Small Business Tax
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.
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.
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.
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.
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.
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.
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.
You’ve devoted time and money and poured heart and soul into building a successful family business. But do you have a succession plan? If not, you should. Without a plan for transferring your business to the next generation, anything could happen.
Deciding on Your New Role
Start by deciding how much or how little you want to be involved in the business after the transfer is complete. Are you picturing a clean break? Or a period of shared responsibilities and gradual transfer? This is an important decision because it will likely influence other decisions, particularly financial ones.
Choosing a Successor
This can get tricky, especially if there are several family members who may have an interest in — or expectation of — taking over the business. If there’s one clear candidate, that makes it easier. But don’t just assume someone (e.g., your oldest son) is the right successor. Do what’s best for the business. The best choice may be a grandchild, a niece, or even a relative paired with a trusted employee.
Estate planning is an important sidebar to a family business succession plan. There may be children who have no interest in being involved in running the business and are happy to let their siblings take over. However, they probably expect equal treatment when it comes to inheritances. If this is a likely scenario, make sure everyone communicates as clearly as possible and develop a plan you think is fair.
Grooming a Successor
Spend time grooming your successor, even if it’s a son or daughter who knows the business. He or she should understand how every part of the business operates. Before your successor starts representing your business publicly, make sure he or she meets your business contacts (clients, vendors, financial partners, etc.).
Figuring Out the Money
You probably don’t want to give your business away, even to your own offspring. Figure out how much you’re going to need to finance your next venture (retirement, a new business, etc.), and come up with an arrangement that meets your needs.
Take charge of your financial future. Give us a call, today, to find out how we can assist you and your business.
Finding the best candidate to hire is often costly and time consuming. But, if your new hire turns into a loyal, hardworking, long-term employee, your investment may be worth every cent and minute.
How do you find good people? In the past, people who were job hunting would look in the “help wanted” section of the newspaper or go from store to store filling out applications. Today, most people use a computer and a mouse and search the Internet for jobs. So if you’re not posting your openings on online job boards and industry blogs and websites, you may be missing talented candidates. Note: Running classified ads may still be a good way to reach out (especially to fill jobs requiring local candidates) since many local newspapers also have an online job board for posting classifieds.
Another way to attract candidates is to add a recruiting page to your website. In addition to posting job openings, you can use the page to attract qualified candidates by highlighting the benefits of working for your company.
And last, but certainly not least, you can use social media to announce openings and solicit job applicants. There’s no better way to reach a large number of people almost instantaneously.
Make an Attractive Offer
If you’re hoping to hire top talent, you’ll want to make sure the benefits you offer are competitive — or better. According to government analysis of private industry data, 86% of full-time workers had access to employer-provided medical care and 76% had access to a retirement plan.*
Keep Employees on Board
Once you’ve assembled a group of valuable employees, an attractive and competitive benefit package will help ensure they stay. Your financial professional can provide insights and help you review your firm’s benefit package for cost efficiency and competitiveness.
For more tips on how to keep business best practices front and center for your company, give us a call today. We can’t wait to hear from you.
* Bureau of Labor Statistics, March 2015
Even if you’ve been using QuickBooks Online for a long time, it’s good to step back and evaluate your actions.
“Best practices” aren’t enforceable rules. They’re simply guidelines businesses commonly follow in one area or another. If you’re in retail, for example, one best practice might be to always ask customers checking out if they found everything they were looking for. This serves two purposes: It conveys a feeling of concern for the customer’s shopping experience, and it may also lead to increased sales.
QuickBooks Online has many best practices, some of which may serve multiple purposes, including these:
- They keep your company data safe and clean.
- They provide insight on your financial status.
- They save time.
- They can lead you to better relationships with customers and vendors.
Are any or all the following common practices for your business?
Reconcile accounts regularly.
One of QuickBooks Online’s most useful features is its ability to connect to your financial institution’s websites and download cleared transactions. QuickBooks Online also offers tools to help you keep your accounts reconciled online, like you used to do every month when your paper statement came. Reconciling accounts can help you uncover errors. It gives you a truer picture of your cash flow, and it improves the accuracy and timeliness of some reports.
It’s not a particularly pleasant process, but you should be reconciling your accounts regularly in QuickBooks Online. We can help.
Clean up your lists.
Some lists in QuickBooks Online aren’t overly long. You don’t have to worry about, for example, Payment Methods, Terms, or Classes. Your lists of customers and vendors, products, and services, on the other hand, can grow unwieldy over the years. This means it can take more time than it should to scroll through lists when you’re using those entities in transactions. It also puts unnecessary stress on your company file. If you can’t delete any, at least make them inactive.
Never leave QuickBooks Online open when you leave your work area.
This goes for everyone, even people who work alone and don’t access their company files away from their work areas. The obvious reason is to keep someone else from getting in and authorizing payments, for example, or otherwise compromising your financial information. It also protects the integrity of your data file in case your internet connection suffers some kind of outage.
