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Taxes Need Year Round Attention

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tax planningGiving your taxes your full attention just once a year isn’t the best business or individual strategy.

Experts suggest that a year-round approach is better for your finances, unless of course you like paying more in taxes than you must!

Numerous tax experts agree that addressing your tax liability effectively requires planning throughout the year. Those business owners who reap the most benefits consider their taxes year-round, rather than waiting to focus on tax payments just a few weeks before the filing date.

With proper tax planning as part of your wealth strategy, you and your CPA will devise a plan to help you not only make money, but keep it as well. The IRS code is partially written on how to file and pay taxes, yet the majority is written on how to legally reduce taxes. This allows you to make better investment decisions.

A typical small business qualifies for roughly a dozen tax deductions. For example, you may be able to claim deductions on the following:

  • Cars operated for business purposes
  • Business-related travel and entertainment expenses
  • Purchases of office supplies, furniture, equipment, and software programs
  • Telephone expenses
  • Contributions toward insurance policies, retirement plans, and pension funds
  • Home office
  • Hiring children
  • Cost segregation

It’s surprising how many small businesses never take advantage of these (and other non-listed) deductions, mainly because they suffer from the “tax-planning-happens-but-once-a-year” syndrome. To fully benefit from these deductions, it’s important to maintain your expense records throughout the year.

It’s also important to meet with your CPA on a regular basis to discuss planning and set up proper strategies for your situation. There are advanced tax strategies that can be uncovered when you and your accountant can sit down and review all details.

Your goal should be to reduce your tax liabilities by retaining records of your purchases and determining the proportion of business costs in combined expenses. By monitoring your expenses closely all year, you can analyze each expense for its tax impact as it’s made. Additionally, smart business owners should contemplate three key steps to tax planning:

1. Invest in the most effective tax and accounting record tools for your business. Whether it’s spending a few dollars on journals or tax books with a set of refill sheets to do manual tracking (or utilize excel) or investing in the latest online software applications, you will benefit from more rigorous and accurate recordkeeping.

Sure, the initial investment could be significant, but regular monitoring should facilitate tracking expenses and making advance payments, which will save you money in the long run. This tips goes for both individuals tracking their personal finances and businesses needing an accounting software and remember businesses can deduct these expenses as they are necessary.

2. Determine when you need professional tax tips and planning advice. At times you will be able to justify paying for professional tax services, particularly if you need advice on unclear requirements in tax laws that could be in your favor.

To prevent unnecessary complications and aggravations, you must avoid violating tax laws that may be applicable to your small business. If you are unsure of these laws, using the tools at your disposal, such as current software and online recordkeeping, and complementing those capabilities with professional advice when needed, can help you keep your taxes under control.

You will know when you need help. Our CPA’s and tax preparers are trained to also know when you may require additional planning. When going through your tax information for preparation it’s not a bad idea to ask questions to understand where opportunities lie to save in taxes.

3. Establish year-round tax planning goals. A good tax-planning strategy will help you accomplish some of these goals:

  • Reduce the amount of taxable income
  • Claim any available tax credits
  • Lower your tax rate
  • Control the time when taxes must be paid
  • Avoid the most common tax-planning mistakes

Plus, a year-end review at the end of your fiscal year or “busy season” can be most effective if you’ve maintained clear records and an understanding of your financial position throughout the year.

When you meet with BGMF CPAs we may recommend monthly, quarterly or annual tax planning sessions to ensure you are taking advantage of every tax saving opportunity available. We set this based on your unique situation and whether you or your business needs planning more often rather than once per year.  Waiting until tax filing season may be too late to take advantage of the various tax savings strategies.

Click here to schedule a consultation to learn the best ways to evaluate the impact of taxes throughout the year.

Family Business and Next Generation

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family business next generationCreating a business that can be passed down to the next generation is a great way to build a legacy in the family and set up future generations.

Having your children work in the family business is a great way to teach your kids about work ethic and money management, and to kick-start their retirement or college savings plan.

It can also enable you to pay your children resulting in less taxes, providing a great tax planning strategy.

However, is having your children work in your family-owned business a blessing or a curse? Mixing business with pleasure and doing so with family can go from an exciting event to a decision you may regret (but not always).

Below are five tips for making it a blessing and preventing it from being curse:

Have them work elsewhere for at least five years. They need time to mature, becoming their own individuals, and to gain confidence learning and doing things as distinct human beings rather than just children of successful parents. Kids need to learn how to work, to be punctual, to earn their own money and to be held accountable. Everyone wins when potential successors have excellent training and gain skills and confidence outside the nuclear family.

