMT

There are many expanded tax benefits that individuals and families with low income can claim on their 2021 tax returns. Watch this video for details so you don't miss out.

What Makes a Business Sustainable?

Fri, 18 Feb 2022 11:53:57 GMT

When we are talking about building a sustainable business, we are talking about one that is built to last.

Often, entrepreneurs get caught up in the headlines about businesses with hyper-growth rates. We start thinking of how we can replicate these results.

But what is often missing is these results are just short-term, fueled by outside money or poor business models that are not sustainable.

There are many examples of the crash and burn businesses that are all the rage but come crashing down. WeWork comes to mind as a perfect example.

Understanding how to build a sustainable business might be the difference between success and failure.

Here are some tips to building a business meant to last:

1) Be nimble

We have all read about the crash and burn start-ups or the established businesses that suddenly can't compete and are stuck on life support (Ex: Blockbuster, Sears, Blackberry). Big companies, by their nature, are not agile. They get stuck in bureaucracies and fear of risks that let smaller upstarts outflank them.

2) Listen to your customers

The pandemic showed us that human decisions and economic trends could be flipped in a very short period of time. From the great resignation to remote work, consumers have changed their behavior. Entrepreneurs need to listen to their customers to develop personas and segments to understand their unique pain points and needs better.

Ask for customer feedback.

Start customer advisory boards.

Track your critical KPIs.

From this data, you can be quick enough to take advantage of consumer trends and pivot your offering to meet these new realities.

3) Listen to your employees

The pandemic has caused a shift in the workforce. Listen to your employees to share their needs and aspirations with you, as this will help them feel supported by the company during these difficult times. Keeping an employee's unique perspective becomes necessary for the survival or success of business operations due to changing conditions like increased competition from other companies who are also listening closely because it pays off big time! Help out those workers trying hard but stretched thin--it is important both physically AND mentally before anything else begins.

4) Budget, budget, budget

If anything, the pandemic has taught us that revenue streams can dry up overnight. From supply chain delays, government regulations to inflation pressures, your margins are threatened more than ever.

It is difficult to know when your business will be profitable and what resources you might need without a proper budget. It can also make operating within one's means more challenging as unexpected costs arise from the unpredictable nature of life (elements such as illness).

A detailed analysis that includes all probable expenses helps identify available capital for future growth opportunities while estimating how many dollars should go towards fixed or variable cost components to achieve maximum returns on investment.

A well-thought-out financial plan provides clarity around these topics: predicting revenue streams, deciding which type(s)of assets best fit company needs, and whether debt or equity financing is required.

5) Own a brand position

Too many businesses try to be all things to all companies. But the most successful brands are very targeted in their message, market, and the problem they are trying to solve. Sometimes it takes a leap of faith to focus on a smaller audience. But positioning your business is the fastest way to grow and utilize pricing power.

6) Retain your key employees

High employee turnover is a significant headwind to business sustainability. If you are constantly replacing key team members, you delay success in lost hours in training. These lost opportunity costs will make it harder to build a sustainable business. Investing in your key managers makes the life of the entrepreneur easier.

Internal training, streamlined processes, and improving efficiency are the key to scalability. This will allow you more time for external growth while still achieving results.

7) Be authentic

Many big corporations and entrepreneurs act more like chameleons, changing their belief systems based on the audience or the timing of the day. You are a leader when you lead with your heart and not just for the sake of it. Your true colors show in how others perceive you, so be authentic. Your employees and your customers will see this passion and follow it. Foster an environment that's infused with curiosity by rewarding those who go against traditional norms or follow their passions - because we all need more inspiration now than ever before.

8) Partner wisely

This is true from every relationship you get into in business. By your choice of co-founders, investors, outsourced teams, and vendors (ex: your accounting firm), your decisions will impact your odds for success.

Always surround yourself with those that will make you better.

Closing

A sustainable business has fewer bumps in the road, from buying out a disgruntled founder to an investor with timelines that don't match yours or the market. Closing A sustainable business is one where profitability and growth rates are in harmony. Running a sustainable business involves using your resources economically, where cash flow and budgeting lead to long-term success. Sacrificing the future for a short-term expansion may not always be the best strategy.

We partner with aspiring entrepreneurs to put them on the path to sustainability. Feel free to reach out to see how we can help you achieve your dreams.

Hiring An Independent Contractor? How QuickBooks Online Can Help

Fri, 18 Feb 2022 11:35:30 GMT

The COVID-19 pandemic created millions of self-employed individuals and small businesses. Whether they chose to, or circumstances forced them to, these new entrepreneurs had to learn new ways to get paid and to prepare their income taxes.

If you’re thinking about taking on a contract worker, you, too, will have to educate yourself on the paperwork and processes required to comply with the IRS’ rules for his or her compensation. It’s much easier than hiring a full-time employee, but it still takes some knowledge of how QuickBooks Online handles these individuals.

You’ll also need to make certain that the person you’re hiring is indeed an independent contractor and not an employee. The IRS takes this distinction very seriously. If you’re at all unsure of your new hire’s employment status, we can help you sort it out.

Creating Records for Contractors

Once new contractors have accepted your offer, you’ll need to have then fill out an IRS Form W-9 . You can download a copy here . Employees complete the more detailed Form W-4 so that the employer can withhold income taxes correctly, but you won’t have to withhold taxes for your contract workers. They will be responsible for calculating and paying quarterly estimated taxes and filing an IRS Form 1040 every year.

You, though, will be responsible for sending them an IRS Form 1099-NEC (Non-Employee Compensation) every January if you paid them more than $600 during the previous year. You do not need to send a 1099-NEC to a corporation or to an LLC that is treated as a C Corp or an S Corp.

You can complete the Vendor Information window for each independent contractor, checking the box in front of Track payments for 1099.

Using the information the contractors provide, you can create records for them in QuickBooks Online. If you don’t have a QuickBooks Payroll subscription, you can set them up as 1099 vendors. Click the Expenses tab in the toolbar and then on the Vendors tab. Click New vendor in the upper right to open the Vendor Information window. Complete the fields for the worker and be sure to check the box in front of Track payments for 1099 , as shown in the partial image above.

The vendor records you create will appear in QuickBooks Online’s Vendors list (again, Expenses | Vendors ). Click on one to open it. You can toggle between two tabs here. The first, Transaction List , will eventually display all your financial dealings with that contractor. Vendor Details opens the record you just created, which you can edit from this screen.

Paying Contractors

When independent contractors send you invoices, you’ll return to this same screen. There are three ways you can pay them. Click the down arrow next to New Transaction in the upper right corner to see your options (or look down at the end of the row while you’re in list view). You can record the debt as a Bill if you want to pay it later (or if that’s the way you structure your recordkeeping). If you’re paying it right away, you can create an Expens e or write a Check .

You can choose an option from this vendor action menu to pay your independent contractors.

When you click one of these, QuickBooks Online opens a form with many of the contractors’ details already filled in. You’ll need to complete any additional fields at the top of the screen, and then either record the payment or debt under Category details or Item details , depending on how you do your bookkeeping. Either way, you’ll be able to enter the quantity and rate and/or amount and mark it billable (with a markup percentage, if you’d like) to a customer or project.

You’re probably going to want our help here, since there’s more than one way to pay independent contractors. If you subscribe to QuickBooks Payroll , you can use the service’s contractor features, which include the ability to invite your contractors to fill out their own records in QuickBooks Online. You may also want to add an account to your Chart of Accounts, and we’d want to offer guidance there. And you need to ensure that you’re classifying payments correctly, so they’ll appear in 1099 reports and 1099s themselves.

Creating records for independent contractors and paying these individuals seem like they should be simple operations. But anytime you’re dealing with payroll issues, you’re dealing with peoples’ livelihoods – and the IRS. We strongly encourage you to let us help you get this right. Contact us, and we’ll make sure you’re handling your worker payments with absolute accuracy.

March 2022 Business Due Dates

Thu, 17 Feb 2022 13:11:47 GMT

March 1 - Farmers and Fishermen

File your 2021 income tax return (Form 1040 or 1040-SR) and pay any tax due. However, you have until April 18 (April 19 if you live in Maine or Massachusetts) to file if you paid your 2021 estimated tax by January 18, 2022. Penalty Relief: IRS will waive estimated tax penalties for farmers and fisherman who were unable to comply with the March 1, 2022, filing and payment deadline as long as they file and pay their 2021 taxes by April 18, 2022.

March 15 - Partnerships

File a 2021 calendar year return (Form 1065). Provide each partner with a copy of their Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1 and, if applicable, Schedule K-3 (Form 1065) or substitute Schedule K-3 (Form 1065). If you want an automatic 6-month extension of time to file the return, file Form 7004. Then file Form 1065 and provide Schedules K-1 or substitute Schedules K-1, and if applicable Schedules K-3, to the partners by September 15.

March 15 - S-Corporations

File a 2021 calendar year income tax return (Form 1120-S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120-S), Shareholder’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1 (Form 1120-S) and, if applicable, Schedule K-3 (Form 1120-S) or substitute ScheduleK-3 (Form 1120-S).

To request an automatic 6-month extension of time to file the return, file Form 7004 and pay the tax estimated to be owed. Then file the return; pay any tax, interest, and penalties due; and provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) and, if applicable, Schedule K-3 (Form 1120-S) by September 15.

March 15 - S-Corporation Election

File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2022. If Form 2553 is filed late, S treatment will begin with calendar year 2023.

March 15 - Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in February.

March 15 - Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in February.

March 31 - Electronic Filing of Forms 1098, 1099 and W-2G

If you file Forms 1098, 1099 (other than 1099-NEC), or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, January 31 or February 28 was the due date, depending on the form filed. The due date for giving the recipient these forms was January 31.

March 31 - Applicable Large Employers (ALE) – Form 1095-C

If filing electronically, file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, with the IRS. If filing on paper the due date was February 28, 2022.

March 31 - Large Food and Beverage Establishment Employers

If you file Forms 8027 for 2021 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, February 28, 2022 was the due date.

March 2022 Individual Due Dates

Thu, 17 Feb 2022 12:09:07 GMT

March 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

March 15 - Time to Call For Your Tax Appointment

It is only one month until the April due date for your individual income tax returns. If you have not made an appointment to have your taxes prepared, we encourage you to do so before it becomes too late.

Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.

Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.