Keep track of 1099 vendors.
Whether your company uses 10 vendors or a hundred or more, you may have to supply at least some of them with an IRS Form 1099 at about the same time you’re preparing W-2s for employees. Your 1099-related tasks will be much easier if those individuals and/or companies are earmarked. If you think vendors might need 1099s when you create their records in QuickBooks Online, click in the box to the left of Track payments for 1099 in the lower right corner. Not sure? Ask us.
Classify everything with care.
Every time you have to create a record or transaction where categories are involved (i.e., Classes, Customers and Vendors, Territories), check and double-check that you’ve assigned them the correct classification. Errors here can result not only in problems with daily workflow, but your reports will not be accurate. A related best practice: Create a meaningful group of Classes, and use them faithfully. They’ll help you make better business decisions.
To create your list of Classes, click the gear icon in the upper right and select All Lists | Classes | New.
View reports on a regular basis.
There are some advanced financial reports in QuickBooks Online that we should be creating for you on a regular basis, either monthly or quarterly. These include Profit and Loss, Balance Sheet, and Statement of Cash Flows. The mechanics of creating them aren’t difficult, but analyzing them is. You should be running reports on your own at frequencies that you think would be helpful, like A/R Aging Detail, Unpaid Bills, and Sales by Class Detail.
If you’ve been using QuickBooks Online for a while, you could probably come up with your own list of best practices. If you’re new to the site, consider scheduling some time with us to go over more of them. Develop good habits from the start, and there won’t be nearly as much need for troubleshooting down the road.
How would you like Uncle Sam to pay for part of your vacation? Sound unlikely? If you combine your vacation with a business trip, you may be able to deduct some of your expenses. Pay attention to the rules, though. Expenses must meet certain requirements before they’re tax deductible.
As long as your primary reason for making the trip is business, you generally can deduct the cost of your transportation to and from your destination. You’ll generally be able to deduct food (within limits) and lodging costs only for the days you actually spend on business.
Bring the Family
You can bring your family along, too. While you can’t deduct their food, lodging, or airfare, you can write off your own expenses, including the single-occupancy rate for lodging on days when you’re conducting business. If you and your family travel by car, you can also deduct the full cost of transportation. Just be sure to keep detailed records.
To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.
The IRS may remove tax penalties if the taxpayer has reasonable cause (e.g., serious illness) for failing to comply with tax filing and payment requirements. This penalty relief is not automatic and may require filing with the IRS Appeals Office before it succeeds. In effect, the IRS rewards typically compliant taxpayers with one-time penalty amnesty, which can save the taxpayer hundreds—sometimes thousands—of dollars.
There is a hidden gem in the IRS penalty abatement policy known as the First Time Abatement (FTA) policy. This provision allows normally compliant taxpayers a chance to escape penalties.
The FTA provision applies if:
- No penalties have been added to or removed from the taxpayer’s account for the previous 3 years, or the taxpayer was not previously required to file a return.
- The taxpayer is current in filing all required tax returns (including extensions)
- The client has paid or made payment arrangements to pay any outstanding tax due (including being current on an installment agreement).
FTA applies to the following penalties:
- Failure to file
- Failure to pay (income tax)
- Failure to deposit (payroll tax)
The taxpayer will not be disqualified from receiving an FTA based on lack of a clean penalty history if the client:
- Had a penalty assessed more than three tax years prior to the tax return in question.
- Had an estimated tax penalty assessed in the past three years.
- Received reasonable-cause relief from penalties at any point in the past.
- Received an FTA more than three tax years prior to the tax return in question.
- Has penalties on subsequent tax years.
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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.
The IRS announced the 2018 cost-of-living adjustments to retirement plan limits. The following plan limits are increased effective January 1, 2018:
- Employee Contributions to 401(k) and 403(b) Plans: the contribution limit is increased from $18,000 to $18,500.
- Defined Contribution Plans: the limit on annual additions to a participant’s defined contribution account increases from $54,000 to $55,000.
- Defined Benefit Plans: the limitation on the annual benefit under a defined benefit plan increases from $215,000 to $220,000.
- Annual Compensation Limit: the maximum amount of annual compensation that can be taken into account for various qualified plan purposes increases from $270,000 to $275,000.
- Government Deferred Compensation Plans: the limit on deferrals under Section 457 (concerning deferred compensation plans of state and local governments and tax-exempt organizations) increases from $18,000 to $18,500.
Some limitations are not increased for 2018, including:
- The limitation for catch-up contributions to an applicable employer plan other than a SIMPLE 401(k) plan or SIMPLE IRA for individuals age 50 and over remains unchanged at $6,000.
- SIMPLE Plans: the maximum amount of compensation an employee may elect to defer remains at $12,500.
- IRS and Roth IRA Limits: the deductible amount for an individual making a deductible IRA contribution remains at $5,500. The Roth IRA limit of $5,500 remains unchanged as well.
If you have any questions on how these rules apply to give, please give us a call.