There were a lot of last minute tax breaks that were recently enacted. This is good news for many taxpayers, but since the changes were very last minute, the IRS needs to update its computer systems to be able to process the returns. This means that you may not be able to file your return until the middle of February.
Who will be affected? If you itemize your deductions, which include expenses such as home mortgage interest and property taxes. Also, taxpayers claiming the Higher Education and Fees Deduction, and teachers who claim the Educator Expense Deduction.
Although the IRS cannot process your returns, whether or not you e-file or file a paper return, you can still prepare your return and wait to file. The IRS will announce when they have their computers up and running.
Tuesday, December 28, 2010
Thursday, November 18, 2010
Time is Running Out to Convert Your IRA . . .
Through the end of this year only, there is a special tax benefit if you convert your traditional IRA to a Roth IRA, which allows you to make tax-free distributions from your retirement account. There is no income limitation, which previously disallowed a Roth conversion if your adjusted gross income was greater than $100,000. Before 2010, if your tax filing status was married filing separately you were not able to convert either, but this restriction has been lifted as well. Additionally, one of the reasons to take advantage of this during 2010 is that you can include any income from the conversion on your 2011 and 2012 tax returns.
But even with these benefits, should you convert your IRA to a Roth and pay additional taxes currently? Possibly, but it depends upon your situation and several major factors. The good news is that you have some time during 2011 to convert or “recharacterize” your Roth back to a traditional IRA if you realize that would be beneficial to you. The deadline to do this is April 15th 2011, but if you file an extension you will have until October 15th 2011.
Do You Have the Money to Pay the Tax? Even though you can spread out the income from the conversion over two years, do you have the money to pay the additional taxes? For example, if you convert $100,000 and you are in the $25% bracket, do you have an additional $12,500 for each of those years? If not, then converting is not right for you. And you never want to use some of the IRA distribution to pay the tax because you will create a tax nightmare for yourself with possible early distribution penalties of 10%.
How Much Time Until Retirement? If you are in your sixties, a conversion will probably not make a lot of sense. The main reason for the conversion is to not pay any taxes in the future from your Roth, which means that you will need several years to recoup the taxes that you have paid up-front. Although, you may want to convert to minimize the tax impact to your heirs. Another benefit is that a Roth IRA does not require minimum distributions once you reach age 70 ½.
Which Tax Bracket Will I Be In? If you think that you will be in a lower tax bracket when you retire, then converting now does not make sense. If you think that you will either be in a higher tax bracket or that tax rates will be higher when you retire, then a Roth makes a lot of sense. Of course, this is a guess, but you need to make an educated guess based upon all of the known factors.
These are just a few of the factors to consider when converting your IRA to a Roth. Conversion strategies, such as filing an extension, the creation of multiple Roth accounts, or conversion of only a partial balance can also be implemented to help make your conversion more tax-efficient and allow the benefit of hindsight.
But even with these benefits, should you convert your IRA to a Roth and pay additional taxes currently? Possibly, but it depends upon your situation and several major factors. The good news is that you have some time during 2011 to convert or “recharacterize” your Roth back to a traditional IRA if you realize that would be beneficial to you. The deadline to do this is April 15th 2011, but if you file an extension you will have until October 15th 2011.
Do You Have the Money to Pay the Tax? Even though you can spread out the income from the conversion over two years, do you have the money to pay the additional taxes? For example, if you convert $100,000 and you are in the $25% bracket, do you have an additional $12,500 for each of those years? If not, then converting is not right for you. And you never want to use some of the IRA distribution to pay the tax because you will create a tax nightmare for yourself with possible early distribution penalties of 10%.
How Much Time Until Retirement? If you are in your sixties, a conversion will probably not make a lot of sense. The main reason for the conversion is to not pay any taxes in the future from your Roth, which means that you will need several years to recoup the taxes that you have paid up-front. Although, you may want to convert to minimize the tax impact to your heirs. Another benefit is that a Roth IRA does not require minimum distributions once you reach age 70 ½.
Which Tax Bracket Will I Be In? If you think that you will be in a lower tax bracket when you retire, then converting now does not make sense. If you think that you will either be in a higher tax bracket or that tax rates will be higher when you retire, then a Roth makes a lot of sense. Of course, this is a guess, but you need to make an educated guess based upon all of the known factors.
These are just a few of the factors to consider when converting your IRA to a Roth. Conversion strategies, such as filing an extension, the creation of multiple Roth accounts, or conversion of only a partial balance can also be implemented to help make your conversion more tax-efficient and allow the benefit of hindsight.
Monday, November 15, 2010
Do You Keep Track of Your Business Mileage?
Most business owners, sales people, and some employees should keep track of their business miles for tax purposes. In my experience, most do not keep very good records, and scramble to come up with an amount to prepare their taxes.
