Closing the Books for Year-End

money-256312_640The year-end closing is a critical part of your annual accounting process. If you are handling your own bookkeeping, here are some things that you can do to help ensure your books are accurate.

  1. Perform a bank reconciliation of all your bank accounts. A bank reconciliation is a process that matches the deposits, checks and other debits you have recorded in your general ledger to what has cleared the bank. This process should be performed monthly as it will identify errors in your accounting records and possibly errors the bank has made.
  2. Reconcile your credit cards to your general ledger. Same process as #1 above except it has to do with your credit cards. This will also ensure you are recording interest expense and haven’t missed any deductions charged to your credit card.
  3. Update your inventory balance. If you are in a business that maintains an inventory of raw materials, work in process, finished products, or goods held for re-sale, be sure to take a physical inventory at year-end, value the inventory at cost (not retail value), and update your general ledger to reflect the amount of inventory you actually have on-hand. You must also keep this list for your records in the event the IRS audits your books.
  4. Record all of your expenses. If you maintain your books on a cash basis (you record an expense when you actually pay for it) this is nothing more than recording all your checks you wrote by the end of the year. A bank reconciliation (#1 above) will help ensure all expenses are captured in your accounting system. If you are an accrual basis taxpayer, be sure you record all amounts you owe your vendors as of the end of the year. This will ensure you are getting credit for all the expenses you are able to deduct. You should also set up a reliable system for recording your out-of-pocket expenses.
  5. Review your outstanding accounts receivable and accounts payable. Be sure to periodically review the outstanding amounts to make sure items aren’t duplicated or otherwise misstated.
  6. Review your fixed asset listing from the prior year.  Are there assets you may have sold? Are there assets you no longer have?
  7. Reconcile all loan balances to year-end loan statements. Not only does this ensure all interest expense is properly accounted for, you could also discover loans that remain on the books but no longer exist because of forgiveness or oversight. Also, make sure all loans are actually recorded on the books. By not recording a loan, you may inadvertently cause yourself to miss an important depreciation deduction as a result of an unrecorded asset.
  8. Set a Closing Date (QuickBooks Users) – Before you send us your QuickBooks data, set a closing date as of the end of the year. This will help prevent making changes to your data after we get it to prepare your tax return. By deleting or adding transactions or otherwise modifying the data in a prior year (including the one you are just closing) you can create extra work for which you may incur additional fees. Because adjustments end up flowing through various balance sheet accounts, changes to prior data will cause other items to be out of balance. When this happens we must identify the changes so we can decide whether you need to amend a prior year return or whether the adjustment belongs in a following year.

By following this list, you will create more accurate books and will save the expense by making the year-end tax return more efficient and effective.

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Year-End Bonuses

Any additional compensation to your employees over and above their standard salary or hourly rates is considered to be taxable compensation. The bonus is considered wages and must be reported as payroll on the employee’s W-2 and is subject to all applicable payroll taxes – federal and state withholding, FICA, Medicare and the related employer taxes.

On your books and records, the bonus is reported as wages on the income statement and it is fully deductible as a valid tax deduction if it is handled this way. Payments to your employees made in cash (and not reported) or recorded as other expenses are not tax deductible, and may cause unforeseen issues if the IRS or state audits your books.

Many employers like to give a flat dollar bonus amount. You can do this by choosing the amount of the bonus you want to hand to your employee and “gross-up” the amount. Most payroll services and payroll software can handle this calculation. By grossing up the flat dollar net amount, you are including the estimated taxes into the amount so that, after taxes, the amount is what you want to provide your employee.

Contact us if you need assistance with this calculation


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Standard mileage rates for 2015 announced

The IRS announced that standard mileage rates for use of a vehicle will increase slightly. With gas prices dropping considerably in the last few months, this is great news for business owners.

For business use of a car, van, pickup truck, or panel truck, the 2015 rate will be 57.5 cents per mile, an increase from 56 cents per mile that was in effect for 2014. Driving for medical or  moving purposes may be deducted at 23 cents per mile, one-half cent lower than for 2014.

The rate for service to a charitable organization is unchanged.

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IRS Offers Tips for Year-end Charitable Contributions

charity_donationsIn a news release, IRS has reminded individuals and businesses making year-end charitable contributions of several important tax law provisions and general substantiation requirements that they should keep in mind.

Rules for clothing and household items. To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item (e.g., furniture, furnishings, electronics, appliances, and linens) for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Donors must get a written acknowledgment from the charity for all gifts worth $250 or more, that includes, among other things, a description of the items contributed.

