Monthly Archives: January 2018

Is Your Hobby a Business?

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Is your activity a business or a hobby? It’s important to know because if the IRS views your activity as a hobby rather than as a business, your tax deductions for business-type expenses are subject to certain limitations.

Business Versus Hobby

To qualify as a business, an activity must be conducted for the primary purpose of making a profit. Factors that are considered in determining whether you have a profit-making objective include:

  • How the activity is conducted
  • Your expertise and that of any advisors
  • The time and effort put into the activity
  • Whether you expect that assets used in the activity will appreciate in value
  • Your success in other similar or dissimilar activities
  • Your history of income/loss with respect to the activity
  • The amount of any profit
  • Your financial status
  • The presence of personal pleasure or recreation

Generally, the IRS presumes that an activity qualifies as a business if it shows a profit for three out of the last five years.

What’s Deductible?

If your activity is considered a hobby, two rules limit the amount of expenses you can deduct. First, your deduction for hobby expenses (such as rent and advertising) cannot exceed the activity’s gross income. So if your hobby income is $5,000 but your expenses are $6,000, you may take only $5,000 in expenses. You may not use the additional $1,000 to offset other income.

Second, hobby expenses are deductible only to the extent they (when combined with other miscellaneous expenses) exceed 2% of your adjusted gross income (AGI). So in the example above, if your AGI was $100,000, you would be able to deduct only $3,000 of the $5,000 in expenses.

Running your activity in a businesslike way can help you avoid the hobby-loss restrictions. Connect with our team today for all the latest and most current tax rules and regulations.

Are Your Social Security Payments Taxable?

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Are your social security payments taxable? They may be. The IRS’s rules for taxing Social Security benefits could require some studying on your part.

If you’ve received Social Security benefits for more than a year, you probably already know the answer to this question. But if you started receiving those government-issued checks or direct deposits in the last year, now’s the time to find out.

As you know, many IRS rules are absolutely cut-and-dried. But there are many others with exceptions, and this is one of them. Numerous factors are involved in determining whether your Social Security benefits are taxable.

Here’s some of what the IRS considers. (To get the whole picture and find out how these regulations apply to you, contact us.)

This worksheet displays the formula you can use to determine whether your Social Security Benefits may be taxable. It doesn’t tell the whole story, though. You may owe tax on only part of your payments.

By now, you should have received a Form SSA-1099, the Social Security Benefit Statement. Using the information reported there, you can use the IRS formula that helps determine whether your benefits may be taxable (it’s possible that they won’t be). The worksheet above illustrates this.

If it looks like your benefits are taxable, you’ll have to determine how much of your distributions are affected. The IRS looks at the combination of your Social Security benefits and your other income. The higher that number is, the more likely it is that you’ll have to pay taxes on a larger percentage of your benefits.

Complex Calculations

In most cases, the maximum taxable portion of your Social Security benefit distributions is 50 percent. You could, though, be taxed on up to 85 percent in one of two scenarios:

    • You add one half of your benefits to the total of all your other income and come up with more than $34,000 ($44,000 if married filing jointly).
    • Your return will report that your status will be married filing separately and you lived with your spouse for any length of time during the year.

Now comes the tricky part: calculating exactly what percentage of your Social Security benefits is taxable. Your 1040 or 1040A instructions should contain a very complex worksheet that can help you. But this, like any other element of your income tax return, must be absolutely correct, or you’ll be receiving post-filing correspondence from the IRS.

It’s no small task to do the calculations and reporting required to find out what–if any–percentage of your Social Security benefits are taxable.

There are many exceptions to the rules and formulas we’ve discussed here. And you must fully understand them to come up with the right answer. This will involve poring over IRS instructions that may be difficult for you to decipher.

Start Now

If you know that you’ll start receiving Social Security benefits in 2018, it would be a good idea to start thinking soon about how this will affect your overall income tax obligation. We always advise year-round tax planning. Such an approach not only helps you avoid unpleasant surprises at filing time – it may also help you take action before the end of the year to minimize what you owe. We’d be happy to meet with you and get you started on better, smarter preparation for taxes.

Be Proactive when it Comes to Business Issues

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Your manager broke her leg playing softball and will be out for a month. Your receptionist’s husband landed his dream job, but it’s in a neighboring state so they’ll be moving. When you own a small business, learning to expect the unexpected comes with the territory. With one important exception: You don’t have to stand idly by and wait for something to disrupt your finances. You can be proactive with these troubleshooting tips.

Watch Your Numbers

You can monitor your company’s financial health, spot developing problems, and improve performance by reviewing key ratios derived from the numbers on your financial statements. Taken together, these ratios help paint a picture of your company’s financial well-being.

At times, you might dwell on problems in one particular aspect of your business. But don’t ignore the rest. If you’re not seeing the big picture, you might not spot trouble in other areas. For example, if your profit margin is falling, you could become so focused on trying to find a solution that you fail to notice that several of your biggest customers haven’t sent a payment lately and a cash flow problem is brewing.