The best practice is to keep a vehicle mileage log. It doesn’t have to be fancy, as it can be written in a notebook, but a better option is Microsoft Excel, which helps with the calculations. An example of a good log would show the following:
- Beginning of year odometer reading
- Columns to show the date, where traveled, description, and the business miles driven
- A total at the bottom for business miles
- End of year odometer reading
Instead of keeping track of everywhere you have driven, for business and personally, you can easily figure your overall miles by subtracting your beginning odometer reading from the ending reading. Subtract your total business miles from the difference to obtain the personal amount.
What’s the benefit of all this extra work? Actually there are several. First, if you are ever audited, you will need to prove the business use of your vehicle. Second, it can reduce your taxes! For example, instead of deducting your actual vehicle business expenses, you may be eligible to use the alternative mileage method. By multiplying your business miles by the mileage rate, currently at $.50 a mile, you can deduct this amount if it is greater than your actual expenses.
The best practice is to keep a vehicle mileage log. It doesn’t have to be fancy, as it can be written in a notebook, but a better option is Microsoft Excel, which helps with the calculations. An example of a good log would show the following:
- Beginning of year odometer reading
- Columns to show the date, where traveled, description, and the business miles driven
- A total at the bottom for business miles
- End of year odometer reading
Instead of keeping track of everywhere you have driven, for business and personally, you can easily figure your overall miles by subtracting your beginning odometer reading from the ending reading. Subtract your total business miles from the difference to obtain the personal amount.
What’s the benefit of all this extra work? Actually there are several. First, if you are ever audited, you will need to prove the business use of your vehicle. Second, it can reduce your taxes! For example, instead of deducting your actual vehicle business expenses, you may be eligible to use the alternative mileage method. By multiplying your business miles by the mileage rate, currently at $.50 a mile, you can deduct this amount if it is greater than your actual expenses.
Do You Use QuickBooks? You Should Be Doing This!
QuickBooks is a very popular accounting software program for small businesses, and I use it personally for my practice as well. But, if you are using QuickBooks, there is one key step you should be taking – reconcile your bank and credit card accounts!
Why? When you reconcile your accounts, it helps to make sure that the data you entered is accurate. Everyone makes mistakes when they enter data, even when they upload data. This is okay, as long as you catch your mistakes by reconciling to your bank and credit card statements.
Reconciling your accounts will not only help you to make sure bank accounts are accurate, but it will also help you to make your receivables from customers and payables to vendors more accurate as well.
Fortunately, this is not a difficult task to do. If you have never reconciled before, it may take some work to get the first month’s reconciliation taken care of, but after that, the task become easier. The steps to reconcile are as follows: Click on banking; reconcile; choose the correct account; type in the statement date and the balances.
We offer ongoing QuickBooks consulting to assist clients with their books to insure they are getting the most from QuickBooks. Do you need help?
Why? When you reconcile your accounts, it helps to make sure that the data you entered is accurate. Everyone makes mistakes when they enter data, even when they upload data. This is okay, as long as you catch your mistakes by reconciling to your bank and credit card statements.
Reconciling your accounts will not only help you to make sure bank accounts are accurate, but it will also help you to make your receivables from customers and payables to vendors more accurate as well.
Fortunately, this is not a difficult task to do. If you have never reconciled before, it may take some work to get the first month’s reconciliation taken care of, but after that, the task become easier. The steps to reconcile are as follows: Click on banking; reconcile; choose the correct account; type in the statement date and the balances.
We offer ongoing QuickBooks consulting to assist clients with their books to insure they are getting the most from QuickBooks. Do you need help?
Wednesday, November 3, 2010
Year-End Tax Planning Tips
We still don’t know what is going to happen to the tax rates after December 31st, but most likely they will go up. So how do you plan ahead to try to save taxes both this year and next? Here are a few ways that are generally effective no matter where taxes are headed:
For Business Owners:
Purchases of equipment and vehicles through the end of this year may qualify for bonus depreciation: This allows you to generally expense 50% of the cost of equipment or a vehicle for this year. For example, if you purchase a new vehicle, you may receive an additional $8,000 of additional depreciation expense for this year.
Review you business structure: If you are a single-member LLC or sole-proprietor, does this structure still make sense for next year? What if you are an S-Corp? Each entity has its own advantages and disadvantages, but a thorough analysis to see which entity will save you more taxes and help your business prosper is beneficial.
Retirement plans: Does your business have a retirement plan? Some plans need to be set-up before the end of this year to take advantage of them for 2010. If you have a plan already in place, is it set-up correctly to allow you to maximize your contributions and save taxes?
Estimated taxes & withholdings: Should you increase your estimated tax payments or withholdings to avoid underpayment penalties, and increase your itemized deductions for state tax payments? Now is the time to plan.