We look forward to hearing from you.

Highlights of College Savings Plans (Sec 529 Plans)

Thu, 17 Feb 2022 12:01:52 GMT

Article Highlights:

Benefits of College Savings Plans
Contributions
Plan Modifications by Recent Tax Acts
Prudence in Using the Funds
Gift Tax Twist

The Qualified State Tuition Plan, often referred to as the Sec 529 Plan, is a tax-beneficial incentive for parents, grandparents, and others to save money for an individual’s future college tuition and fees. There is no federal tax deduction for making contributions. But the tax benefit of these plans is that the earnings within the plan accumulate tax-deferred and then are tax-free when withdrawn if used for college tuition and related qualified expenses. Let’s take a simplified example.

Example: Jo’s parents establish a 529 plan when she is age 5, and contribute $10,000 to the plan. The $10,000 is invested in mutual funds that pay dividends of $400 per year. The tax on the dividends is deferred until the time when funds are withdrawn from the plan, and only payable if the distribution isn’t used for eligible education expenses. Let’s say that Jo enters college in 13 years and with the dividends earned over those years and an increase in the value of the original $10,000 to $15,000, the account is worth $20,200. Jo’s tuition and related expenses for her first semester is $25,000. The entire $20,200 is withdrawn to pay those expenses, so none of the dividends received and none of the $5,000 gain in the value of the account will be taxable. If Jo’s parents were in a 24% tax bracket, the tax savings by investing in the 529 plan compared to putting $10,000 in a regular brokerage account will be at least $1,530. The benefit would be compounded if more than $10,000 was contributed to the 529 plan.

Contributions - To maximize the tax benefits of a plan, it should be established for a child as soon after birth as possible when funds are available for contribution. For tax purposes, there is no limit on the amount that can be contributed, but contributions are considered gifts and each individual contributing to a plan would have to file a gift tax return if the gift exceeds the annual inflation-adjusted gift tax exclusion, which is $16,000 for 2022 (up from $15,000 for years 2018 through 2021).

A special gift provision permits a contributor to contribute up to 5 times the annual gift tax exclusion amount to a qualified tuition account in a single year and treat the contribution as having been made ratably over the five-year period beginning with the calendar year in which the contribution is made. Why would someone want to do this? Because by front-loading the contributions, they would accelerate the accumulation of earnings within the account. When making 5 years’ worth of 529 plan contributions in one year, a gift tax return is required in the year of contribution. If the contributor dies within the 5-year period, any amount contributed that is allocable to the years within the five-year period remaining after the year of the contributor’s death are includible in the contributor’s gross estate for estate tax purposes.

Although the income and gift tax laws don’t cap how much can be contributed to a qualified tuition plan, the 529 plans do limit the maximum amount that can be contributed per beneficiary based on the projected cost of a college education, and the maximum amount will vary between plans, though most have limits in excess of $200,000, with some topping $475,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow.

Modifications – Since originating these plans, Congress has continued to modify the purpose of the plans by allowing plan funds to be used for more than just college tuition and fees. Over the years, they have allowed plan funds to be spent on additional expenses, including books, supplies, equipment, reasonable room and board, and computer technology.

More recently, the following qualified expenses were added:

Elementary and Secondary School Tuition Expenses – The Tax Cuts and Jobs Act (2017) included a provision that treats withdrawals from 529 plans for elementary or secondary school (kindergarten through grade 12) tuition expenses as qualified expenses. However, the annual withdrawal for each beneficiary is limited to $10,000 (regardless of the number of 529 plans in the beneficiary’s name). This special $10,000 amount applies only for tuition (not books, supplies, room and board, etc.) paid to public, private or religious schools. Be Cautious – Since the greatest tax benefit and primary goal of these plans is accumulating tax-deferred investment income, which then can be withdrawn tax-free to pay qualified education expenses, using these funds too early will not achieve that desired goal. Thus, you should carefully consider whether to use the funds for elementary and secondary school education expenses or to wait and tap the account for post-secondary education, with the latter choice maximizing investment income.
Apprenticeship Expenses – The category of qualified expenses was expanded by the Secure Act to include fees, books, supplies, and equipment required to participate in registered apprenticeship programs certified by the Secretary of Labor under Sec 1 of the National Apprenticeship Act, effective for distributions made in years after 2018.
Repayment of Student Loans – Another Secure Act addition to 529 plan qualified expenses is effective for distributions after 2018 of up to $10,000–a lifetime limit–that may be used to pay the principal and interest on qualified higher education loans of the designated beneficiary or a sibling of the designated beneficiary. To prevent double-dipping, Sec 529 plan distributions used to pay interest on the education loan cannot be used for the above-the-line deduction allowed for student loan interest.

In addition to 529 plans Congress has also provided tax credits to help fund a child’s college education, though the rules for these credits aren’t entirely straight-forward. For example, one favorable twist of the tax code allows a grandparent (or others) to directly pay to the educational institution the child’s tuition without being subject to the gift limitations or reporting. On top of that, assuming the child is a dependent of their parent, the parent may qualify for a higher education credit even though the grandparent paid the tuition. The parent’s eligibility depends on their income, since the credits phase out once the adjusted gross income of the individual claiming the credit exceeds an amount based on filing status and the type of credit claimed.

If you need assistance with long-term education planning, give this office a call.

Counseling The Counselors: What Your Therapy Business Needs To Know About Taxes

Tue, 15 Feb 2022 13:57:37 GMT

Therapy and counseling are invaluable services, and counselors make such a difference in clients’ lives that it’s hard to remember that they’re also operating a business. But if you’re a therapist it’s no surprise to you. With tax time right around the corner, now’s the time for a quick update on what you need to know about filing your income taxes. We’ve compiled some important tips to help make sure that your bookkeeping and accounting records are up-to-date and that you’re in compliance.

You create a clear separation between your professional relationships with clients and your personal relationships, and you need to exercise the same discipline when it comes to your finances. That means keeping separate accounts — both banking and credit card — for your practice. You should be keeping track of business income and expenses too. It doesn’t matter whether you do this using an old-fashioned ledger book, an Excel spreadsheet, or any of the easy-to-use apps and software packages that are available, though we will point out that the latter makes it much easier to import information for tax prep.

Be Sure to Pay Your Taxes – Quarterly and Annual

All self-employed individuals are required to submit quarterly estimated income taxes, as well as additional self-employment taxes that make up for what others pay through employer-withheld payroll taxes. The due dates for these change each year depending on where weekends and holidays fall, but they are generally due mid-April, mid-June, mid-September, and mid-January. If you’re a sole proprietor your annual federal and state taxes are due April 15th, though if you’ve set yourself up as an S-corporation you’ll need to have them in a month earlier.

Deductions and Expenses

Knowing which of your expenses are legitimate write-offs is one of the most challenging aspects of doing your own taxes. You know about office space, but what about any continuing education that you are pursuing in support of your continued expertise, or having to pay for childcare to allow you to see patients while your children are home? Determining whether an expense is legitimately in support of your practice requires a thoughtful approach. Here are a few tax deductions that you can feel comfortable including:

Subscriptions and membership fees
Costs of advertising and marketing
Fees you pay to credit cards or banks (for your business accounts)
Meals and travel expenses associated with your business
Fees to maintain your license and registration
Continuing education costs
Depreciation of any office equipment or furniture
Home office expenses and supplies
Liability and malpractice insurance
Fees paid to attorneys, accountants or other professionals in support of your business
Office rent and utilities
Personal therapy
Software

Do You Practice Across State Lines?

If your practice includes telemedicine or you travel across a nearby state line to provide your services, you may need to research the reciprocal tax agreements between your state and any other state where you provide service. Where these agreements exist, you can simply pay income tax on what you earn in your own state, but without such agreements, you will likely have to file a comprehensive resident tax return in your state that includes all of your income (both local and from out of state clients) and a nonresident one in the state where you don’t live that is strictly reflective of the income earned there. You will probably be eligible for a tax credit in your residential state for taxes paid to another state.

How Do I Determine My Own Wages?

When you’re running your own business as a sole proprietor, all of the income flows directly to you. But that doesn’t mean that it is all available to spend as you like. Determining what represents salary, what needs to be set aside for taxes (federal and state), what pays for business expenses, and what gets set aside as savings is one of the biggest responsibilities of being self-employed. We recommend that sole proprietors determine a percentage of income to set aside for each category on a monthly or bimonthly basis and then do so regularly.

If you’ve chosen another type of business structure, such as an S-Corp or LLC, for your practice, then you will need to identify the salary that your state has identified as reasonable for your profession. Upon doing so you will then be able to pay yourself that amount, as well as owner distributions that are not taxed as income.

It is easy to get caught up in caring for your clients that your bookkeeping and accounting get away from you. If that is the case, it may be time to call in a professional. We can provide the guidance you need regarding your practice’s taxes and bookkeeping. Contact us today to learn more.

Does A Tax Deducstion And A Tax Credit Result In The Same Tax Benefit?

Tue, 15 Feb 2022 13:54:49 GMT

Article Highlights:

Itemized Deductions
Above-the-Line Deductions
Below-the Line Deductions
Business Deductions
Asset-Sale Deductions
Refundable Credits
Nonrefundable Credits
Carryover Credits
Business Tax Credits

Tax lingo, even without getting into the weeds of the Internal Revenue Code, tax regulations, IRS rulings, etc., can be confusing. Two frequently used terms that taxpayers sometimes think provide the same tax benefit, but don’t, are “tax deductions” and “tax credits.” Although a tax deduction and a tax credit both help lower the taxpayer’s tax, there’s a difference between them, and there are distinct types of deductions and categories of credits. This article explains these terms. In general, a deduction reduces taxable income, whereas a credit reduces the tax itself.

Tax Deductions – Tax deductions reduce the taxable portion of an individual’s income, which then reduces the tax on that income. But tax deductions come in a variety of flavors, as explained next:

Itemized Deductions – When taxpayers think of deductions, they typically think of the itemized deductions that are claimed on Schedule A. This is the only way to deduct personal expenses such as medical costs, state and local tax payments, investment and home-mortgage interest, charitable contributions (in most years), disaster-casualty losses, and various rarely encountered expenses. In some cases, itemized deductions are limited. For instance, medical expenses are only deductible to the extent they exceed 7.5% of the taxpayer’s adjusted gross income (AGI). Similarly, state and local tax payments (including those for income, sales, and property taxes) are currently capped at $10,000. However, pending legislation may increase or eliminate that limitation. For any change, please contact this office. On top of that, itemization only reduces taxable income to the extent that the total of the itemized deductions exceeds the standard deduction. When the sum does not exceed the standard deduction, the itemized deductible expenses provide no tax benefits at all.