Guidelines for monetary donations. To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement, or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

To help taxpayers plan their holiday-season and year-end giving, IRS offered these additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2014 even if the credit card bill isn’t paid until next year, and checks count for 2014 as long as they are mailed before the end of the year.

• Only donations to qualified organizations are tax-deductible. IRS maintains a searchable online database, Exempt Organization Select Check available at, listing most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in the database.

• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. Thus, individuals who choose the standard deduction, including anyone who files a short form (i.e., Form 1040A or 1040EZ), are ineligible to claim the deduction.

• For all donations of property, including clothing and household items, the taxpayer should get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, the taxpayer should keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.

• The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.

• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.


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IRS Telephone Scam Prevalent in Illinois Now

scamalertOver the years, the IRS has been warning taxpayers and tax professionals about scams where someone calls, allegedly from the IRS, that they had a balance due and needed to pay their balance by a certain date or they would be arrested. There have been several variations over the years. But lately, the scammers seem to be targeting taxpayers in the Midwest. I’ve received several calls from clients reporting this scam and our local police station has issued a warning.

Characteristics of the current scam include:

  • A claim the taxpayer is subject to a review by the criminal investigative branch of the IRS and owes taxes that must be paid immediately to the IRS.
  • Robotic sounding messages
  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

The IRS recommends the following steps should you receive this call:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
  • You can file a complaint using the FTC Complaint Assistant; choose “Other” and then “Imposter Scams.” If the complaint involves someone impersonating the IRS, include the words “IRS Telephone Scam” in the notes.

You can also call your local police station and, of course, call us to help determine if the call is legitimate.


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Reimbursement of Individual Health Insurance Premiums No Longer Qualify for Non-Taxable Reimbursement

cancelled_checkOn November 6th, 2014, the Department of Labor issued new guidance that clarifies how the Affordable Care Act is changing the tax treatment for the reimbursement of individual health insurance premiums.

Previous to this new legislation and clarifications, employers were allowed to either pay for, or reimburse, the cost of employees’ individual healthcare premiums on a tax-free basis. The new legislation and last week’s guidance from the Department of Labor now prohibits this practice. This is effective for the 2014 tax year and affects any employer with 2 or more employees that does not have a group plan.  As a result, if you are an employer reimbursing the premiums for your employees’ individual health care premiums, you must now include this reimbursement as taxable income on the employee’s paychecks and W-2. This income is subject to the normal federal income tax, FICA, Medicare, and state withholdings.

If you have a group health plan, nothing changes; the changes are only for employers that reimburse the cost of individual health plans.

Note: If the employer (including an S-Corporation) has only one participant in a health reimbursement arrangement, the corporation is allowed to reimburse that employee on a tax-free basis as before the ACA rule changes. If that person is a more than 2% shareholder of the S-corporation, the rules still require that the cost of the premiums reimbursed be included in wages in order to allow an above-the-line deduction for the shareholder. FICA and Medicate need not be charged.

Employers with more than one employee that have traditionally reimbursed their employees on a pre-tax basis for their individual health care premiums must now either (1) eliminate their health benefits entirely,  (2) establish group health insurance coverage for their employees, or (3) add an amount for health insurance on their paycheck as regular (taxable) compensation.

Penalties for continuing to reimburse employees on a tax-free basis face severe penalties of $100 per day, per employee.

Please let me know if you have any questions regarding this.


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Are You Concerned About Filing for an Extension?

april15Are you filing for an extension?  Has time run out to meet the April 15th initial deadline? It’s OK. Really, it is. For some reason, taxpayers get very worried if they, or their preparer, need to file for an extension for any reason. The reason could be valid: you are still missing a K-1 from a company you own, or waiting on a corrected W-2 or 1099 you know you are getting. Or it could be your preparer ran out of time, or you submitted your tax information late. Or maybe, you just plain didn’t get around to doing it yet.

It’s OK to file for an extension. You should pay an estimate of what you think you’ll owe by April 15th to avoid or minimize penalties, but the simple act of filing for an extension to allow for an additional few days or few months to file should not cause a lot of stress and consternation. The IRS automatically accepts your extension request. They don’t even ask for a reason. Honestly I’m not sure why they don’t just make the filing deadline October 15th, but I guess they have to get people going somehow. Otherwise everyone would wait until September and October to file.

This is a link to an AICPA guide to frequently asked questions about extensions. It reviews several of the concerns and questions people have about extensions. Here are a couple of myths I hear circulating about extensions.