For Individuals:
Residential energy credits: You have until the end of this year to purchase eligible energy-efficient equipment, such as a new hot water heater, or even doors and windows, to receive a credit equal to 30% of the cost for a maximum credit of $1,500.
Convert you IRA to a Roth: For this year only, if you convert your IRA to a Roth IRA, you can defer the taxes over two years, 2011 and 2012. By converting to a Roth, distributions are tax-free! This decision should be weighed carefully to see if it makes sense for you.
Contribute to an FSA Plan: If your employer offers a flexible spending account for medical expenses, you can save taxes by participating. You will most likely need to enroll before this year is over.
Remember, a little planning can go a long way!
For Business Owners:
Purchases of equipment and vehicles through the end of this year may qualify for bonus depreciation: This allows you to generally expense 50% of the cost of equipment or a vehicle for this year. For example, if you purchase a new vehicle, you may receive an additional $8,000 of additional depreciation expense for this year.
Review you business structure: If you are a single-member LLC or sole-proprietor, does this structure still make sense for next year? What if you are an S-Corp? Each entity has its own advantages and disadvantages, but a thorough analysis to see which entity will save you more taxes and help your business prosper is beneficial.
Retirement plans: Does your business have a retirement plan? Some plans need to be set-up before the end of this year to take advantage of them for 2010. If you have a plan already in place, is it set-up correctly to allow you to maximize your contributions and save taxes?
Estimated taxes & withholdings: Should you increase your estimated tax payments or withholdings to avoid underpayment penalties, and increase your itemized deductions for state tax payments? Now is the time to plan.
For Individuals:
Residential energy credits: You have until the end of this year to purchase eligible energy-efficient equipment, such as a new hot water heater, or even doors and windows, to receive a credit equal to 30% of the cost for a maximum credit of $1,500.
Convert you IRA to a Roth: For this year only, if you convert your IRA to a Roth IRA, you can defer the taxes over two years, 2011 and 2012. By converting to a Roth, distributions are tax-free! This decision should be weighed carefully to see if it makes sense for you.
Contribute to an FSA Plan: If your employer offers a flexible spending account for medical expenses, you can save taxes by participating. You will most likely need to enroll before this year is over.
Remember, a little planning can go a long way!
Friday, September 17, 2010
How Healthy Are Your Sales?
There are many ways of measuring risk, but did you know that your sales concentration may be placing an unnecessary risk to your business? This also applies to sales professionals as well.
I have seen it over and over again, whereas a small business relies heavily on one or several large customers, and then the customer disappears. Sometimes multiple large customers disappear at the same time. Either they go out of business, cut-back due to a slowdown, have management changes, or other various changes happen that are beyond your control. This will all impact your business as your sales now plummet.
As a good rule of thumb, you don’t want to have more than 10% of your sales from one customer. It creates more risk than necessary because you never know if or when things will change. There is an adage known as Murphy’s Law that states, “Anything that can go wrong, will go wrong.” Additionally, you don’t want to rely heavily on one referral source for new business either. Murphy’s Law applies here as well.
What should you do to minimize your risk? First, never build your business around one or a few customers. This may be the case when a business is relatively new, but over time it is a huge risk. Secondly, assess sales per client to acknowledge who the large customers are. And thirdly, you need to market your business to decrease your risk of serving a few large customers.
A healthy business is constantly looking for ways to reduce risk. This not only decreases your chance of set-backs, but increases your odds of insuring ongoing success.
I have seen it over and over again, whereas a small business relies heavily on one or several large customers, and then the customer disappears. Sometimes multiple large customers disappear at the same time. Either they go out of business, cut-back due to a slowdown, have management changes, or other various changes happen that are beyond your control. This will all impact your business as your sales now plummet.
As a good rule of thumb, you don’t want to have more than 10% of your sales from one customer. It creates more risk than necessary because you never know if or when things will change. There is an adage known as Murphy’s Law that states, “Anything that can go wrong, will go wrong.” Additionally, you don’t want to rely heavily on one referral source for new business either. Murphy’s Law applies here as well.
What should you do to minimize your risk? First, never build your business around one or a few customers. This may be the case when a business is relatively new, but over time it is a huge risk. Secondly, assess sales per client to acknowledge who the large customers are. And thirdly, you need to market your business to decrease your risk of serving a few large customers.
A healthy business is constantly looking for ways to reduce risk. This not only decreases your chance of set-backs, but increases your odds of insuring ongoing success.
Children and Tax Benefits
With the recent birth of our twins, I thought it would be appropriate to write about the tax benefits of raising children. The rules can get tricky, and your children must meet certain criteria to become your qualifying children for tax purposes. Here are a few highlights:
Dependency Exemption: For each qualifying dependent child, you can exempt from your income $3,650.