Consider this scenario: A family-owned restaurant in a small town occasionally has three generations working together on a Friday night. The children are under the age of 16. Assuming that child labor laws have been taken into account, the family is content that they are passing on a tradition and family trade. The kids work one or two nights during the weekend.

In this example, the family is limiting the number of hours, and their expectations are reasonable. It’s a way for children to learn the family business and helps them gain self-respect. Indeed, one adult who remembers working with his mother in a greenhouse when he was 12 and 13 recalls that the job was hot, dirty and exhausting. However, he recalls he got paid for the work he did, and it gave him a greater appreciation for the work his parents did to support their family.

Understand generational differences. Today’s young people are far more likely to want to work to live rather than adopt their parents’ “live to work” attitude. That’s why your adult children don’t want to work 80-hour workweeks. Younger children and other employees are most likely looking for a different workplace experience.

With that said, if they have incentive to see the family business succeed, they will put the time and effort necessary to ensure this happens. Thereby, taking pride in the family business.

Give psychometric assessments to make their personalities/capabilities fit their jobs. One child may be temperamentally unsuited for a position demanding detail and strict deadlines; he or she may be more of a big-picture, laissez-faire personality. Assessing such things will go a long way to improving both business function and family harmony.

Hold them accountable, but not to an unreasonable standard. Give your kids crystal-clear roles and responsibilities and regular reviews so they know whether they’re living up to their job descriptions. The biggest morale killer in small businesses is under-performing or dysfunctional family members who are allowed to meander through various roles with virtually no accountability and to inflict themselves on others in your organization. In that case, pruning the family tree almost always results in improved business productivity.

Communicate formally and regularly with a third-party facilitator. Virtually every family employee thinks he or she works harder and contributes more than anyone else and stews over this. Family businesses have a greater need for formal communication to resolve perceived contribution issues, especially if you decide a family member is ill-suited to working at your company. You need to be able to discuss volatile topics constructively and productively. Seek the help of a talented facilitator to get the most from your family business.

It can be a wonderful experience for all involved to have your children work with you. Just remember that it’s a delicate balancing act that needs your attention.

BGMF CPAs offers consulting services to assist in situations surrounding family businesses.  Contact our team today to see how we can help ensure your family business is set up for future generations.

Sales Tax Ruling and Nexus

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Sales tax nexus wayfairThe below sales tax ruling and nexus discussion will help you determine if it is time for your company to decide if it has potential compliance requirements if it does business in multiple states.

Nexus is an important and confusing topic all in one. It relates to where your business is being conducted and now has added complexity due to a recent court decision that impacts sales made from one state to another.

Each state can be different with regards to nexus, sales tax, income tax and other business matters so it’s important to understand your company’s exposure to doing business between states.

Wayfair…

The U.S. Supreme Court’s decision in South Dakota v. Wayfair will allow states to mandate a sales tax for items purchased online from out-of-state retailers.

On June 21, 2018, the U.S. Supreme Court issued its opinion on South Dakota v. Wayfair. This case is a landmark nexus (sufficient physical presence) case for sales and use tax that will have implications for many online sellers and multi-state businesses.

Prior to the case, a company had to have physical presence (defined by each state) whether it be an employee in the state, a sales rep, a location or other factors that would represent the company should register and comply with tax regulation in that particular state. With the advances in technology, selling online had the states wondering who was responsible for taxes causing a lot of debate and confusion.

In a 5-4 decision, the Court ruled that a state could require an out-of-state-seller to collect sales or use tax on sales to customers in that state, even though the seller lacks an in-state physical presence.

The Wayfair decision affects companies doing business in thousands of state and local tax-collecting jurisdictions across the country. The immediate impact will be on sellers with a significant virtual or economic presence in a state that asserts economic nexus.

Sellers delivering taxable products or services into a state with economic nexus will need to determine if they surpassed the dollar amount or transaction volume threshold for establishing nexus with that state. Sellers should be prepared for states to adopt and aggressively enforce expanded nexus provisions, although future legal challenges or Congressional action could limit the scope of the Court’s decision.

We expect state revenue departments to continue issuing guidance regarding the South Dakota v. Wayfair decision, and we will continue to follow those developments closely. There are thresholds provided in each state and it is important to understand that specific state’s regulations in regards to nexus and tax compliance.

If you would like to discuss how the decision might affect your business, please contact us.

Tax Planning for College

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college tax planningIt is never too early to prepare and go through the process of tax planning for college.