Watch Your Assets

Always try to make the most of your assets. If you carry inventory, keep your eye on turnover rates. Slow inventory turnover can strain your cash flow. Figure out how many days’ worth of product you’d ideally like to have on hand, and adapt your purchasing to meet that goal. Also, check your fixed assets. If you have equipment that’s not being fully utilized, you may be able to repurpose it. If not, it may be time to sell or donate it.

Watch Your Debt

It’s practically impossible to operate a business without taking on at least some debt. Debt itself isn’t a problem, as long as you keep it under control. A high level of debt can eat up your cash, cut into your profits, and reduce the return you’re getting on your investment in the company — and that’s definitely trouble.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

How to Follow the Rules when Writing off Bad Debts

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In any economic environment, businesses typically have a percentage of customers who don’t pay their invoices. Here are some tax guidelines.

Cut Your Loss

If a customer or client owes your business money you can’t collect, you might be able to claim a bad debt deduction on your business return. You must be able to show the debt is partially or totally worthless. This may be the case if you have taken reasonable steps to collect a debt and there is no longer any possibility you will receive payment. Business bad debts typically arise from credit sales to customers.

Timing Is Critical

The tax law doesn’t allow a deduction for any part of a debt after the year in which it becomes totally worthless. To ensure you don’t miss out on bad debt deductions this year, review your records carefully to pinpoint any potentially worthless receivables you may still be carrying on the books. Make sure you carefully document your failed collection efforts in case the IRS challenges the bad debt deduction.

Note that bad debt deductions generally aren’t available to businesses that use the cash method of accounting. To deduct a bad debt, you must have previously included the amount in your income. Since cash-method taxpayers don’t report income until payment is received, no deduction is allowed for uncollectible amounts, even if the money is owed to you for services you performed.

To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.

Exemptions from the Penalty for Not Having Health Insurance

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People who do not have qualifying health insurance are subject to a penalty under the Affordable Care Act.  The individual mandate was repealed by the Tax Cuts & Jobs Act; however, the repeal does not take effect until after December 31, 2018.  It still applies to the 2018 tax year for which tax returns will be filed in the next several months.  Fortunately, a number of exemptions exist that protect individuals from being subject to the penalty.  These exemptions include:

  • Members of religious sects recognized by the Social Security Administration who have a religious conscience exemption
  • Members of health care sharing ministries
  • Incarcerated individuals, other than those who are incarcerated pending the disposition of charges
  • Members of federally recognized Indian tribes
  • Individuals qualifying for services through an Indian health care provider or the Indian Health Service
  • Individuals with short coverage gaps of two months or less. An individual is treated as having coverage for a full month if she is covered for at least one day during a month.
  • Individuals whose household or gross income is below the threshold for having to file an income tax return
  • Citizens living abroad and certain noncitizens
  • Individuals who are ineligible for Medicaid solely because the state in which they reside did not participate in Medicaid expansion
  • Individuals with household income below 138% of the applicable year federal poverty line for their family size who reside in a state that did not expand Medicaid coverage
  • Individuals enrolled in certain Medicaid programs that are not Minimum Essential Coverage
  • Individuals who could not afford coverage based on their actual household income
  • Individuals who could not afford coverage based on their projected household income.
  • Individuals in families where the aggregate cost of self-only coverage for two or more employed individuals is unaffordable and the cost of employer-sponsored coverage for the entire family is unaffordable

The General Hardship Exemption

In addition, individuals who qualify for a general hardship exemption will be exempt from the penalty.  Federally facilitated and federal partnership marketplaces may consider the following circumstances as keeping an individual from obtaining coverage under a qualified health plan:

  • Becoming homeless.
  • Being evicted or facing eviction or foreclosure.
  • Receiving a shut-off notice from a utility company.
  • Recently experiencing domestic violence.
  • Experiencing the death of a close family member.
  • Experiencing a fire, flood, or other natural or human-caused disaster that results in substantial damage to the individual’s property.
  • Filing for bankruptcy.
  • Incurring unreimbursed medical expenses that resulted in substantial debt.
  • Experiencing unexpected increases in essential expenses due to caring for an ill, disabled, or aging family member.
  • Claiming a child as a tax dependent when that child has been denied coverage in Medicaid and CHIP, and another person is required by court order to provide medical support to the child.
  • As a result of a marketplace appeals decision, being determined eligible for (1) enrollment in a QHP, (2) lower costs on monthly premiums, or (3) cost-sharing reductions for a period of time during which the individual was not enrolled in a QHP through the state marketplace.

State-based marketplaces can use the same criteria, but have the flexibility to develop their own criteria, as long as they meet the requirements in the HHS regulations.

 

Get Your Business Costs Under Control Today

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Increasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort, business costs are often very ripe for a quick trimming. Here are some possibilities.

Supplies and Other Purchases

Usually in any business, relatively few items represent a very large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by making sure you always bid out significant purchases or by more actively seeking less expensive alternatives.

For many companies, inventory carrying costs are a very significant expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and Other Services

The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage.

Look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you are not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash Management

To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts.

On the receiving side, deposit all receipts daily. And always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed Expenses

One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives.

To learn more ways to control your business costs give us a call today. Our trained staff of professionals are always available to answer any questions you may have.

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