Child Tax Credit: For each qualifying child under 17 years of age you can receive a credit of up to $1,000 per child. The credit phases-out after your modified adjusted gross income is greater than $110,000 for filing jointly and $75,000 for filing as single or head of household.
Child Care Credit: If you pay for daycare, after-care or preschool so that you can work, you may be eligible for a credit of 20% to 35% of the cost, up to a maximum of $3,000 of qualified expenses for one child and $6,000 for two or more. Your children must be under age 13 to qualify.
Education Credits: There are three credits available for education expenses. The American Opportunity Credit provides a credit of up to $2,500 per eligible student for the first four years of college (100% of the first $2,000 of expenses and 25% of the next $2,000). The Hope Credit provides a credit of up to $1,800 for the first two years of college (100% of the first $1,200 of expenses and 50% of the next $1,200). The Lifetime Learning Credit provides a credit of up to $2,000 for an unlimited number of years (20% of the first $10,000 of expenses). There are income limitations for each credit which range from $120,000 for the Lifetime Learning Credit for joint filers to $180,000 for the American Opportunity and Hope Credits for joint filers. The income limitations are half for all other filers.
Income Shifting: If you are self-employed, you may be able to hire your minor children, pay them wages, and not have to pay income taxes or payroll taxes. Even if you do not own a business you may still be able to shift investment income to your children to minimize taxes. It takes a lot of planning, but strategizing can save a lot of taxes.
These are just some of the tax benefits to having children. Hopefully this will help to offset some of the cost of raising a family.
The 1099 Nightmare is Coming
In addition to income tax filings, sales tax filings, and payroll tax filings, businesses need to also file annual 1099’s. Generally, a 1099-MISC is an information report that needs to be prepared by a business when they spend $600 or more on services from a non-employee. For example, if you are a contractor and you pay $600 or more to a subcontractor that does not own a corporation, you will need to issue him a 1099 at the end of the year.
Depending upon how many subcontractors you compensate, if any, you may not have to prepare and issue that many 1099’s during any given year. It may not be much of a burden, except for the new changes due to the Patient Protection and Affordable Care Act . . .
After December 31, 2011 business will have to report all payments totaling $600 or more to any vendor during the year, with almost no exceptions. If you go to the same gas station to fill up your tank, you will need to issue a 1099. Purchase supplies from Staples? Have a telephone and a cell phone bill? Take clients to the same restaurant often? Business owners will also need to obtain the taxpayer identification number of all of their vendors, along with their address to comply with the new regulations.
The main reason for these changes is because the federal government is trying to increase compliance with the tax laws by having businesses report all income that is received. But these reporting requirements are still being clarified by the IRS, and the obvious result of these changes is an increased time and expense burden to small business owners.
Wednesday, July 21, 2010
But It’s Tax Deductible!
Paying mortgage interest, property taxes, equity loan interest, business expenses are all generally tax deductible. But does it make sense to incur excessive expenses just to produce a tax benefit?
For example, if you are looking to move to a bigger house, you will save a lot of money in taxes, right? Yes, you may actually save income taxes, but at the same time you will have spent much more money. Spending a dollar to save a quarter doesn’t make much sense at all.
Just because qualified business meals and entertainment may be deductible (generally only 50% deductible), it may not make sense to spend excessively. I have seen some business owners spend so much on meals that they could have used this money to hire an assistant so they can work less. Now, that’s real savings!
For example, if you are looking to move to a bigger house, you will save a lot of money in taxes, right? Yes, you may actually save income taxes, but at the same time you will have spent much more money. Spending a dollar to save a quarter doesn’t make much sense at all.
Just because qualified business meals and entertainment may be deductible (generally only 50% deductible), it may not make sense to spend excessively. I have seen some business owners spend so much on meals that they could have used this money to hire an assistant so they can work less. Now, that’s real savings!
Wednesday, July 14, 2010
The One Most Important Thing Your Business Needs
You probably think I am going to say a good accountant is the most important thing your business needs. Although a good accountant is essential, it is not the number one priority. The most important thing your business needs is sales! Call it sales, revenues, fees, customers, or clients, but it is all the same. Without sales you do not have a business, therefore nothing else matters.
The recession has taken its toll on business owners, which is why it is even more important to focus on sales. The way to increase sales is to increase your marketing efforts. It doesn’t have to be expensive, but it should be effective. Your marketing efforts should be planned and focused.
As part of your marketing, you need to focus on who you want to target and how. For example, a veterinarian should only target pet owners. Lists can be obtained from database companies, such as infousa that are very specific.
The next step is how to contact your target market. Maybe the veterinarian can send a postcard to the pet owners. Maybe he/she can even get more creative and partner with a local, independent pet shop to cross market his/her services.