Above-the-Line Deductions – Certain deductions actually reduce income. These are commonly called above-the-line deductions because, when applied, they reduce the income figure that is used to calculate AGI. Thus, their benefits apply regardless of whether the taxpayer uses itemized deductions. Above-the-line deductions include educators’ expenses; contributions to health savings accounts, traditional IRAs, and certain qualified retirement plans; deductible alimony payments; and student-loan interest. Most of these deductions have annual maximums (not discussed in this article).

Below-the-Line Deductions – These are deductions allowed without having to itemize that reduce a taxpayer’s taxable income but not their AGI. For example, for 2021 taxpayers who don’t itemize their deductions are allowed a limited deduction for cash charitable contributions. That donation to charity is a below-the-line deduction. Normally, charitable contributions are only allowed when itemizing on Schedule A.

Example: In 2021 Liz, who is single, has wage income of $50,000 and made a contribution to her traditional IRA of $3,000. She also contributed $300 to the Red Cross and is not itemizing deductions. Her AGI is $47,000 ($50,000 - $3,000). Her taxable income is $34,150 (AGI $47,000 - $300 donation - standard deduction for a single person of $12,550). Her income tax is based on her taxable income of $34,150.

Another below-the-line deduction is the Section 199A qualified business income deduction that is generally 20% of net business income from pass-through activities.

You may wonder: why bother to distinguish between above- and below-the-line deductions? The AGI is used for applying limitations and phaseouts for a variety of deductions and credits. While Congress wanted taxpayers to benefit from below-the-line deductions, the legislators didn’t want taxpayers to benefit too much – they didn’t want the AGI to be reduced by these deductions because that could have resulted in more generous other deductions and credits.

Business Deductions – Taxpayers who operate noncorporate businesses can deduct from their business income expenses that they incur when operating their businesses. These deductions (which cover advertising fees, employee wages, office-supply costs, etc.) are used to reduce profits, which in turn reduces AGI and taxable income and, ultimately, income tax. In addition, most self-employed taxpayers pay Social Security and Medicare taxes on their net business income, so any reduction in their business profits also reduces their Medicare taxes and possibly their Social Security taxes.

Asset-Sale Deductions – An individual who sells an asset is allowed to deduct that asset’s cost from the sale price to determine the taxable profit. Good recordkeeping is helpful here because the original expense may have been incurred years prior, even though it is only deductible when the asset is sold. For example, any improvements that an individual makes to a home over years of ownership are not deductible until the home is sold. At that point, the individual can reduce the taxable gain from the sale by counting the improvements as part of the home’s cost.

Tax Credits – Tax credits come in several varieties, and the amount of benefit can vary:

Refundable Credits – A refundable credit first offsets current tax liability and if there’s any credit remaining after applying it to the tax, the difference is refunded to the taxpayer. Hence, the term refundable credit. Refundable credits include the Earned Income Tax Credit, the Child Tax Credit and the Premium Tax Credit (net of any advances received), as well as the American Opportunity Tax Credit (an education credit that is 40% refundable up to $1,000). As a matter of general interest, these credits are subject to significant filing fraud because of their refundability. The IRS also considers prepayments such as income-tax withholding and estimated tax payments to be refundable credits.

Nonrefundable Credits – A nonrefundable credit only offsets tax liability; any unused amount is lost (unless it can be carried over to another year; see below). Over time, Congress has become more generous with credits; most credits that are not refundable now carry over for a given period. Nonrefundable credits include the Saver’s Credit, the Lifetime Learning Credit, and the Child and Dependent Care Credit.

Carryover Credits – For some nonrefundable credits, any unused current-year credit can be carried over to the next tax year (or for a longer period) until the carryover amount is used up. These credits include the Adoption Credit (which can carry over for up to five years) and the Home-Solar Credit.

Business-Tax Credits – Numerous business-tax credits are available; however, they are grouped into the General Business-Tax Credit, which is nonrefundable but if the credit exceeds the tax, the credit is eligible to be carried back for one year and forward for up to twenty years. (The carryback provision allows a business owner to amend the prior year’s return so as to claim the credit.)

If you have questions related to how you might benefit from tax credits or deductions, please call this office.

Congratulations, You Just Sold Your Business: What Happens Next?

Sat, 12 Feb 2022 13:19:44 GMT

One of the most important things to understand about selling a business is that this is not a decision that should be made lightly.

This is true both in terms of who you sell to and with regard to what will happen to your finances after all is said and done. You need a solid financial plan in place ahead of time to not only make the most of the sale, but to guarantee that you'll have everything you need to live as comfortably as possible moving forward.

The Art of Selling Your Business

By far, the most important step that you can take in terms of selling your business actually occurs before the sale even happens: planning ahead.

When you sell your organization, especially if you're lucky enough to do so for millions of dollars, you generate enough of a profit to live comfortably for several years. But you need to be forward-thinking in terms of how you maximize those profits with regard to the taxes you'll be required to pay.

A great strategy for long-term investors is QSBS stock exclusion, which permits shareholders of certain qualified small businesses to exclude a significant portion or all their associated capital gains when selling or exchanging that stock if they've held it over five years.

The point is that you're maximizing the income that you're actually making from the sale of your company, which ultimately should be the goal of any entrepreneur. So planning ahead can literally save you millions in tax liability and higher take-home cash. QSBS is just one example of possible tax strategies.

Another critical step to take after selling your business involves evaluating all healthcare options available to you. In a lot of situations, entrepreneurs will sell their company prior to the age of 65 — meaning before they are eligible for Medicare. Depending on the nature of the sale, they may be able to stay on a company-sponsored health insurance plan. They may also be able to get coverage through a spouse who is still employed. But if neither of these things is true, they're likely going to need to find coverage on the open market — something that can amount to thousands of dollars every year.

This is why working with insurance brokers and other financial professionals is key because it can help make sure your health insurance needs are taken care of within the context of the impending business sale. It's critically important to think about this if you also have a chronic health condition like diabetes. It may not seem like a big expense prior to the sale, but health conditions come with doctor's visits, expensive prescriptions, etc. You need to make sure that you're not being short-sighted — that you're getting the necessary care you need while still maximizing the profits from the sale at the exact same time.

Finally, when it comes to taxes, it's also important to look at a charitable donation strategy — especially if you'll be cashing in company stock as you exit the business entirely. Making a significant charitable donation during the same year in which you sell your company is hugely beneficial as it can help counteract much of the regular income taxes that you would be forced to pay as a result of the transaction.

In the end, selling a business is never an easy decision. You've devoted a significant portion of your life to building something special — parting with it is always going to be difficult. But from the financial side of the equation, so long as you follow a few key best practices, you'll be able to enjoy all of the benefits of this process with as few of the potential downsides as possible.

If you'd like to find out more information about what happens in the wake of selling your business, or if you just have any additional questions that you'd like to go over with someone in a bit more detail, please don't delay — contact us today.

Managing Your Finances During An Inflationary Period

Thu, 10 Feb 2022 14:30:26 GMT

It’s hard to ignore the real-life impacts inflation is having. While gas and grocery prices are having the most immediate effect, the price of almost everything is going up. People who are looking for ways to counter the impact and preserve financial stability can start with these solutions. They’re accessible options that can make a real difference.

Search for better savings options – If you’ve been parking your savings in your bank’s basic savings accounts, you know that you’re not earning much in the way of interest. Historically speaking, higher inflation leads to interest rates rising, but so far that hasn’t been the case. Still, online banks and others have introduced some attractive options that may make it worthwhile to shift your savings. The stock market and long-term investments are other options, though the uncertainty may not be for everybody. Experts urge people who opt for investment to diversify and to resist being reactive to sudden drops in prices. A long view will usually result in incremental growth.
Pay off your credit cards – While savings account interest rates aren’t rising, credit card interest rates are. If you’re carrying debt from one billing cycle to the next, you’re paying too much – and are likely to be paying more soon. Evaluate the rates your current card is charging and if you can, consider a balance transfer – especially to a card that is offering special introductory terms. One way or another, create a plan to pay your debt down and stick to it.
ARM Mortgage Update – Mortgage rates have been at historically low levels, but that won’t last much longer… in fact, they’re already rising. If your mortgage rate adjusts, don’t get complacent. The rates that are coming are going to be significantly higher, so now’s the time to refinance and grab a low fixed rate while they’re still available.
Maximize Your 401K – If your employer offers a 401K program with a match, do whatever you can to maximize your savings. The more that you put away now, the better off you will be in the future.
Be Cost-Conscious – When money is flowing and prices are low, it’s easy to get into a casual spending habit. Now that prices are rising, it’s time to take a closer look at where your money is going. From auto-renewing subscriptions to services you may no longer be using, to using food delivery services instead of going out to pick up your groceries yourself, it may be time to write down what you’re spending, eliminate where you see waste, and create a budget you can stick to and increase the cash you have in your pocket. You’ll be amazed how much you can save if you look for sales, turn the heat setting down by a couple of degrees, and start shopping smarter.

As with all boom-to-bust cycles, this period will also come to an end. Following this advice will help you get through the added cost increases without significant consequences to your pocketbook.

If You Have A Side Hustle, Be Advised: The IRS Is Cracking Down

Thu, 10 Feb 2022 14:19:36 GMT

Form 1099-K
Reporting Threshold
Marketplaces
Payment Processors (credit and debit cards)
Online Service Providers
Airbnb and VRBO
Delivery and Other Personal Services
Business Expenses
Record Keeping

For several years now, the IRS has required payments made to merchants through various marketplaces, payment processors (credit & debit cards), and third-party settlement organizations (TPSOs) to be reported on Form 1099-K. The purpose being to uncover merchants that do not report all of their income by comparing the 1099-K amounts to the amount reported on the individual’s or business’s tax return and following up with the under-reporters by correspondence or by audit.

