Monthly Archives: November 2013

Income Statement Shows Profit, but There is No Cash…Why?

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Business owners who feel tight on cash are usually surprised when their income statements show substantial profit.  If the business is profitable, where is the cash?  The short answer is that the cash is somewhere in the business such as in inventories, in accounts receivable or in fixed assets; or it was distributed to the owners.

The longer answer is that the income statement follows tax or accounting rules and profit/loss usually does not reflect the cash flows of the business.  Unfortunately, business owners are taxed on the profit in their business, and not on the true cash flows.

This post will explain three very common scenarios where business owners have profit but a low cash balance.

In the following examples, assume the business owner has $0 cash at the beginning of each example and that the business is not a C corporation.

Example:  John is a builder.  He sells a house at a $20,000 profit and uses the $20,000 to buy more land.  John again has no cash.  He has $20,000 in a land asset.  John doesn’t think he has profit because he has no cash.  Unfortunately, the $20,000 invested in land is not deductible until the land is sold and John must pay tax on the $20,000 profit from the sale of the house.  John is in a bad position because he now has no cash to pay taxes.  Business owners who have profit have to make sure they set aside funds to pay taxes before using the profit to purchase more inventory or fixed assets such as equipment. 

Example 2:  Joan is a successful architect.  She has $150,000 profit in her architectural firm.  She has $150,000 in the bank account.  She then takes a distribution of $80,000 from the business.  Joan is surprised that she has $150,000 in profit when she only has $70,000 in the bank.  The reason is that the distribution is not a tax deduction to the company.   Joan will have to pay tax on the $150,000 profit.  The money for the distribution either came from current or prior years’ profit (that was taxed in the current or prior year), a tax-free return of amounts invested in the company, a capital gain to the extent the distribution exceeds accumulated profit and amounts invested.

Example 3:  Tim has a small manufacturing business.  He has profit of $80,000 and uses all of the profit to pay down debt.  While Tim has no cash at the end of the year, he will have to pay tax on his $80,000 profit even though he has no cash because debt paydowns are not deductible.  Business owners are surprised that paying down debt is not deductible because it is a cash outflow.  When a loan is taken out, the loan proceeds are not taxable to the borrower because they have to be paid back.  When the business owners uses the loan proceeds for business expenses, the business expenses paid with borrowed funds will be deductible.  Later, when the debt is paid down, the business owner does not get a second deduction.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Tax Credit to Offset Health Insurance Premiums

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Beginning in 2014, certain individuals will qualify for a Premium Assistance tax credit to help them pay for health insurance premiums.  The credit is calculated on a monthly basis for individuals and families who have a qualified health plan, which is a bronze plan or better.

Ultimately, what the Premium Assistance credit does is set a maximum percentage of household income that an individual or family will have to pay for health insurance.  The maximum percentage is based on the individual’s household income compared to the poverty level as follows:

Income
Tier

Initial
Maximum Percentage

Final
Maximum Percentage 

Up to 133%

2.0%

2.0%

133% up to 150%

3.0%

4.0%

150% up to 200%

4.0%

6.3%

200% up to 250%

6.3%

8.05%

250% up to 300%

8.05%

9.5%

300% to 400%

9.5%

9.5%

Thus, for example, someone who is at 150% of the poverty level wouldn’t have to pay more than 4% of her household income for health insurance premiums.  The maximum percentages are on a sliding scale—for example, someone who is at 175% of the poverty level is in the middle of an income tier, so the maximum percentage for this person would be 5.15% (the midpoint between 4% of 6.3%.)  To be eligible for the credit, taxpayers must be between 100% of 400% of the poverty level.  Taxpayers under 100% of the poverty level will be eligible for Medicaid.  In states that have expanded Medicaid, individuals may be eligible for Medicaid if they are at 138% of the poverty level or less.

The poverty level for 2013 is $11,490 plus $4,020 for each additional family member.  So a husband and wife with two kids would be at the poverty level if their household income is $23,550 ($11,490 plus $4,020 times 3).  This family would be eligible for the Premium Assistance credit as long as their household income is 400% of the poverty level or less.  400% of the poverty level for this family would be $94,200.  At 400% of the poverty level, the maximum percentage of household income they would have to pay for health insurance premiums is 9.5%.

Taxpayers can calculate the Premium Assistance credit at the end of the year on their personal tax returns and receive a refundable tax credit.  Alternatively, taxpayers may estimate the Premium Assistance credit during enrollment for the year and receive advance payment of the tax credit—however, the credit amounts would be paid directly to the health insurer, and taxpayers would pay the net amount of the premium after the credit.  However, if a taxpayer receives an advance of the tax credit, a reconciliation will have to be done at year end and the taxpayer may owe some of the tax credit back or be entitled to an additional tax credit based on actual income amounts that will be known at year end.

The Applicable Benchmark Plan

The amount of the Premium Assistance credit is based on the premiums for the applicable benchmark plan.  The applicable benchmark plan is the second lowest cost silver plan, regardless of which plan the taxpayer ultimately enrolls in.  If a taxpayer actually enrolls in a bronze plan, the taxpayer’s actual maximum percentage of income to pay health insurance premiums will be lower than the maximum percentages listed in the above table.  This is because the tax credit is based on excess of the silver plan over the maximum percentage rather than the lower premium cost of the bronze plan over the maximum percentage.

Below are examples of the amounts of Premium Assistance tax credits for individuals at different income levels and with different family sizes.  The Silver Plan premium is based on amounts from Healthcare.gov.  While the credit is computed monthly, the amounts in the tables are based on annual amounts.

Single with no kids

(A)

Household

Income Amount

(B)

% of Poverty Level

(C)

Maximum % of Income

(D)

Maximum Premium Cost

A times C

(E)

Silver Plan Annual Premium

 

Annual Credit Amount

E minus D

$20,000 174% 5.15% $1,030 $2,600

$1,570

$30,000 261% 8.37% $2,511 $2,600

$89

$50,000 435% Not Eligible (over 400% of poverty level)      

 

Single with 1 Kid

(A)

Household

Income Amount

(B)

% of Poverty Level

(C)

Maximum % of Income

(D)

Maximum Premium Cost

A times C

(E)

Silver Plan Annual Premium

 

Annual Credit Amount

E minus D

$20,000 129% 2% $400 $5,000

$4,600

$30,000 193% 5.98% $1,794 $5,000

$3,206

$50,000 322% 9.5% $4,750 $5,000

$250

$70,000 451% Not Eligible (over 400% of poverty level)      

 

Married with no kids

(A)

Household

Income Amount

(B)

% of Poverty Level

(C)

Maximum % of Income

(D)

Maximum Premium Cost

A times C

(E)

Silver Plan Annual Premium

 

Annual Credit Amount

E minus D

$20,000 129% 2% $400 $5,376

$4,976

$30,000 193% 5.98% $1,794 $5,376

$3,582

$50,000 322% 9.5% $4,750 $5,376

$626

$70,000 451% Not Eligible (over 400% of poverty level)      

 

Married with 1 kid

(A)

Household

Income Amount

(B)

% of Poverty Level

(C)

Maximum % of Income

(D)

Maximum Premium Cost

A times C

(E)

Silver Plan Annual Premium

 

Annual Credit Amount

E minus D

$20,000 102% 2% $400 $7,440

$7,040

$30,000 154% 4.18% $1,254 $7,440

$6,186

$50,000 256% 8.22% $4,110 $7,440

$3,330

$70,000 358% 9.5% $6,650 $7,440

$390

$90,000 461% Not Eligible (over 400% of poverty level)      

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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