Just remember that a good marketing strategy is to diversify your marketing methods. I recommend marketing in at least 5 different ways because not all usually work at the same time. To obtain a list of marketing techniques for your products or services, please feel free to email me and I will send you the report right away.
The recession has taken its toll on business owners, which is why it is even more important to focus on sales. The way to increase sales is to increase your marketing efforts. It doesn’t have to be expensive, but it should be effective. Your marketing efforts should be planned and focused.
As part of your marketing, you need to focus on who you want to target and how. For example, a veterinarian should only target pet owners. Lists can be obtained from database companies, such as infousa that are very specific.
The next step is how to contact your target market. Maybe the veterinarian can send a postcard to the pet owners. Maybe he/she can even get more creative and partner with a local, independent pet shop to cross market his/her services.
Just remember that a good marketing strategy is to diversify your marketing methods. I recommend marketing in at least 5 different ways because not all usually work at the same time. To obtain a list of marketing techniques for your products or services, please feel free to email me and I will send you the report right away.
Tuesday, July 13, 2010
Are You Overwhelmed By Debt?
The number of bankruptcy filings has increased over the last several years due to the increase of household debt. Statistics can be found at www.abiworld.org, which is the website for the American Bankruptcy Institute. Bankruptcy is a tough decision to make and should be well thought out before filing. The focus of this article is not bankruptcy though, but debt management.
Why or how do so many people get into trouble with debt? When does it become a problem? There are so many reasons, such as job loss or, health problems, but overall it is a disconnect between income and spending, and not enough focus on financial management.
I’d like to share a few simple ways to reduce your debt and help to minimize its use in the future. If you keep it simple, you are more likely to be successful.
Stop incurring more debt: You can’t get out of debt if you are still using your credit cards. Do not increase your debt or you will never get out.
Emergency fund: By building up an emergency fund, you are less likely to take upon more debt for something unexpected. For now, it can be around $1,000 to start. Ideally, you will want to work towards 3 to 6 months worth of expenses, but it doesn’t make sense at this point to save $10,000 and simultaneously have a $10,000 credit card balance.
Budget: If you are serious about reducing your debt and improving your financial situation, you need to take the time to make a budget. You can use software, such as Excel or Quicken, but a very simple and effective way is to use envelopes. For example, if you are paid weekly by your employer and spend an average of $100 a week on groceries, then place $100 in an envelope labeled groceries. When you go food shopping, bring this envelope so that you can only spend$100 or less. This can be done with all other expenses. It is simplistic, but if it is done right it is extremely effective. My father taught me this one.
Know what you owe and prioritize: Make a list of all of the debts you owe, including credit cards, auto loans, equity loans, mortgages, student loans, etc. Now you need to work at chipping away those debts. The rational place to start is with the highest interest debt, but I don’t recommend this. You should actually try to pay off the smallest balances first because it will give a sense of accomplishment. Once the smallest is paid off, then use that payment toward the next balance. Finances are extremely psychological, as most of our financial decisions are emotional-based.
These few steps are a good place to start to manage and reduce your debt. If you are serious about debt elimination, you will not look for shortcuts, but rather ways to increase your income to pay off your debt sooner and take control. Focus and simplicity are the keys. If you need more help you can contact my office. Additionally, there is an excellent book on this topic that parallels my thoughts on debt, entitled “The Total Money Makeover” by Dave Ramsey.
Why or how do so many people get into trouble with debt? When does it become a problem? There are so many reasons, such as job loss or, health problems, but overall it is a disconnect between income and spending, and not enough focus on financial management.
I’d like to share a few simple ways to reduce your debt and help to minimize its use in the future. If you keep it simple, you are more likely to be successful.
Stop incurring more debt: You can’t get out of debt if you are still using your credit cards. Do not increase your debt or you will never get out.
Emergency fund: By building up an emergency fund, you are less likely to take upon more debt for something unexpected. For now, it can be around $1,000 to start. Ideally, you will want to work towards 3 to 6 months worth of expenses, but it doesn’t make sense at this point to save $10,000 and simultaneously have a $10,000 credit card balance.
Budget: If you are serious about reducing your debt and improving your financial situation, you need to take the time to make a budget. You can use software, such as Excel or Quicken, but a very simple and effective way is to use envelopes. For example, if you are paid weekly by your employer and spend an average of $100 a week on groceries, then place $100 in an envelope labeled groceries. When you go food shopping, bring this envelope so that you can only spend$100 or less. This can be done with all other expenses. It is simplistic, but if it is done right it is extremely effective. My father taught me this one.
Know what you owe and prioritize: Make a list of all of the debts you owe, including credit cards, auto loans, equity loans, mortgages, student loans, etc. Now you need to work at chipping away those debts. The rational place to start is with the highest interest debt, but I don’t recommend this. You should actually try to pay off the smallest balances first because it will give a sense of accomplishment. Once the smallest is paid off, then use that payment toward the next balance. Finances are extremely psychological, as most of our financial decisions are emotional-based.