In the past the filing threshold for 1099-Ks was when the gross amount of total reportable payment transactions during a calendar year exceeded $20,000, and the aggregate number of transactions for that payee in that year exceeded 200. Thus, entrepreneurs with a small side hustle selling merchandise on the Internet directly or through the likes of Amazon, E-Bay and others may not have received a 1099-K in the past.

That will all change beginning in January 2023 when reporting begins for 2022 transactions, since the American Rescue Plan Act of 2021 included a provision to reduce the reporting threshold to $600, effective in 2022. Also impacted by this reduced threshold will be homeowners who rent out their vacation homes through the likes of Airbnb and VRBO who generally avoided 1099-Ks in the past because of the 200-transaction threshold. Also, individuals providing services through Internet websites such as for delivery, babysitting, companionship, home cleaning, elder care and other services seldom met the $20,000 threshold and have not received 1099-Ks in the past.

The 1099-K only reports gross income, and the cost of the products sold and other business expenses can be deducted to determine a merchant’s net taxable profit. Those renting vacation homes through TPSOs can deduct depreciation, utilities, repairs, and other expenses, while those providing services can deduct certain travel and other expenses. The net profits are subject to income tax, and generally are also subject to self-employment tax, including rentals where significant personal services are performed.

Thus, keeping records of expenses becomes important. Please contact this office for further information related to your specific side hustle and what expenses will be deductible.

IRS Stops Using Facial Authentication Software For Access To Oneline Accounts

Wed, 09 Feb 2022 14:48:17 GMT

Article Highlights:

Prior Article
ID.me
Treasury Decision
IRS Third-Party Authentication

A prior blog article posting included an article about the IRS’ plans to use ID.me facial recognition software for taxpayers and others to authenticate access to their online accounts.

Under pressure from privacy activists and several members of Congress, the Treasury Department has directed the IRS to transition away from using the controversial ID.me ID facial recognition verification services after deciding that biometric information is inherently risky and pointing out that many facial recognition systems have deep racial and gender biases.

On February 7, 2022, the IRS announced that over the next few weeks it will transition away from requiring taxpayers to use third-party facial recognition software to authenticate their online accounts. The IRS says that it will develop "an additional authentication process that does not involve facial recognition." However, it didn't specify what that process would be and when it would be effective.

So, you will not be needing an ID.me verification if the IRS requirement was your only need for one.

All The Things That Entrepreneurs Can Learn From The Overnight Success Story Of Wordle

Wed, 09 Feb 2022 14:38:52 GMT

Few things have captured the attention of so many people in recent memory like the word-based game Wordle. It's one part crossword, one part Sudoku — players have to guess the word of the day through equal parts strategy and luck. Based on their guesses, colored tiles tell players when letters are in the correct position or if they're included in the word at all. The goal is to guess the daily word in as few attempts as possible.

Wordle is the product of Josh Wardle, a man who initially built the game simply for himself and his partner to play. It became public in October 2021 and, after exploding in popularity, was eventually purchased by The New York Times for a seven-figure sum.

In an interview , Wardle himself admitted that the game — which he published online for free — had "gotten bigger than I ever imagined. It has been incredible." Indeed, there are a number of important lessons to be learned in this story — all of which are worth exploring.

Why the Journey of Wordle Matters to Entrepreneurs

By far, one of the most important lessons to be learned from Wordle is that entrepreneurs should focus on projects that are born out of love.

Again, Josh Wardle — a software engineer by trade — initially created the game simply so that he and his partner could have something to play together. There was no quest for fame or fortune — it was a fun, daily activity that the two could share. Especially during the still-ongoing COVID-19 pandemic, it seems that this was a sentiment that many people shared, and the skyrocketing popularity is more than proof of that.

Another important lesson to be learned from Wordle is that the brilliance of the game is in its simplicity. It's not necessarily a word-based game like Scrabble where every game is different. Every day, players all over the world attempt to guess the same word in as few choices as possible. Then, they can post their results to social media and essentially compete against one another.

For entrepreneurs, the lesson is clear: don't over-think things. It is absolutely possible for an idea to become too complicated for its own good. Instead, keep things simple, and a large body of people are likely to respond to it.

This also plays into one of the most critical lessons that Wordle can teach us: get people talking. That competition element has been key to the game's success — people want to show on social media that they've gotten today's word in three guesses, as opposed to their friends who may have gotten it in four or five. This is especially true when words are particularly challenging. It creates a conversation that allows people to have fun and interact with one another, but above all else, it keeps Wordle in the public consciousness — which in and of itself is the most important goal of all.

Perhaps the final lesson that Wordle can teach entrepreneurs is that it's always important to leave people wanting more. Josh Wardle said that it was important to his original conception to limit the game to a single word every day. This does a few different things, all at the same time. For one, it essentially makes it a game that anyone can play — usually, sessions are over in ten minutes or less. But beyond that, it also means that people have something to look forward to on a daily basis. They eagerly await the new word and their attempts to guess it. They anticipate being able to brag to their friends that they guessed a word in fewer tries than they did. It's not a game that they can spend an hour playing without realizing it — which might be the ultimate secret to its success.

In the end, Wordle — and Josh Wardle — are another in a long line of examples of entrepreneurs who struck precisely the right note at exactly the right time. Following the path of its simple creation, all the way through its acquisition by The New York Times in just four months has valuable lessons to teach for us all.

Video Tip: An Overview Of The Adoption Tax Credit

Tue, 08 Feb 2022 16:01:56 GMT

Taxpayers who adopted or started the adoption process in 2021 may qualify for the adoption credit. This credit can be applied to international, domestic private, and public foster care adoption. Watch this video for a quick overview of the adoption tax credit.

Important Enhancesment To The Earned Income Tax Credit For 2021

Tue, 08 Feb 2022 15:07:59 GMT

Article Highlights:

Largest Antipoverty Program
Taxpayers Not Required to File
Earned Income
Filing Age Threshold
Investment Income
Childless Workers
Maximum Credit and Phase-out Ranges
Qualifying Children
2019 AGI
Separated Spouses
Child Does Not Have an SSN
Refunds Delayed
Active Military
Disabled Individuals

The earned income tax credit (EITC) is regarded as one of the government’s largest antipoverty programs and helps millions of American families every year. You are urged to check to see if you qualify for this very beneficial refundable credit. Significant enhancements have been added (some only for 2021), and even if you have not qualified in the past, you may qualify this year.

If you are not normally required to file a tax return because your income is below the filing threshold, you could qualify for this credit. You may also qualify for the child tax and the recovery rebate credits, plus get a refund of any income tax withholding you had during 2021, so don’t assume there is no benefit from filing a tax return.

The IRS estimates that one in five individuals eligible for EITC fail to claim it simply because they don’t understand the criteria. Plus, many individuals who never qualified for the EITC previously may be eligible in 2021 because their income will be lower because of the COVID pandemic. Nationwide last year, almost 25 million eligible workers and families received over $60 billion in EITC with an average EITC of $2,411.

To qualify for the EITC you must have earned income. Earned income is generally income from working, such as wages and net self-employment income, but also includes tips, union strike benefits, nontaxable military combat pay and nontaxable parsonage allowances for clergy. Wages for this purpose includes wages before reductions due to salary deferrals such as 401(k)s, cafeteria plans, and excludable dependent care benefits.

There are several changes to EITC for 2021 that will allow significantly more individuals to qualify for the credit. Generally, the age threshold to claim the EITC is 19, with certain exceptions, and with no upper cap on age. In the past, the EITC was only available to people ages 25 to 64. In addition, individuals may have investment income of $10,000 (up from $3,650 in 2020) and still qualify for EITC. Childless workers and couples can qualify for the EITC if their earned income is below $21,430 ($27,380 for joint filers), and the maximum credit for a taxpayer with no qualifying children is $1,502, up from $538 in 2020.

As mentioned previously, the EITC is based on the amount of your earned income and whether there are qualifying children in your household. The credit increases as the taxpayer’s earned income or adjusted gross income (AGI) increases, until it reaches a plateau, where it remains constant at the maximum credit amount until it reaches the AGI phase-out threshold. Once the threshold amount is exceeded, the credit is reduced by a set percentage, and no credit is allowed once the income exceeds the top of the phase-out range. The following table illustrates the maximum credit and phase-out ranges based on filing status and number of children for 2021.

Qualifying children – A qualifying child must be under the age of 19 or be a full-time student under age 24 at the end of the tax year. This age test does not apply to a child who is permanently and totally disabled. In addition, they must meet relationship and residency tests.

2019 AGI – There is a special rule for 2021 only: Where a taxpayer’s 2021 earned income is less than their 2019 earned income, the taxpayer can elect to use the 2019 earned income amount to compute the 2021 EITC. This was put into effect for taxpayers whose income has decreased because of COVID but applies to anyone who chooses to use the 2019 AGI. However, one must be cautious when making the choice to ensure the AGI that produces the best result is used.

Selecting the 2019 AGI to compute the EITC will have no effect on the 2021 income tax since the 2021 AGI will be used for that computation. Taxpayers should also note that any Economic Impact Payments or Child Tax Credit payments received are not taxable or counted as income for purposes of claiming the EITC. Eligible individuals who did not receive the full amount of their Economic Impact Payment may claim the Recovery Rebate Credit on their 2021 tax return.

Separated Spouses - Married but separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, must have a qualifying child living with them for more than half the year and either:

Not have the same principal residence as the other spouse for at least the last six months out of the year, or
Be legally separated according to their state law under a written separation agreement or a decree of separate maintenance and not live in the same household as their spouse at the end of the tax year for which the EITC is being claimed.

Child Does Not Have an SSN - Single people and couples with children who do not have Social Security numbers cannot claim the EITC available for taxpayers with children. But they can claim the smaller EITC available to childless workers. In the past, these filers didn't qualify for any credit.

Refunds Delayed – Because of substantial fraud related to refundable credits, Congress revised the tax law a few years ago so that the IRS cannot issue refunds before mid-February for tax returns that claim the EITC or the Additional Child Tax Credit (ACTC). The IRS must hold the entire refund, giving the agency more time to detect and prevent errors and fraud.