It’s no secret that a college education is expensive. Average annual charges for tuition, fees, and room and board at four-year public colleges and universities stood at $20,770 for in-state students and $36,420 for out-of-state students (this was averages for the 2017-2018 school year.)

Average charges were $46,950 at four-year private colleges and universities.1 Based on historical trends, these costs are likely to increase in the future.

Parents who are intimidated by these figures should realize that the expenses at most colleges and universities are generally less than the quoted prices. There are scholarships, grants, and work-study programs available that can soften the financial impact of a college education.

Parents should take the time to look into the various tax benefits that can help reduce the costs of sending a child to college. Getting an early start on tax planning for college expenses can help reduce some of the anxiety surrounding the whole issue of trying to figure out how to pay for college. Here are some areas worth further investigation.

Savings Programs

Parents have several education savings opportunities that come with built-in tax benefits. Section 529 plans have grown in popularity over the years, but Coverdell education savings accounts also offer valuable tax benefits.

Section 529 Savings Plans

Section 529 college savings plans* are specifically designed for educational saving. You can invest a little at a time or contribute a larger lump sum, whatever approach works best for you. You choose how you want your contributions invested; your plan investments are then professionally managed. These plans offer several features that parents may find appealing:

  • Investment earnings accumulate tax deferred and won’t be subject to federal income taxes when withdrawn for your child’s qualifying educational expenses. (Excess withdrawals are subject to tax and a potential 10% penalty.)
  • Some states offer their residents tax incentives for investing in an in-state plan. For example, Ohio gives up to a $4,000 deduction for each child’s 529 plan contributed to during the year.
  • As a parent, you retain control of the money in the account even after the child turns 18.
  • If your child does not attend college or deplete the fund, you can change the account beneficiary to another qualifying family member without losing tax benefits.

Coverdell Education Savings Accounts

Annual contributions to these accounts are limited to $2,000 per child. This maximum phases out (is gradually reduced to zero) for taxpayers with modified adjusted gross income (AGI) between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers).

Your contributions accumulate tax deferred at the federal level and earnings are tax-free when used for qualified educational expenses such as tuition, room and board, and books. If you make withdrawals from the account for non-educational expenses, the earnings portion of the withdrawal may be subject to federal income tax and an additional 10% penalty.

IRAs

Another college planning option may be to discuss if opening a Roth IRA would make the most sense. Roth IRA contributions are post tax and offers special withdrawal rules for higher education.

Similar to other college savings plans, the earnings will grow tax-free and with a Roth you will have more flexibility on how the money is utilized (for example, if your child doesn’t need the money for college you can continue to invest in the Roth for the future).

Roth IRAs do not get tax benefits similar to other college savings plans and you will want to understand how financial aid views a Roth IRA for planning purposes.  Roth IRA contributions have income limitations as well that you should know.

It’s best to sit down with your advisors to determine which vehicle makes the most sense for your situation.

Scholarships

Young adults who demonstrate high academic promise or who possess certain desirable skills may receive scholarships that can defray a percentage of the cost of attending college. Scholarships are generally exempt from income tax if the scholarship is not compensation for services and is used for tuition, fees, books, supplies, and similar items (and not for room and board).

Tuition Tax Credits

A tax credit gives you a dollar-for-dollar reduction against the taxes you owe the IRS. The following two education tax credits can help eligible parents alleviate the costs of educating a child.

American Opportunity Tax Credit (AOTC)

This credit is worth up to $2,500 per year for each eligible student in your family. It’s for the payment of tuition, required enrollment fees, and course materials for the first four years of post-secondary education. The credit is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000. Were the credit to exceed the amount of tax you owe, you may be eligible for a refund of up to 40% of the credit. The available credit is phased out for single taxpayers with modified AGI between $80,000 and $90,000, and for married couples with modified AGI between $160,000 and $180,000.

Lifetime Learning Credit (LLC)

This credit can be as much as $2,000 a year (per tax return) for the payment of tuition and required enrollment fees at an eligible educational institution. It is calculated as 20% of the first $10,000 of expenses. You cannot claim the credit for a student if you are claiming the AOTC for the student that year. Unlike the AOTC, qualified expenses for the LLC do not include academic supplies and no portion of the credit is refundable. The LLC is phased out (in 2018) for single taxpayers with modified AGI between $57,000 and $67,000, and for married couples with modified AGI between $114,000 and $134,000.