These few steps are a good place to start to manage and reduce your debt. If you are serious about debt elimination, you will not look for shortcuts, but rather ways to increase your income to pay off your debt sooner and take control. Focus and simplicity are the keys. If you need more help you can contact my office. Additionally, there is an excellent book on this topic that parallels my thoughts on debt, entitled “The Total Money Makeover” by Dave Ramsey.
Friday, July 9, 2010
Thursday, July 8, 2010
Update to the Homebuyer's Credit
The homebuyer credit has been extended until September 30th for eligible taxpayers. If you entered into a binding contract to purchase a home by April 30th, then you have until this time to close on your home.
Tuesday, May 4, 2010
A Primer on QuickBooks
What exactly is QuickBooks? QuickBooks is an accounting program that is used primarily by small businesses. It is very user-friendly, which makes it ideal if you are not an accountant.
QuickBooks will enable you to take control of your business finances to help you to make better decisions. Business owners can keep track of receivables from customers and clients, bills that are due, and account balances such as checking accounts, inventory, and credit cards. You can even reconcile your accounts to your statements to make sure your records are accurate. Can you imagine not knowing how much your customers owe you?
Ideally, you will want to be able to generate financial reports such as profit and loss statements, as well as balance sheets. A profit and loss statement will tell you how much your sales, expenses, and profits were, while a balance sheet reflects assets (such as checking accounts), liabilities (such as loans), and equity (the difference between assets and liabilities, which is your ownership stake).
Successful small business owners know how their business is performing on an ongoing basis. This is where QuickBooks can help. Your decisions should be made based upon the financial results of your business. Just remember not to do it alone. While QuickBooks is very user-friendly, many people do need assistance from an expert. It can be extremely advantageous to consult with us on an on-going basis. We can advise you on how to best set up QuickBooks, how to use it effectively, and how to interpret your business results to help you to save money, taxes, and increase profits.
QuickBooks will enable you to take control of your business finances to help you to make better decisions. Business owners can keep track of receivables from customers and clients, bills that are due, and account balances such as checking accounts, inventory, and credit cards. You can even reconcile your accounts to your statements to make sure your records are accurate. Can you imagine not knowing how much your customers owe you?
Ideally, you will want to be able to generate financial reports such as profit and loss statements, as well as balance sheets. A profit and loss statement will tell you how much your sales, expenses, and profits were, while a balance sheet reflects assets (such as checking accounts), liabilities (such as loans), and equity (the difference between assets and liabilities, which is your ownership stake).
Successful small business owners know how their business is performing on an ongoing basis. This is where QuickBooks can help. Your decisions should be made based upon the financial results of your business. Just remember not to do it alone. While QuickBooks is very user-friendly, many people do need assistance from an expert. It can be extremely advantageous to consult with us on an on-going basis. We can advise you on how to best set up QuickBooks, how to use it effectively, and how to interpret your business results to help you to save money, taxes, and increase profits.
I Received a Notice from the IRS – Now What?!
If you receive a letter in the mail from the IRS, the first thing you should do is open it! It might not be as bad as you think. The most common notice I see is that a client forgot to include interest, dividends, or wages from a W-2 on their income tax return and now they owe additional taxes, interest, and penalties.
Just because you receive a notice that you owe money doesn’t mean the notice is correct. You want to see why there is an increase, and compare the figures in the letter to your tax return. Then you want to see what the proposed changes are. I have seen notices that have actually showed incorrect W-2 wages.
Usually you have 30 days to respond to the notice before additional interest and penalties will be assessed. There are several options to take at this point.
The first option, if the notice is correct and the additional penalties and interest are very insignificant, should be to pay the amount due as soon as possible. If the notice is correct and you have a valid reason for not including a portion of income, you should then include payment of the taxes and interest on those taxes only. Additionally, you will need to respond to the notice to state why the penalties should be removed. The IRS will remove penalties if you have a justifiable reason. As a caveat, if the penalties are not removed then you will owe not only penalties, but possible interest on the penalties as well. The cost/benefit has to be weighed carefully. If the notice is completely wrong, then you should not send any payment, but include an explanation in your written response to the IRS, along with any supporting documents to show why you do not owe additional taxes, interest, and penalties.
As you can see there are several options when receiving a notice from the IRS or one of the state taxing authorities. Do not hesitate to contact our office if you receive a notice. We can clearly explain it to you and guide you through the next step to take.
Just because you receive a notice that you owe money doesn’t mean the notice is correct. You want to see why there is an increase, and compare the figures in the letter to your tax return. Then you want to see what the proposed changes are. I have seen notices that have actually showed incorrect W-2 wages.