Active Military - Members of the military can elect to include their nontaxable combat pay in their earned income for the earned income credit. If that election is made, the military member must include all nontaxable combat pay received as earned income. If spouses filing a joint return both received nontaxable combat pay, then each one can make a separate election. Disabled Individuals - Disabled individuals frequently overlook the opportunity to claim EITC. Even though they may not be working and earning income, certain disability income is treated as earned income for purposes of the EITC and includes the following amounts:

Disability benefits attributable to the employer’s payment of disability policy premiums. However, nontaxable disability income from policies whose premiums the employee paid, and Social Security benefits, are not “earned income” for purposes of the EITC.
Long-term disability benefits to an individual who is retired on disability are only earned income until the individual reaches the minimum retirement age, which is generally the earliest age at which the individual could receive a pension or annuity if not disabled.

If you qualify for but failed to claim the credit on your return for 2018, 2019 and/or 2020, you can still claim it for those years by filing an amended return or an original return if you have not previously filed.

If you have questions about your qualifications for this credit or need help amending or filing a prior year’s return to claim the credit, please give this office a call.

Is Interest Paid on Borrowed Money Tax Deductible?

Thu, 27 Jan 2022 09:53:38 GMT

Article Highlights:

Interest Categories
Category Deductibility
Interest Tracing Rules

If you borrow money will the interest you pay be deductible for income tax purposes? The answer to that question can be complicated, and unfortunately, not all the interest an individual pays is tax-deductible. The rules for deducting interest vary, and essentially depend on what the loan proceeds are used for: personal items, investment, home mortgage, business activities or higher-education. Interest expense can fall into any of the following categories:

Personal interest – is not deductible. Typically, this includes interest paid on personal credit card debt, personal car loans, home appliance purchases, etc.
Investment interest – this is typically paid on debt incurred to purchase investments such as land, stocks, mutual funds, and the like. However, interest on debt to acquire or carry investments that produce tax-free income is not deductible at all. The annual investment interest deduction is limited to “net investment income,” which is the total taxable investment income reduced by tax-deductible investment expenses. Prior to the tax reform enacted in 2017, these expenses often included investment advisory fees that were part of miscellaneous itemized deductions. However, for years 2018 through 2025, the deduction of these types of expenses is suspended. Currently, the IRS’s instructions to Form 4952, Investment Interest Expense Deduction, list only depreciation and depletion as examples of eligible expenses, and most individuals typically won’t have these expenses. So, for most taxpayers, their investment interest deduction will be limited to the amount of their investment income. However, the investment interest deduction is only allowed to taxpayers who itemize their deductions on Schedule A.
Home mortgage interest – includes the interest on a taxpayer’s primary home and a single second home. However, the debt on which the interest is deductible is generally limited to $750,000 ($1 million for debt incurred before December 16, 2017) of home acquisition debt (debt used to purchase or substantially improve the home(s)). The acquisition debt must be secured by the home(s) to be deductible as home mortgage interest. In addition, home mortgage interest is only deductible by those who itemize their deductions. Interest paid on equity debt – such as debt that may result when acquisition debt is refinanced – is not deductible as home mortgage interest with a couple of exceptions.

If the loan proceeds are used to make substantial improvements to the home, the debt is treated as acquisition debt and the interest on that debt would be deductible.

If the amount of the new loan merely replaces the balance of the old acquisition debt, as may be the case when the original loan is refinanced only to take advantage of a lower interest rate and no cash (equity) is taken out, then the interest would continue to be deductible as home mortgage interest so long as the $750,000 or $1 million debt cap isn’t exceeded.

But to the extent the new loan is greater than the balance of the old acquisition loan and isn’t used for substantial home improvements or traceable to another deductible use, the interest on the excess debt isn’t deductible.

Note: the rules stated here are for federal tax purposes; state rules may be different.

Passive activity interest – includes interest on debt that's for business or income-producing activities in which the taxpayer doesn’t “materially participate” and is generally deductible only if income from passive activities exceeds expenses from those activities. The most common passive activities are probably real estate rentals. For rental real estate activities, there is a special passive loss allowance of up to $25,000 for taxpayers who are active, but not necessarily material, participants in the rental. The $25,000 phases out for taxpayers with adjusted gross income between $100,000 and $150,000.
Trade or business interest – includes interest on debts that are for activities in which a taxpayer materially participates. This type of interest can generally be deducted in full as a business expense, although the deduction is limited for taxpayers with average annual gross income for the prior three years exceeding $27 million. The details of this limitation are not covered in this article.
Educational loans – Interest paid on a qualified student loan may be claimed as an above-the-line deduction (i.e., itemizing isn’t required). The maximum deduction per year is $2,500. This is a per return limit, not a per student limit. Mixed-use loans don’t qualify. A “qualified student loan” is generally one used to pay higher education expenses, such as tuition, room and board, and related expenses, for attending post-secondary educational institutions, including certain vocational schools, and certain institutions offering postgraduate training, on behalf of the taxpayer, spouse, or any dependent of the taxpayer (at the time the loan is incurred). For 2022, the deduction is phased out when modified AGI is between $145,000 and $175,000 for joint filers and $70,000 to $85,000 for others, except the deduction is not allowed when filing using the married separate status or if the taxpayer is a dependent of someone else. Once the AGI reaches the upper amount, no deduction is allowed for that year.

Because of the variety of limits imposed on interest deductions, the IRS provides special rules to allocate interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds. Thus, interest expense on a debt is allocated in the same manner as the allocation of the debt to which the interest expense relates. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, i.e., by “following the money.” These tracing rules, combined with the restrictions associated with the various categories of interest, can create some unexpected results. Here are some examples:

Example 2: A taxpayer takes out a loan secured by his rental property and uses the proceeds to finance a European vacation. The use of the funds was to pay for a vacation and thus the interest on the loan is nondeductible personal interest expense.

Example 3: The taxpayer owns a rental property free and clear and wants to purchase a home that he’ll use as his personal residence. He obtains a loan on the rental to purchase the home. Under the tracing rules, the taxpayer must trace the use of the funds to their use, and as the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest, the debt must be secured by the home, which it is not. Result: the interest is not deductible anywhere.

Example 4: The taxpayer uses her bank credit card to pay her son’s college tuition and related expenses as well as for purchasing clothing, food, household items, vacations, etc. None of the interest she pays on the credit card balance can be allocated to education interest since interest paid on mixed-use debt isn’t allowed for the student loan interest deduction. On the other hand, if she had one credit card that she used only for her son’s eligible education expenses, then the interest would be deductible as student loan interest if she didn’t exceed the modified AGI phaseout limit.

Is there a Tax Break for Tuition Paid to Special Schools?

Wed, 26 Jan 2022 10:04:46 GMT

Article Highlights:

Medical Deduction
Tuition To Treat Learning Disabilities is Deductible
Special Teaching Techniques
Private Letter Rulings

A component of itemized deductions is the cost of medical care. The total of eligible medical expenses paid during the tax year is reduced by 7.5% of the taxpayer’s adjusted gross income (AGI). While you are undoubtedly familiar with most of the medical expenses eligible for the deduction, such as payments for doctor/dentist care, surgeries, prescription drugs and other commonly encountered medical costs, one type of eligible medical expense that you may not be aware of is the cost of a child attending a special school. This type of school is designed to compensate for or overcome a physical or mental handicap, in order to qualify the individual for future normal education or for normal living. This includes a school for the teaching of Braille or lip reading. The principal reason for attending must be the special resources available at the school for alleviating the handicap.

Treating a child at such a school can be financially burdensome to the child’s parents, especially if the care isn’t covered by health insurance. Provided the parents have total itemized deductions greater than their standard deduction, they can get help from the tax law, which allows as eligible medical costs:

The tuition for ordinary education that is incidental to the special services provided at the school, and
The cost of meals and lodging supplied by the school The distinguishing characteristic of a special school is the substantive content of its curriculum, which may include some ordinary education, but only if the ordinary education is incidental to the school's primary purpose of enabling students to compensate for or overcome a handicap.

In a private letter ruling, the IRS said that for a child diagnosed with multiple learning disabilities, tuition paid to attend a school designed to assist students in overcoming their disabilities and developing appropriate social and educational skills was a deductible medical expense.

IRS ruled that where the school uses special teaching techniques to assist its students in overcoming their condition and that these techniques along with the care of other staff professionals are the principal reasons for the child’s enrollment at the school, then the school is a “special school.” Thus, the child’s tuition expenses at the school in those years he is diagnosed as having a medical condition that handicaps his ability to learn are deductible.

Side Note: Private letter rulings by the IRS are written responses to a taxpayer’s request for guidance on a particular issue or complex situation. A private ruling is applicable only to the specific tax situation, can’t be cited as precedence by other taxpayers and doesn’t commit the IRS to taking a similar position with regard to other taxpayers. However, a ruling does provide a look into the IRS’ position on the matter in question and can sometimes lead to a broader revenue ruling that would apply to all taxpayers. There is a fee, often several thousand dollars, that the taxpayer is required to pay when submitting their request for a private ruling.

The Tax Court has also held and IRS has privately ruled in other situations that, where a school attended by a student with a medical problem doesn't qualify as a special school because the ordinary education isn't incidental to the special services provided, the costs of the special program or special treatment (but not the entire tuition) may still be a deductible medical expense.

If you have questions related to this or other medical deductions, please give this office a call.

How to Automate Email Reminders for Overdue Customers

Mon, 24 Jan 2022 13:13:59 GMT

Most small businesses struggle with cash flow. How do you get customers to pay by the due date, or at least not long after? We’ve written about some of the possible solutions. Accept credit/debit cards and direct bank payments. Send statements regularly. Offer a discount for early payment if it makes financial sense for you.

QuickBooks Online offers another tool for accelerating incoming payments: automated reminders. If you set these up, you won’t have to spend so much time keeping up with past-due remittances. It’s easy to do, and you can personalize your messages. You can even do this manually if you come across an individual customer who needs a nudge.

What about reminders for yourself? QuickBooks Online doesn’t come with a to-do list that you can use to enter tasks that must be done. But there are still ways to tie a digital string around your finger so you don’t fall behind on your own critical chores.

If you feel like you’re being too intrusive by sending out payment reminders, think about how you feel when you receive one yourself. Often, a financial obligation has simply slipped your attention. You want to maintain a good working relationship with your vendors, so you might even welcome such an email or letter.

Setting Up the Automation

To get started, click the gear icon in the upper right corner. Under Your Company , click on Account and Settings . Click the Sales tab and scroll down to Reminders . Click the pencil icon way over to the right to open the options here, then click the on/off button next to Automatic invoice reminders to activate them. Click the down arrow next to Default email message for invoice reminders to open the template.