Student Loan Interest Deduction

A tax deduction lowers your tax liability by reducing the amount of income on which you pay tax. You can deduct interest on qualified loans you take out to pay for your child’s post-secondary education. The maximum deduction is $2,500 per year, but it phases out for taxpayers who are married filing jointly with AGI between $135,000 and $165,000 (between $65,000 and $80,000 for single filers). The deduction is available even if you don’t itemize deductions on your return.

*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

College Funds Held in Each Account

529 Plans 30%
General Savings Accounts 22%
Investment Accounts 14%
Checking Accounts 8%
Prepaid State Plan 8%
Certificate of Deposit 5%
Other 13%

Don’t put this off until it’s too late. Set up a time to talk with one of our advisors to get started on the right path for tax planning and college.

Source/Disclaimer:

1 Trends in College Pricing 2017, The College Board, 2017

Rental Real Estate and Taxes

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real estate taxationInvesting in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Because BGMF CPAs provides tax, accounting and advisory services to real estate investors, flippers, developers, realtors and other areas of real estate, we will focus an entire category of our blog articles to real estate to help you along your business and investment path.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

There is a category that more difficult to qualify for and that is of the Real Estate Professional. We will not get into the criteria and discussion in this post, but will dedicate an entire post to this aspect of real estate.

Selling the Property

A gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.

Allow us to assist you with a projection of both the cash flow from the sale and the taxes you’ll pay in any potential gain.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.

This is just the start to the conversation surrounding real estate, taxes and anything associated with this business/investment. Sit down with one of our CPA’s today to discuss real estate and how we can work together to ensure you maximize your investments in real estate.

Know What Small Business Insurance Coverage is Needed

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There is no lack of options when it comes to insurance for your small business. Not every business needs every kind, but you should know what’s available.

Our team at BGMF CPAs are not insurance agents, however it is an area we help clients to determine which small business insurance coverage is necessary through proper review and analysis .  It allows us to provide you another point of view given our experience and knowledge.

Have you thought about the insurance your small business might need? Whether it’s a one-person outfit you run out of your home or a family corporation with dozens of employees, you need to protect yourself and your company.

Review the following list to see what might apply to you.

  1. General liability insurance — Even for home-based companies, liability insurance tops the list. The policy both defends against and covers damages for alleged bodily injury or property damage to a third party by you, your employees, or your products or services.
  2. Property insurance — This is for your building or business personal property of office equipment, computers, inventory or tools. Consider a policy to protect against fire, vandalism, theft and smoke damage. Think about interruption/loss of earnings insurance as part of the policy to protect earnings if your business is unable to operate.
  3. Business owner’s policy — This packages all required coverage a business owner would need, including business interruption, property, vehicle, liability and crime insurance. You have a say in what you want to cover in a BOP, which often costs less money as a package than if coverage were bought individually.
  4. Commercial auto insurance — Protect your firm’s vehicles that carry employees, products or equipment. You can insure work cars, SUVs, vans and trucks from damage and collisions. If employees drive their own cars on company business, you should have non-owned auto liability policies to protect your company in case your employee doesn’t have enough coverage. Non-owned auto insurance can be part of your BOP package.
  5. Workers’ compensation — This provides insurance to employees who are injured on the job, and it includes wage replacement and medical benefits. Employees therefore forfeit the right to sue the employer. This then protects you and your firm from legal complications. State laws vary, but they typically require workers’ comp if you have W-2 employees. Penalties for noncompliance can be very stiff.
  6. Professional liability insurance — Also known as errors and omissions insurance, this coverage in the form of defense and damages is provided for failure to render or improperly rendered professional services. This insurance is applicable for such professionals as lawyers, accountants, consultants, notaries, real estate agents, insurance agents, hair salon owners and technology providers.
  7. Directors and officers insurance — This coverage protects against actions by directors and officers that affect the profitability or operations of your company.
  8. Data breach — If you store sensitive or nonpublic information about employees or clients on your computers and servers or as paper files, you’re responsible for protecting that information. For electronic or paper breaches, the policy protects against loss.
  9. Life insurance — This provides money to beneficiaries in the event of an individual’s death. You pay a premium in exchange for benefits. This insurance gives peace of mind, allowing you to know that your family/friends will not be burdened financially when you die. Although technically this is not business insurance, if you are essential to a business you own, you’ll want this to protect your family.

You, as a business owner, have been exposed to risks from the day you opened the company. One lawsuit or catastrophic event could be enough to wipe out your business. Fortunately, you have access to a wide range of insurance to protect your company against danger. Call us, and we can help you sort through your choices.