Usually you have 30 days to respond to the notice before additional interest and penalties will be assessed. There are several options to take at this point.
The first option, if the notice is correct and the additional penalties and interest are very insignificant, should be to pay the amount due as soon as possible. If the notice is correct and you have a valid reason for not including a portion of income, you should then include payment of the taxes and interest on those taxes only. Additionally, you will need to respond to the notice to state why the penalties should be removed. The IRS will remove penalties if you have a justifiable reason. As a caveat, if the penalties are not removed then you will owe not only penalties, but possible interest on the penalties as well. The cost/benefit has to be weighed carefully. If the notice is completely wrong, then you should not send any payment, but include an explanation in your written response to the IRS, along with any supporting documents to show why you do not owe additional taxes, interest, and penalties.
As you can see there are several options when receiving a notice from the IRS or one of the state taxing authorities. Do not hesitate to contact our office if you receive a notice. We can clearly explain it to you and guide you through the next step to take.
Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act is 906 pages long. It can be easily found by typing it in at google.com. One of the highlights of the Act is to provide a credit to small business owners who provide health insurance to their employees starting in 2010.
The amount of the credit is equal to a maximum of 35 percent of the premiums paid by an eligible small business during 2010. This will increase to a maximum of 50 percent of premiums paid during the year 2014. The employer must have paid at least half the cost of single coverage for their employees to be eligible.
Since the credit was designed to help small business owners that employ low and moderate income workers, average wages per employee must be less than $50,000 per year. Generally, an employer must have fewer than 25 full-time equivalent employees. Employers with less than 10 full-time equivalent employees with average annual wages per employee of less than $25,000 will receive the maximum credit.
Unfortunately, employees such as dependents, including spouses and children, and most business owners are excluded from the definition of employee.
Hopefully this credit will be of help to many small business owners who are on the fence about providing health insurance for their employees due to cost concerns.
The amount of the credit is equal to a maximum of 35 percent of the premiums paid by an eligible small business during 2010. This will increase to a maximum of 50 percent of premiums paid during the year 2014. The employer must have paid at least half the cost of single coverage for their employees to be eligible.
Since the credit was designed to help small business owners that employ low and moderate income workers, average wages per employee must be less than $50,000 per year. Generally, an employer must have fewer than 25 full-time equivalent employees. Employers with less than 10 full-time equivalent employees with average annual wages per employee of less than $25,000 will receive the maximum credit.
Unfortunately, employees such as dependents, including spouses and children, and most business owners are excluded from the definition of employee.
Hopefully this credit will be of help to many small business owners who are on the fence about providing health insurance for their employees due to cost concerns.
Monday, March 1, 2010
Saving Energy Can Give You a Tax Break (Part II to Make Sure You Know All of the Details)
During the last newsletter I wrote about the tax savings of installing energy-saving equipment, and I have received a lot of questions on this topic lately.
Firstly, the tax credit is available for 2009 and 2010. Although the total credit available is a combined $1,500 during both years. For example, if you purchased windows for $4,000 during 2009 you will receive a tax credit of $1,200 on your 2009 taxes (30% of $4,000). Then, if during 2010 you insulate your house for $1,000, you will receive a credit of $300 on your 2010 taxes, for a combined credit limit of $1,500.
What qualifies exactly?
The cost of windows, doors, and metal or asphalt roofs that meet or exceed the Energy Star program requirements qualify. Installations costs do not count towards the cost.
A natural gas, propane or oil water heater that has an energy factor of at least 0.80 or a thermal efficiency of at least 90%. For property placed in service after February 17, 2009, the property must have an energy factor of at least 0.82.
A central air conditioner that achieves the highest efficiency tier that has been established by the CEE as in effect on January 1, 2006. For property placed in service after February 17, 2009, the property must achieve the highest efficiency tier established by the CEE as in effect on January 1, 2009.
A natural gas, propane, or oil furnace or hot water boiler that achieves an annual fuel utilization efficiency rate of at least 95. For property placed in service after February 17, 2009, the annual fuel utilization efficiency rate is reduced to 90.
Also, check PSE&G’s website to find out if your purchase qualifies for state rebates.
Firstly, the tax credit is available for 2009 and 2010. Although the total credit available is a combined $1,500 during both years. For example, if you purchased windows for $4,000 during 2009 you will receive a tax credit of $1,200 on your 2009 taxes (30% of $4,000). Then, if during 2010 you insulate your house for $1,000, you will receive a credit of $300 on your 2010 taxes, for a combined credit limit of $1,500.
What qualifies exactly?
The cost of windows, doors, and metal or asphalt roofs that meet or exceed the Energy Star program requirements qualify. Installations costs do not count towards the cost.