The IRS charges a fee: FALSE. I have heard this many times and even heard that “the IRS charges $75 to extend your return”. This is not true. Your CPA may charge a fee of you brought in your information late and they need to do a special calculation to find out how much you should pay, but the IRS does not charge a fee.

It increases your chances of getting audited: FALSE. There is no evidence this is true. In fact I’ve heard others claim your audit chances are smaller, but that is is speculation. I can say that of all the IRS audits I have ever seen or heard about, not one was the result of extending your return. In fact, I have personally extended my personal and business returns for a very long time with no repercussions.

My return won’t get filed until October: FALSE. If your CPA or tax preparer is extending your return, it may mean only a week or two delay in getting your return completed. I’ve had clients tell me when their preparer extended them it meant an additional 6 month wait. This should not be the case; the extension allows for 6 months additional time but it doesn’t mean you have to take all 6 months to get the return filed.

So, if you need to file for an extension, don’t worry about it. If your preparer is extending your return, it may mean an additional week or two. But that’s not a bad thing: it allows your preparer to work on your return in a more sane atmosphere, spend more time on your return and possibly make it more accurate or find ways to lower your tax bill.



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IRS Reminder: April 1 is Key Date for Taxpayers with IRAs and Qualified Plans

In a news release, IRS has reminded taxpayers who turned 70 1/2 during 2013 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans (i.e., 401(k), 403(b), and 457 plans) by Apr. 1, 2014.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by December 31. So, for example, a taxpayer who turned 70 1/2 in 2013 and receives the first required payment on Apr. 1, 2014 must still receive the second RMD by Dec. 31, 2014.

Affected taxpayers who turned 70 1/2 during 2013 must figure the RMD for the first year using their life expectancy on Dec. 31, 2013 and their account balance on Dec. 31, 2012 (reported by the trustee to the IRA owner on Form 5498). Most taxpayers use Table III (Uniform Lifetime) of Publication 590 to figure their RMD. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions.

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Don’t Overlook the Credit for Small Employer Health Insurance Premiums

Article Highlights

  • Small employers get a tax credit for providing a health insurance plan.
  • Credit can be as much as 35% of the premiums paid.
  • A small employer is one with no more than 25 full-time equivalent employees (FTE) with average wages less than $50,000.
  • Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small employer health insurance credit.
  • Seasonal workers of an employer are not taken into account in determining the FTE employees and average annual wages of the employees unless the worker works for the employer more than 120 days during the tax year.

The tax law provides a credit for small business employers who pay the health insurance premiums for their workers. This credit can be as much as 35% (25% for tax-exempt organizations) of the insurance premiums paid by the employer in 2013.

Beginning in 2014, the credit percentage increases to 50% (35% for tax-exempt organizations), and claiming the credit is limited to two consecutive years, but if the credit was claimed for any of years 2010 through 2013, those years aren’t counted for the two-year limit. In addition, for 2014 and later years, the insurance must be purchased through a state exchange, and the coverage must be uniform and not less than 50% of the premium cost.

To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year. The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula.

To see if your firm may qualify for the credit, complete the two worksheets below. The results at lines 6 and 9 will tell you if your firm is under the maximum full-time equivalent employee and average wage limitations.

Determine the Number of Full-Time Equivalent Employees:

1. Enter the number of employees who worked 2,080 hours or more during the year:2. Multiply line 1 by 2,080:

3. Enter the total hours worked by all employees who worked less than 2,080 hours during the year:

4. Enter the total of lines 2 and 3:

5. Divide the result on line 4 by 2,080:

6. Number of full-time equivalent employees (round line 5 down to the next whole number, unless the number is less than one, in which case enter 1:

If line 6 is greater than 25, stop – your firm does not qualify for this credit.

Determine the Average Annual Wage:

7. Enter the total of all wages paid to employees during the tax year:8. Divide line 7 by the number of full-time equivalent employees (line 6):

9. Average annual wage (round amount from line 8 down to the next whole $1,000):

If the amount on line 9 is $50,000 or less, you may qualify for the credit. Besides meeting the limits of lines 6 and 9, to qualify for the credit an employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis.

The amount of the credit gradually phases out if the number of full-time equivalent employees exceeds 10 or if the average annual wage of the employees exceeds $25,000. Under the phase-out, the full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual wages of less than $25,000.

The credit is in lieu of taking a business deduction for the employer-paid premiums used in computing the credit. It is also part of the general business credit, which may exceed the amount of the business’ income tax, and any unused credit in the current year can be carried back one year and then forward until used up but no longer than 20 years.