QuickBooks Online includes email templates for late payment reminders that you can edit.

If you’ve ever done a mail merge, this will look familiar to you. QuickBooks Online replaces the text in [brackets] with data from your company file. So it will prepare an email for every customer that is past due and replace the bracketed content with your own customer and company names and invoice numbers. Of course, you can choose not to personalize the emails, but it’s likely to be more effective if you do. Everything in the template can be edited, and you can check a box to have a copy sent to you.

Below this email template are three reminder-scheduling blocks. Click the button next to Reminder 1 to turn it on. You’ll see that you can set up a reminder to go out to customers either on the due date or a specified number of days (3, 7, 14, 30, or 90) before or after.

QuickBooks Online checks the due dates for your invoices and will automatically send the email reminder out to everyone who meets the criteria. If a customer record has an email address in it, a reminder will be dispatched even if you didn’t send the original invoice through email.

You can schedule automatic invoice reminders to every customer who meets the criteria you’ve specified.

To set up additional, different reminders, you can do so in the Reminder 2 and Reminder 3 blocks. When you’ve finished, click Save . You can always go back in and edit these. To see who received reminders, click on Sales in the left vertical toolbar, then Invoices . The word Reminded should appear in the Status column.

If you’d rather dispatch reminder emails manually, you can do so in QuickBooks Online. With the same Sales | Invoices screen open, click on the down arrow next to Receive payment at the end of the row and select Send reminder . If you want to send reminders to multiple customers, click the box in front of each name to create a checkmark. Click the down arrow next to Batch actions right above the table and select Send reminder .

Reminding Yourself

We wish that QuickBooks Online had a reminder feature like QuickBooks Desktop does, that greets you every time you launch the software and displays tasks that need to be done. But there are still ways to remind yourself that invoice and bill payments are running late. You just have to make a habit of checking certain data screens regularly. For example, you should be visiting:

The Business Overview element of the home page. There’s an Income graph that shows you how much money is tied up in overdue invoices (and open invoices).
The Invoices and All Sales screens that you can see by clicking on Sales in the left vertical toolbar.
Reports, like Accounts receivable aging detail, Open Invoices, Unbilled charges , and Unbilled time .

If you just started using QuickBooks Online this year and are struggling with it, we’re available to set up training sessions and answer questions. And, of course, we’re always here for longtime users, too. The COVID-19 pandemic is still affecting a lot of small businesses, and we understand you may be facing difficult issues. If we can help you better use QuickBooks Online to manage your finances, please contact us.

What’s Next for the Child Tax Credit?

Sun, 23 Jan 2022 13:33:01 GMT

December 15th, 2021 marked the last deposit date for the child tax credit payment expanded under the American Rescue Plan (ARP). Though many had hoped the program would be continued, political leaders are struggling to find a way forward that makes the majority of Congress happy, and as a result, many families have been left waiting and wondering what will come next.

Though a child tax credit has existed since 1997, it was significantly revised in the face of the global pandemic to offer parents financial relief. Where it had previously been provided to eligible families as a single, partially refundable amount at tax time, the ARP allowed checks to be sent out on a monthly basis and made the credit fully refundable. It also substantially expanded the credit from $2,000 to $3,000 annually per child, with a $600 bonus for children under the age of 6.

The impact of the revision was undeniable. According to a report issued by the Center on Poverty and Social Policy at Columbia University in late October, the payments of up to $300 per child being deposited in bank accounts (along with other COVID-19-related government support) contributed to a 4.6 percentage point (26 percent reduction) in child poverty in September of 2021 alone. Previous reports documented similar results, with an August report on its impact on material hardship reporting that the “more generous and inclusive monthly payment marks a historic, albeit temporary shift in the American welfare state’s treatment of low-income families.”

With the addition of the word “temporary” in the report’s main takeaway, the center shines a light on the question of what happens next, now that the payments will stop being sent. Both Democrats and Republicans had backed the credit through the Tax Cuts and Jobs Act under the Trump administration, and there is bipartisan support for some type of continuation, but the devil is in the details and consensus has been hard to find.

Much of the disagreement about how to move forward has revolved around whether the tax credit should be tied to a work requirement, and there are other issues surrounding what agency should be responsible for its administration and to whom and how it should be distributed. Where Senator Mitt Romney has proposed that monthly cash should be sent to all families regardless of income, with those above eligible income thresholds reconciling the difference on their income tax return, others object that it doesn’t limit the benefit to working families and those paying into the tax system. Still, others insist that there must be oversight from social service agencies to ensure that children are getting the benefit of the payments – Senator Joe Manchin called attention to the many grandparents who have assumed responsibility for raising their grandchildren and insists that a mechanism be put in place to ensure that the money follows the child rather than their parent.

To that last point, the Census Bureau conducted a survey of American households to see how they spent their child tax credit checks. The majority used the cash for household expenses including rent or mortgage payments, groceries, and utilities, with four in ten using the first few payments to pay down their debt and many using it to pay for child-care and school supplies. Others used it to provide extras that they might otherwise not have been able to afford, including music lessons, entertainment, or occasional take-out food during the pandemic.

While Congress works its way through the challenges of finding a replacement, many families for whom the extra money made a real difference are dreading the coming months, particularly with inflation rising. There are also some who received the money and believe they may owe some of it back when tax filing season arises.

However, the monthly payments were “advance” credit payments and any credit amount you are entitled to and didn’t receive in advance will be credited to your 2021 tax return. So you did not lose out on anything, you just did not get it in advance.

The IRS will be sending Letter 6419 which will show the total amount you received in advance payments; you will need to reconcile the advance payments with the amount you are entitled to. Don’t discard that letter and keep it with your other tax records and documents.

If your family received advance child tax credit funds, you are not alone in wondering what will come next from Congress for 2022. You also may need help with your upcoming tax return. If so, don’t hesitate to contact us for assistance.

February 2022 Business Due Dates

Sat, 22 Jan 2022 14:13:57 GMT

February 10 - Certain Small Employers

File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2021. This due date applies only if you deposited the tax for the year in full and on time.

February 10 - Farm Employers

File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2021. This due date applies only if you deposited the tax for the year timely, properly, and in full.

February 10 - Federal Unemployment Tax

File Form 940 for 2021. This due date applies only if you deposited the tax for the year in full and on time.

February 15 - All Businesses

The following information statements are due to recipients to whom certain payments were made during 2021: Form 1099-B (Proceeds from Broker and Barter Exchange Transactions), Form 1099-S (Proceeds from Real Estate Transactions) and Form 1099-MISC (Miscellaneous Income) if substitute payments are reported in Box 8 or gross proceeds paid to an attorney are reported in Box 10. With consent of the recipient, the 1099 can be issued electronically.

February 15 - Social Security, Medicare, and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in January.

February 15 - Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in January.

February 16 - Payroll Withholding

Employers begin withholding for employees who claimed exemption from withholding in 2021 but have not provided a W-4 (or W-4(SP)) to continue the exemption for 2022.

February 28 - Information Returns Filing Due

File government copies of information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2021, other than the 1099-NECs that were due January 31. There are different 1099 forms for different types of payments.

February 28 - Payers of Gambling Winnings

File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2021. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.

February 28 - Applicable Large Employers (ALE) – Form 1095-C

If you’re an Applicable Large Employer, file 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you’re filing any of these forms with the IRS electronically, your due date for filing them will be extended to March 31. See the Instructions for Forms 1094-B and 1095-B and the Instructions for Forms 1094-C and 1095-C for more information about the information reporting requirements.

February 28 - Large Food and Beverage Establishment

Employers File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31.

Video Tips: Tax Break for Special Education Tuitions and Expenses

Fri, 21 Jan 2022 14:32:37 GMT

When itemizing deductions in the tax return, a taxpayer can include medical expense payments to a special school for a mentally impaired or physically disabled person if the main reason for using the school is its resources for relieving the disability. Watch this video for a better understanding of this tax break.

February 2022 Individual Due Dates

Fri, 21 Jan 2022 14:21:48 GMT

February 4 - Tax Appointment

If you don’t already have an appointment scheduled with this office, you should call to make an appointment that is convenient for you.

February 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

February 15 - Last Date to Claim Exemption from Withholding

If you are an employee who claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

Costs for Installing Medically-Related Home Improvements Have Tax Benefits

Thu, 20 Jan 2022 14:45:15 GMT

Article Highlights

Aging Population
Home Improvements for Medical Care or Treatment
Improvements That Increase the Home’s Value
Improvements That Do Not Increase the Home’s Value
Medical AGI Limitations

According to the Social Security Administration, 10,000 baby boomers a day are reaching the age of 65, as of 2018 16% of Americans were age 65 or older, and by 2030 all boomers will be at least 65. Boomers aren’t the only reason the nation’s overall population is aging – people are living longer due partly to better health care (even though deaths from COVID-19 have lowered life expectancy projections).

The CDC has stated that falls are the leading cause of injuries among people age 65 and older, and nearly 30% of older adults reported falling at least once in the preceding 12 months. To help minimize falls, and to accommodate age-related infirmities, many people are adding grab bars in showers, modifying stairways, widening hallways to accommodate a wheelchair, and other projects to make the home safer and more accessible for older occupants. If you are planning to make such home improvements, you may be eligible to include the costs as a medical expense for income tax purposes.

Generally, the costs of home improvements are not deductible except to offset home gain when the home is sold. But a medical expense deduction may be claimed when the primary purpose of the home modification is for a medical reason. The tax law says that deductible medical expenses are those paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.”

So, if you are making the modification because you, your spouse, or a dependent has a medical need for doing so, then the modification expense may be deductible as a medical expense, but only to the extent that it exceeds any resulting increase in the property’s value.

Example: A doctor recommends that his patient with severe arthritis have daily hydrotherapy, and so the individual has a hot tub installed at a cost of $21,000. The individual then hires a certified home appraiser to determine how much the hot tub addition increased the home’s value. The appraiser concludes the increase is $20,000. The individual’s medical deduction for the year the hot tub is installed will be limited to $1,000 ($21,000 - $20,000). The other $20,000 of expenses will increase the home’s basis, meaning that it will add to the home’s cost and will offset the sales price when the home is sold.