When counting employees and wages, make the following adjustments:

  • Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small-employer health insurance credit. Thus, the wages and hours of these business owners and partners, and of their family members and dependent members of their household, are disregarded in determining full-time equivalent (FTE) employees and average annual wages, and the premiums paid on their behalf are not counted in determining the amount of the credit.
  • Leased employees are included in employee count, but insurance premiums paid for the benefit of the leased employee by the leasing company are not taken into account in determining the credit.
  • The number of hours of service worked by, and wages paid to, an employer’s seasonal worker are not taken into account in determining the FTE employees and average annual wages of the employer unless the worker works for the employer more than 120 days during the tax year. Premiums paid on behalf of seasonal workers can be counted in determining the amount of the credit. There is no minimum number of hours of service that a worker has to work in a day before that day is taken into account for purposes of the 120-day test.

Please give this office a call if you have questions related to this credit, the pros and cons of offering health insurance to employees, and determining how much your firm can benefit from claiming the credit.

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Maximizing Qualified Tuition Program Contributions

collegeQualified Tuition Programs, commonly referred to as Section 529 plans (named after the section of the IRS Code that created them), are plans established to help families save and pay for college 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 you maintain 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. 529 plans 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 excellent vehicles for college funding.

Tax Benefits: There is no federal tax deduction for making a contribution, but taxes on the earnings within a 529 plan are not only tax-deferred while they are held in the account, but are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can with an account where you have to pay tax on the investment gains and earnings.

How Much Can Be Contributed? Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Section 529 plans allow you to put away larger amounts of money. There are no income or age limitations for the Section 529 plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximums on an in-state, four-year education, while others base theirs on the costs of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000. Generally, once an account reaches the plan-imposed cap, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow through investment earnings and growth.

How Much Should You Contribute? Although there is no contribution limit other than the plan’s limit based on the cost of the education, there are some gift tax limitations that may influence the amount of your contribution. Contributions to Section 529 plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) money to another individual, only up to an annual limit (double for a married couple), without triggering gift taxes or reducing their lifetime gifts and inheritance exclusions. The gift exclusion amount is inflation adjusted. For 2014, the gift tax exclusion is $14,000 per recipient.

Five-Year Option: Where contributions to a qualified tuition program exceed the annual gift exclusion amount, a donor may elect to take certain contributions to a QTP into account ratably over a five-year period in determining the amount of gifts made during the calendar year. The provision applies only for contributions of up to five times the annual exclusion amount available in the calendar year of the contribution. Any excess may not be taken into account ratably and is treated as a taxable gift in the calendar year of the contribution. Thus, for 2014 an individual could contribute up to $70,000 (five times the 2014 annual exclusion amount), while a married couple could contribute twice that amount ($140,000) to the same individual. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exclusions would revert back to the donor’s estate. Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion and to claim this special exemption.

Don’t Overlook Additional Contribution Opportunities During The Five-Year Period: If in any year after the first year of the five-year period the annual exclusion amount is increased, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made.

If you have previously utilized the five-year option, you may have the opportunity to make additional annual contributions since the annual exemption amount has increased in the past few years, to $14,000.

If you need assistance evaluating the benefits of a Section 529 plan and its impact on your estate plan, please give this office a call.

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Do you have Cancellation of Debt Income?

Cancellation of debt incomeCancellation of Debt (COD) is settlement of a debt for less than the amount owed. It can be in the form of credit card debt, auto loans, mortgages, home equity lines, etc.  When you have debt that was cancelled, the lender must provide you a Form 1099-C and this income is reported to the IRS. Whether this income is taxable or not, depends on whether you were insolvent or not at the time the debt was cancelled.

We have a two page summary of how cancellation of debt income works and how you might qualify for a full or partial exemption. Or for more information from the IRS, click here.

The rules can be tricky so consult with a tax adviser for information specific to your situation.

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Navigating IRA Contribution Limits

ira contribution limitsAre you wondering if you can make a contribution to your IRA to help save on taxes? Not every one is eligible to deduct an IRA contribution on their return and the rules concerning IRA contribution limits can be confusing, so here’s some guidance.

First, the overall limit for a contribution to a traditional (deductible) IRA in 2013 and 2014 is $5,500 if you are under 50 years old, or $6,500 if you are 50 years or over.