Even though a prescription from a doctor for most medically related home modifications isn’t required, the taxpayer, if questioned by the IRS, needs to be able to demonstrate how the expenditure relates to his or her medical care or that of a spouse or dependent. And having a letter from the individual’s doctor that explains the type of modifications that would be medically beneficial would help to prove a medical need.

Not all improvements result in an increased home value. In fact, some, such as lowering cabinets for an occupant confined to a wheelchair, could actually decrease the home’s resale value.

The IRS has identified certain improvements that don’t usually increase a home’s value but for which the full cost can be included as a medical expense. These improvements include, but are not limited to, the following items:

Constructing entrance or exit ramps for the home;
Widening doorways at entrances or exits to the home;
Widening or otherwise modifying hallways and interior doorways;
Installing railings, support bars, or other modifications;
Lowering or modifying kitchen cabinets and equipment;
Moving or modifying electrical outlets and fixtures;
Installing porch lifts and other forms of lifts (but generally not elevators);
Modifying fire alarms, smoke detectors, and other warning systems;
Modifying stairways;
Adding handrails or grab bars anywhere (whether or not in bathrooms);
Modifying hardware on doors;
Modifying areas in front of entrance and exit doorways; and
Grading the ground to provide access to the residence.

Only reasonable costs to accommodate a home to a disabled condition or to an elderly individual are considered medical care costs. Additional costs for personal preferences, such as for architectural or aesthetic reasons, are not medical expenses (but could be additions to the home’s tax basis).

Unfortunately, the total of all medical expenses can be deducted only to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income (AGI) and only if the taxpayer itemizes deductions. With the current high value of the standard deductions, fewer than 15% of taxpayers are expected to itemize their deductions in the years through 2025, down from 30% prior to 2018 when the standard deduction amounts were last changed. So even if a medically needed home improvement is made and qualifies to be deducted, only a small percentage of taxpayers will end up with a tax benefit as a result of the expenditure.

All is not lost, though. To the extent that the taxpayer doesn’t claim the expense as an itemized deduction, the improvement costs, including those that might not meet the medically necessary standard, can be added to the home’s purchase cost to determine the home’s tax basis. Thus, when the home is sold, the capital gain from the sale will be lower.

Either to substantiate the currently deductible improvements or with a future home sale in mind, taxpayers should be sure to keep records of the home improvements they make, including the receipts for the costs.

If you have questions related to this deduction and whether you will benefit, tax-wise, from any medically related home modifications, please call this office.

All the Best Cash Flow Practices for Medical Practices

Tue, 18 Jan 2022 15:23:30 GMT

According to one study conducted by U.S. Bank , a massive 82% of all businesses that ended up failing said that cash flow issues were a major contributor to that event. Often, this doesn't just come down to the amount of money coming into an organization — it relates to the timing as well.

Proper cash flow management requires a fundamental understanding that not all types of businesses are created equally. Some, like retail stores, tend to make a significant portion of their income at the end of the year — hence events like "Black Friday" and "Cyber Monday." Others, like landscaping businesses, see the vast majority of their income generated during the warm summer months.

Medical practices also present their own unique challenges. Therefore, if you really want to take control over the cash flow for your practice, there are a few key things you'll need to keep in mind.

Medical Practices and Cash Flow: What You Need to Know

Perhaps the most critical thing to understand about medical practice cash flow is that the dynamic has changed significantly over the last few years.

More and more, insurance companies are shifting costs to consumers — a burden that they may not be ready to handle. According to one recent study , about 10% of families in the United States have a medical bill they can't afford to pay at all. A further 25% currently have some type of outstanding medical bill. It's an unfortunate situation for all involved, but it requires medical practices to be especially proactive about how they're collecting for services rendered.

In terms of cash flow, a way to mitigate risk involves getting as much money from patients at the time of their visit as you can. To get to this point, you need to offer a wide range of different payment options. People can always pay with cash and checks, but you should also offer the option for credit cards, digital services like PayPal or Venmo and more.

Making the checkout process as efficient as possible is also a great way to get to this point. Train your employees to take someone's copay when they check-in so that they don't have to wait after their appointment. Make sure that they're informing patients that a statement will be coming with additional charges and outline any that their insurance policy might not cover. The more efficient you can make this process, the more likely it is that you'll be able to collect payment while someone is still in your office. At the very least, it will significantly reduce the amount of time you're waiting on unpaid bills.

Depending on the type of practice you're running, you may also consider instituting a policy to bill patients for appointments that they miss. A missed appointment is so much more than just a minor inconvenience for doctors and staff — it's literally taking up time that could have been used to provide care to another patient. Therefore, it may be a good idea to keep a credit card on file and let people know that if they don't cancel an appointment they can't keep ahead of time, they will be charged a flat fee. Usually, it's recommended to tell patients that they need to cancel at least 24 hours in advance.

Another step that medical practices can take to improve cash flow involves paying their suppliers on the due date. Sure, we'd all like to be paid ahead of time — but there is a due date on an invoice for a reason. Especially if you're having a hard time managing funds, pay vendors and suppliers on the due date so that you can use that money for more important matters in the meantime.

Beyond that, setting a base balance and a target balance are also important steps to take. A base balance is a pre-determined balance in your practice's operating account that will allow you to see fluctuations relative to that amount. A target balance can be a useful tool for identifying the progress you're making toward certain income-related goals.

In the end, cash flow management for medical practices has always been tricky — but it is absolutely possible to be successful with the right approach. By making tips like those outlined above a normal part of your operations, you'll be able to enjoy all the benefits of this process with as few of the potential downsides as possible.

Don't Think You Have to File a Tax Return? You May Be Missing Out!

Tue, 18 Jan 2022 15:06:47 GMT

Article Highlights:

Withholding
Other Prepayments
Tax Credits
Earned Income Tax Credit
Child Tax Credit
American Opportunity Tax Credit
Recovery Rebate Credit

These days the tax return is used for more than just collecting taxes. It has also become a tool for the government to provide social benefits. This article discusses the various reasons and resulting benefits available to you when you file, even if you are not required to, as you may be eligible for a refund of withholding or estimated payments or a refund as a result of a refundable tax credit or even a stimulus payment that you didn’t previously receive. Here are some of the possibilities.

Refund of Withholding – You may have worked or had other income that included income tax withholding, but the total of all your income was less than the requirement to file a return. You are required to file a 2021 return if your income is equal to or more than the amount shown in the following table based on the filing status you would use if you did file:

2021 GENERAL TAXPAYER FILING REQUIREMENTS

Add to the Above Amounts for Taxpayers Aged 65 and Older or Meet the Blind Qualifications

Caution: Self-employed taxpayers generally must file in all circumstances

So, if you are not required to file and decide not to bother, you would be forfeiting any income tax withholding on wages you earned.

Other Pre-payments – You may have made 2021 tax payments but have forgotten about them, such as estimated tax payments or a 2020 overpayment you applied to your 2021 return. Surely you don’t want to forfeit those amounts.

Tax Credits – Even though you may not be required to file a return and the withholding was negligible enough not to worry about it, you may be entitled to more than just a withholding refund. Normally tax credits can only be used to offset income tax. However, there are some credits that are refundable and may provide you with a significant refund. Here are the details of those credits:

Earned Income Tax Credit (EITC) – The EITC provides a fully refundable credit for lower income taxpayers who have earned income (income from working) and can range from $519 to $6,728 for 2021. The amount you receive depends on your income, filing status, and how many children you have. Even eligible individuals without children may qualify for the EITC.
Child Tax Credit – For the 2021 tax year return only (unless Congress extends it) the tax credit is $3,000 per child under the age of 18 ($3,600 under the age of 6). (The credit is reduced for upper-income taxpayers.) The credit is fully refundable for those who are not required to file.
American Opportunity Tax Credit – This is a credit to help pay for college costs. To qualify, the taxpayer, spouse or dependent child must have been a student enrolled at least half time for one academic period during the year to qualify. The maximum credit is 100% of the first $2,000 of eligible expenses and 25% of the next $2,000 but only $1,000 is refundable.
Recovery Rebate Credit - Individuals who didn't qualify for a third Economic Impact Payment or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit based on their 2021 tax year information. If they're eligible.

If you were considering skipping filing your 2021 return, maybe you should reconsider. You will need to file a 2021 tax return even if you don't usually file a tax return to benefit from any of these tax benefits.

If you are an existing client and have questions, please give this office a call. If you have been trying to do your own tax return and would like professional preparation, we are here to assist you.

10 Must-Have Policies for 2022

Mon, 17 Jan 2022 15:41:31 GMT

Some laws require employers to provide information to employees via a written policy. Policies are also important for communicating company expectations and requirements. Here are 10 policies that are considered must-have for 2022:

#1: COVID-19

By now, many employers have written policies that address masks, vaccination, social distancing, and other safety measures to help prevent the spread of COVID-19 in the workplace. Employers should keep in mind that federal, state, and local governments have been rapidly adopting laws, regulations, and executive orders that may impact employer policies in these areas. Here are some examples:

A few states require employers to have a written policy/program on preventing the spread of COVID-19 and specify the elements the program must include.
Several states and local jurisdictions require masks for unvaccinated employees. Some require masks indoors regardless of vaccination status.
Federal, state, and/or local rules require certain employees to be vaccinated.
Several states have rules that prohibit employers from enforcing vaccine mandates, unless they provide certain exemptions.

In some cases, federal, state, and local rules may even conflict. Employers should consult legal counsel to discuss the impact of recent federal, state, and local rules on their COVID-19 policies and practices.

#2: At-will employment

This statement reiterates that, absent certain exceptions such as an implied contract or public policy, either you or the employee can terminate the employment relationship at any time and for any reason, as long as the reason is a lawful one. It's a best practice to prominently display this statement in the beginning of your employee handbook (except in Montana, where at-will employment isn’t recognized). Reinforce at-will status in your handbook acknowledgment form as well.

#3: Anti-harassment

A growing number of jurisdictions are requiring employers to maintain a written policy on preventing harassment in the workplace, including:

California (all employers)
Connecticut (employers with three or more employees)
District of Columbia (employers of tipped employees)
Illinois (bars, restaurants, hotels, and casinos)
Maine (all employers)
Massachusetts (employers with six or more employees)
New York (all employers)
Oregon (all employers)
Rhode Island (employers with 50 or more employees)
Vermont (all employers)
Washington (hotel, motel, retail, and security guard entities, as well as property service contractors)

Note: Maine and Massachusetts also require annual distribution of the policy.