Second, you must have “earned income” in an amount equal to or greater than the amount you wish to contribute.  Earned income includes W-2 income, income from self-employment, alimony and separate maintenance payments received under a divorce decree or separate maintenance, and combat zone compensation that is excluded from income. It does not include K-1 pass-through income from your corporation, even if you own 100% of the business. In other words, the contribution to the IRA is limited to the lesser of your earned income or the $5,500/$6,500 limit discussed above.  If you don’t work, and your spouse does, you can contribute to your own IRA under the spousal IRA provision.

The last limitation is based on your overall income and whether you participate in a retirement plan at your employer. Income includes income from all sources, including wages, self-employment, interest income, income from investments, rental income, pension income and anything else that is taxable income.

Various limits come into play depending on filing status. If you are an active participant in your employer’s plan, your contribution becomes limited when your income exceeds $95,000 (MFJ), or $59,000 for single filers. There is no deduction allowed if you are married filing separately and your income exceeds $10,000.  All amounts are for 2013 and are adjusted annually by the IRS for inflation. The deduction quickly becomes phased out at income levels above this, and is completely eliminated when your income exceeds $115,000 for married filing joint taxpayers and $69,000 for single taxpayers.

If you are not an active participant, but you are married and your spouse is, your deductible contribution becomes limited when your modified adjusted gross income exceeds $178,000 in 2013. It is completely phased out when your income exceeds $188,000.  There is no deduction allowed if you are married filing separately and your income exceeds $10,000.

These income limitations do not prevent you from making the contribution, they just prevent you from deducting the contribution on your tax return. If that happens, you may want to consider contributing to a Roth IRA instead. However, there are income limitations for Roth IRAs as well, but there are also strategies to get around those income limits that we can discuss with you.

The deadline for contributions for 2013 is April 15, 2014.

The rules are complicated so please contact us for advice particular to your situation.

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16 Tax Issues Facing Small Business Owners in 2014

1040-12014 will be a challenging tax year for businesses and higher-income taxpayers. The following issues are concerns that may impact you and your company’s tax liability in the new year.

  • Small Business Health Insurance Credit – The tax credit to small employers (25 or fewer equivalent full-time employees) that provide an affordable health insurance plan for their employees and supplement at least half the premiums, will increase to 50% of the employer’s contribution in 2014, up from 35% in 2013. For non-profit employers, the credit will be 35% in 2014.
  • Net Investment Income Tax – As part of the Patient Protection & Affordable Care Act (the new health care legislation sometimes referred to as “Obamacare”), a new tax kicked in for 2013 and will continue in 2014 and beyond. It is a surtax levied on the net investment income of taxpayers in the higher-income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, certain business assets, stocks, or other investments. This is on top of the 20% long-term capital gain tax rate now in effect for higher-income taxpayers.
  • Higher Tax Rates – Prior to the increase in 2013, there were six tax brackets: 10, 15, 25, 28, 33, and 35%. Beginning in 2013 and continuing for future years, a new top rate of 39.6% has been added for higher-income taxpayers.
  • Higher Capital Gains Rates – Beginning in 2013 and continuing for future years, the tax rate for long-term capital gains and qualified dividends has been increased to 20% (up from 15%) for taxpayers with incomes exceeding the threshold for their filing status.
  • Medical AGI Phase-out – Beginning in 2013 and continuing for future years, a taxpayer’s medical deductions will be reduced by 10% of their adjusted gross income, up from the previous 7.5% (but the 7.5% continues to apply to seniors through 2016).
  • Possibility of Lower Expensing Deductions – The Sec 179 business expensing allowance for business equipment drops from $500,000 per year to $25,000 in 2014 unless Congress extends the more liberal amount.(1)
  • Bonus Depreciation Expires – Beginning in 2014, the 50% bonus depreciation for tangible business assets will expire unless Congress extends it.(1) This also reduces the first-year maximum depreciation deduction for business autos and small trucks.
  • Individual Insurance Mandate – Beginning in 2014, the Patient Protection & Affordable Care Act will impose the new requirement that U.S. persons, with certain exceptions, have minimum essential health care insurance, or face a penalty.
  • Large Employer Mandatory Insurance Requirement – Originally scheduled to begin in 2014 but delayed until 2015 because the government did not have the reporting mechanisms in place, large employers, generally those with 50 or more full-time equivalent employees in the prior calendar year, that:
    o Do not offer health coverage for all its full-time employees,
    o Offer minimum essential coverage that is unaffordable (employee contribution being more than 9.5% of the employee’s household income), or
    o Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60% (i.e., less than the bronze plan coverage),

    will be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state or federal exchange and qualified for either tax credits or a cost-sharing subsidy.