Keep in mind that your state or local law may require specific information to be included in the policy, such as how employees may file complaints with the state or local agency.

Even if your jurisdiction doesn't require a written policy, it's a best practice to have one. In several additional jurisdictions, state and local agencies and/or case law recommends employers adopt a written anti-harassment policy.

#4: Nondiscrimination

Federal, state, and local laws prohibit employers from discriminating against applicants and employees on the basis of certain protected characteristics, such as age, race, sex, and religion, among others. The list of protected characteristics and the list of covered individuals continues to grow as states and local jurisdictions enact new laws and government agencies and courts take new positions on existing laws. Some jurisdictions require a policy addressing discrimination . Even in the absence of a requirement, it's a best practice to have a policy that:

Includes all characteristics protected under federal, state, and/or local laws.
Addresses who is covered by the policy, such as applicants, employees, interns, and contractors (if applicable).
Prohibits retaliation against employees for filing a complaint or participating in an investigation.
Stresses that all employment decisions are based upon one's qualifications and capabilities to perform the essential functions of a particular job, without regard to protected characteristics.
Governs all aspects of employment, including but not limited to hiring, selection, training, benefits, promotions, compensation, discipline, and termination.
Urges employees to report all instances of discrimination and offers multiple avenues for them to do so.
States that appropriate disciplinary action, up to and including immediate termination, will be taken against any employee who violates the policy.

#5: Employment classifications

It's a best practice to clearly define employment classifications , such as full-time, part-time, exempt or non-exempt since an employee's classification can dictate eligibility for benefits and overtime pay.

#6: Leave and time off benefits

These policies address company rules and procedures related to holidays, vacation, or leave required by law (such as sick leave, voting leave, family leave, and domestic violence leave). Several state and local jurisdictions recently enacted laws requiring leave for COVID-related reasons. Some leave laws may require a written policy. In general, these policies should cover who is eligible, what reasons qualify for leave, how much leave will be granted, how the leave will accrue and carryover (if applicable), whether the leave is paid or unpaid, how much notice employees must give before taking leave, continuation of benefits during leave, the procedures for requesting leave, recordkeeping and employer notice requirements, and reinstatement at the end of the leave. Check your state and local law to ensure all leave requirements are included in your employee handbook.

#7: Meal and break periods

A policy on meal and break periods informs employees of the frequency and duration as well as any rules or restrictions related to break periods. Rest periods, lactation breaks, and meal periods must be provided in accordance with federal, state and local laws. Check back next week for our Tip of the Week on break periods.

#8: Timekeeping and pay

A timekeeping policy informs employees of the method for recording time worked and the importance of accurately recording their time. With many employees working remotely and/or on flexible schedules, employers should ensure the policy meets their needs. Among other the things, the policy should direct non-exempt employees to record all of the time they work and expressly prohibit off-the clock work (however, if they do perform off-the clock work, you must pay them for this time). Require non-exempt employees to confirm their work hours at the end of each pay period and inform them that they should report any errors in their time record immediately. A policy on paydays should let employees know the frequency of paydays, the methods available for receiving pay, and any special procedures for when a payday falls on a holiday or when an employee is absent from work.

#9: Employee conduct, attendance, and punctuality

Attendance policies make it clear that employees must be ready to work at their scheduled start time each day and provide procedures for informing the company of an unscheduled absence or late arrival. It's also a best practice to have policies on standards of conduct, drug and alcohol abuse, disciplinary action, confidentiality, conflicts of interest, and workplace violence.

Pay particular attention to your drug and alcohol policy in light of the evolving landscape regarding marijuana. Many states currently permit medical marijuana, and several states also permit recreational marijuana use. While none of these laws require employers to allow employees to use, possess, or be impaired by marijuana during work hours or in the workplace, some states have employment protections for employees who use marijuana outside of work. With this in mind, check your state and local law and work closely with legal counsel to review your policy and determine your rights and responsibilities.

#10: Reasonable accommodations

Under certain laws, such as the Americans with Disabilities Act and Title VII of the Civil Rights Act, employers must provide reasonable accommodations to qualified applicants and employees with a disability, or with sincerely held religious beliefs and practices, unless doing so would cause undue hardship. Some states have similar requirements that apply to smaller employers, and some states and local jurisdictions have laws that require accommodations in additional circumstances, such as when an employee has a pregnancy-related condition. Additionally, some of these laws require employers to have a written policy on reasonable accommodations, and it's a best practice to have a policy even if it isn't required.

Conclusion: When drafting and reviewing your employee handbook, make sure your policies comply with all applicable federal, state, and local laws and are consistent with current best practices.

Strategic Preparation is Key to Selling Your Company

Sun, 16 Jan 2022 15:49:41 GMT

Many people dream of starting their own company, but if you’re one of the few who has turned their dream into reality, you know that it didn’t happen overnight. Making your business a success involved plenty of research, preparation, and hard work that you were happy to invest in. What few who are ready to move on realize is that selling requires almost the same amount of effort and planning.

Entrepreneurs intent on selling often want to move as quickly as possible: they may dread the emotional letdown and want to make a clean break, or they may be eager to move on to their next venture. Either way, the more preparation time you put in, the easier and more successful the process will be. Just as home sellers get a better price when they address maintenance issues and throw on a coat of paint before listing, your anticipatory activities will smooth the way for selling painlessly and profitably.

Where to start? You want to take a two-pronged approach, looking at what’s yours to make sure that you’re protected, and looking at the business as if you’re a potential buyer to ensure that everything is in order and is as appealing as possible. Here are our recommended steps:

Stay Tuned In to the Business
Once you’ve made the decision to sell your business, there’s a natural tendency to mentally check out. You need to guard against this, even as you focus on the steps you need to pursue to get the process started and look to your next venture. The success of your sale relies on the company operating at the top of its game, and if you’re distracted or have a loss of interest, that’s not going to happen. Put as much effort into the company’s success as you approach its last day as you did in its first days.
Make Your Books — and Everything Else — Meticulous
You may have all the numbers and figures in your head, but that’s no help to a potential buyer. They want – and need — to see the pertinent records, go over the books, and double-check to make sure that everything is running as swimmingly as you say it is. They also want to make sure no legal issues are lurking, or other surprise entanglements. Not only should you get caught up on your accounts, take the time to update all your other financials, get all equipment maintained, organize your inventory, and gather all pertinent paperwork into a clean package that you can present with pride. Doing so will paint a clear picture of your company as a good investment.
Ensure that Trademarks and Copyrights in Place
You’ve built a brand, but have you secured it? If you haven’t secured a copyright, patent, trademark, or whatever other protection is suitable for your business, your most valuable asset may end up in someone else’s hands. If you’ve been gliding along without the help of an attorney then it’s past due time to hire one – even if you’re about to walk away.
Establish Your Exit Strategy
Do you intend to just walk away once all the paperwork is signed, or do you want to continue to play a role in the business you created? There’s no right or wrong answer, but you need to figure it out before you start the sales process so you can present your plan as part of the package. Nothing will kill a deal faster than springing a previously unknown detail on a buyer whose plans don’t mesh with yours.

Along the same lines, you need to consider what your post-ownership plan consists of. If you’ve already lined up a new gig that provides financial stability then you’re all set, but if not then your deal may need to include details of deferred payments, stock options, maybe even a consulting fee, or other paid position for a period of time. You also need to consider your tax liability from any gains you realize from the sale. If your company qualifies as a qualified small business you may be able to defer the federal tax on your capital gains.
Take A Good Look from the Buyer’s Perspective
Once you’ve taken all of the steps to prepare for a sale and protect yourself, take a final hard look at what you’re putting on the market. Just as you’d walk through your house and give it a once-over before you have an open house, you need to scrutinize the way the company’s assets look from a potential buyer’s perspective to see if there’s anything else you could have done to optimize or reveal its appeal.

In addition to each of these steps you can pursue on your own, it is worth considering bringing in an expert to help you with valuation and the sales process. Not only will they guide you through what can be a challenging process, but they will also ensure that you haven’t overlooked any important legal requirements.

Now's the Time to Brush Up Your Bookkeeping Habits

Fri, 14 Jan 2022 10:01:25 GMT

Are you the type who makes New Year’s resolutions? Though the vast majority of those who pledge self-improvement focus on losing weight or exercising more, deciding to brush up on your bookkeeping habits may actually be smarter – and easier to stick to. If you’ve ever found yourself shaking your head at your own process, the beginning of the year is the perfect time to correct inefficiencies and counter oversights. There’s no reason to overhaul everything; just making changes for how you go about things in the future will make a significant difference. Here are some of our top tips for small steps that will go a long way towards improving your operations in 2022.

Get away from hard copies
One of the top reasons people give for not going paperless is that they have too many paper records to convert. The truth is that you can keep your paper files and still switch over to digital. All you have to do is check the box to convert to paperless as you log on to each of your accounts. You’ll be amazed at how much lighter you feel without account statements filling your snail mail mailbox, and how easily you can access information with the ‘find’ function of your computer.
Where autopayment is available, activate it
Why should you go through the process of tracking and paying monthly bills manually? As long as you have plenty of cash in your payment account you can set yourself up with autopay and move on to more important tasks.
Separate your business accounts from your personal accounts This is one of the top pieces of advice for every business owner, and if you haven’t done it previously then now is the time. Things are going to get even more complicated with the changes in tax law that take effect in 2022, so make it easier on yourself by setting up separate accounts.
Create a recurring monthly date for reviewing your bookkeeping and accounting numbers
Think about how many times you’ve found yourself confronted with some kind of bookkeeping emergency or question that has stopped you in your tracks and sent you scrambling for answers. If you set a date with yourself once a month that is specifically for reviewing your financial issues, you’ll avoid the sense of urgency and enter the discussion prepared.
Anticipate and prepare for your tax needs
If you find yourself worrying about how you’re going to pay your tax bill each year, it means that you’re not paying attention. If you know how much you’re making then you have a good idea of how much you’re going to owe, and you should be setting those funds aside now so that you’re not stressed later.

If a fresh start sounds good but you need help, we’re here for you. Give us a call to learn how our comprehensive bookkeeping and accounting services can make your life easier.

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