  • Simplified Home Office Deduction – Effective for tax years beginning in 2013 and continuing for 2014 and beyond, taxpayers can elect a simplified deduction for the business use of the taxpayer’s home. The deduction is $5 per square foot with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. Eligibility qualifications are the same whether the simplified or regular deduction is claimed.
  • Increased Payroll and Self-Employment Tax – As part of the new health care legislation, higher-income taxpayers are faced with an additional 0.9% health insurance (HI) tax. Starting in 2013, and continuing for future years, this surtax is imposed upon wage earners and self-employed taxpayers whose wage and self-employment income exceeds $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others.
  • Pease Limitations – The Pease limitation on itemized deductions that was reinstated in 2013 will continue for 2014. The Pease limitation phases out certain itemized deductions for higher-income taxpayers.
  • Phase-out of Exemptions – The phase-out of exemptions for higher-income taxpayers that was reinstated in 2013 continues for 2014.
  • Longer Depreciation Life for Leasehold and Restaurant Property – The current 15-year depreciable life will increase to 39 years in 2014.(1)
  • Qualified Small Business Stock Gain Exclusion – Beginning for qualified small business stock issued in 2014, the gain exclusion drops from 100% to 50%.
  • Qualified Real Property Expensing – Congress temporarily permitted the use of the Sec 179 expensing deduction to write off certain leasehold improvements, and restaurant and retail property improvements. Without Congressional intervention, this provision will no longer be available in 2014.

(1) Congress, a few years back, engaged in brinkmanship with last-minute tax changes. Normally, they have managed to finalize tax law by year’s end. However, for 2013, they adjourned without addressing the issue of extending many tax breaks that were set to expire at the end of 2013. It is not known if these tax provisions will be extended or not.

Posted in Business taxes, Tax Planning | 2 Comments

Did You Collect the Needed W-9s?

2013 Form 1099-MiscHighlights:

  • The IRS Form W-9 is used to obtain independent contractors’ tax ID numbers.
  • Tax ID numbers are required when filing 1099s.
  • 1099-MISCs must be issued to independent contractors that are paid $600 or more during the year for performing services for a trade or business.

If you used independent contractors to perform services for your business or trade, and you paid them $600 or more for the year, you must issue them a Form 1099-MISC to get the deduction for their labor and expenses and avoid potential penalties. (This requirement generally does not apply to payments made to a corporation. However, the corporation exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.)

It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total paid him for the year exceed the $600 limit. If this happens, you may overlook the information needed to file 1099s for the year. Therefore, it is good practice always to have individuals complete and sign the IRS Form W-9 the first time you use them. This eliminates oversights and protects you against IRS penalties and conflicts.

Many small business owners overlook this requirement during the year, and only realize in January that they have not collected the required documentation to issue 1099s.

If you have not collected W-9s throughout the year, do so as soon as possible, so you will have them available when it comes time to prepare 1099s for the year. It is sometimes difficult to acquire contractor information after the fact, especially from those contractors with no intention of reporting the income, so it’s always better to get it up front.

Form W-9 provides entries for the contractor’s name, contact information and tax ID number. It also includes a signature block for the contractor, certifying the information and insulating you against penalties if he or she provides an incorrect or phony ID number.

Click here to download the Form W-9.

If you have questions or need copies of the Form W-9, please call us. We can also assist you with your 1099 filing requirements; the deadline to mail these to your vendors is January 31st.

Posted in Business taxes | 1 Comment

A Business Plan Template to Help Your Business Succeed

Are you just starting a new business? Has your business been operating for a while but you aren’t achieving the success you need? When we consult with business owners, many times they don’t have a clear sense of direction. They don’t have a plan to grow their business in a profitable manner.  Using a written business plan can help clarify that vision and help you focus on the priorities that make your business more successful and enjoyable.

We’ve developed a business plan template to get you started in this process. We encourage all of our business owners to have a business plan in place and to refer to it and update it frequently. It’s easy to get distracted by the day-to-day operational issues that come up. I’m a business owner myself, so I get it. I develop my business plan during my slow time of the year in late Fall. I update it at least once a year. For me my business plan is a guide that keeps me focused on my longer term strategies. It doesn’t need to be fancy or 50 pages long. Sometimes a 2-3 page plan is a great starting point. But it should be written, and it should contain specific, measurable goals you look at every month to keep you focused.

Take a look at this business plan template to help you get started in the process.

Posted in Business coaching | 2 Comments