A natural gas, propane or oil water heater that has an energy factor of at least 0.80 or a thermal efficiency of at least 90%. For property placed in service after February 17, 2009, the property must have an energy factor of at least 0.82.
A central air conditioner that achieves the highest efficiency tier that has been established by the CEE as in effect on January 1, 2006. For property placed in service after February 17, 2009, the property must achieve the highest efficiency tier established by the CEE as in effect on January 1, 2009.
A natural gas, propane, or oil furnace or hot water boiler that achieves an annual fuel utilization efficiency rate of at least 95. For property placed in service after February 17, 2009, the annual fuel utilization efficiency rate is reduced to 90.
Also, check PSE&G’s website to find out if your purchase qualifies for state rebates.
Thinking of Starting a New Business?
Starting a new business can be an exciting endeavor. You get to be your own boss, create your own hours, and possibly achieve a greater sense of satisfaction. But what should you do to make sure your business is successful?
Proper planning goes a long way, and a business plan is an excellent starting point. A business plan should contain the following information1:
General Company Description: What will your business do? What are your goals? What do you expect of the industry you will operate in? Will your business be structured as a sole-proprietor, partnership, corporation, or S-corporation?
Products and services offered: If you are a contractor, which type of construction will you perform - residential, commercial, or both? Will you be a general contractor or have a specialty such as plumbing? What are your competitive advantages and disadvantages?
Marketing: It is a good idea to perform some type of market research to make sure there is demand for your products or services. How will you obtain customers or clients? Will you serve a specific industry or niche?
Operations: What will the daily operations of your business look like? Generally, how will you run your business and manage employees.
Management and Advisors: Most likely you will be managing all aspects of your business during the beginning stages. You must realize though, that you cannot be an expert in everything. Advisors will help you to start off on the right track, save you time, money, and keep you out of trouble. A short list should include at a minimum: a CPA, attorney, insurance agent, banker, and a mentor. Never underestimate the value of a qualified professional advisor!
Start-up Expenses: You will need to estimate your expenses to start your business even before you begin operations. Some expenses can include legal fees, accounting fees, office equipment, software, machinery, vehicles, insurance, and marketing expenses. You need to know how you will pay for these expenses also. The funds may come from financing or personal funds used to capitalize the business.
Financial Plans & Projections: This should include a projected profit and loss statement for at least the first year, but it is also helpful to project the first 3 years, which is what I recommend. You want to make sure that when accounting for sales, the number is realistic and you can state how you will achieve this number. This also coincides with your marketing plan.
There is a lot to consider when starting a new business, but it is important to be thorough to insure its success. A little planning goes a long way to help your business start off on the right foot and avoid costly mistakes. Business planning is so important that it even makes sense for existing business to create a business plan to get back on track and take advantage of opportunities.
1 Sample business plan at score.org
Proper planning goes a long way, and a business plan is an excellent starting point. A business plan should contain the following information1:
General Company Description: What will your business do? What are your goals? What do you expect of the industry you will operate in? Will your business be structured as a sole-proprietor, partnership, corporation, or S-corporation?
Products and services offered: If you are a contractor, which type of construction will you perform - residential, commercial, or both? Will you be a general contractor or have a specialty such as plumbing? What are your competitive advantages and disadvantages?
Marketing: It is a good idea to perform some type of market research to make sure there is demand for your products or services. How will you obtain customers or clients? Will you serve a specific industry or niche?
Operations: What will the daily operations of your business look like? Generally, how will you run your business and manage employees.
Management and Advisors: Most likely you will be managing all aspects of your business during the beginning stages. You must realize though, that you cannot be an expert in everything. Advisors will help you to start off on the right track, save you time, money, and keep you out of trouble. A short list should include at a minimum: a CPA, attorney, insurance agent, banker, and a mentor. Never underestimate the value of a qualified professional advisor!
Start-up Expenses: You will need to estimate your expenses to start your business even before you begin operations. Some expenses can include legal fees, accounting fees, office equipment, software, machinery, vehicles, insurance, and marketing expenses. You need to know how you will pay for these expenses also. The funds may come from financing or personal funds used to capitalize the business.
Financial Plans & Projections: This should include a projected profit and loss statement for at least the first year, but it is also helpful to project the first 3 years, which is what I recommend. You want to make sure that when accounting for sales, the number is realistic and you can state how you will achieve this number. This also coincides with your marketing plan.
There is a lot to consider when starting a new business, but it is important to be thorough to insure its success. A little planning goes a long way to help your business start off on the right foot and avoid costly mistakes. Business planning is so important that it even makes sense for existing business to create a business plan to get back on track and take advantage of opportunities.
1 Sample business plan at score.org
Monday, February 1, 2010
Deductibility of Donations for Haiti
The earthquake in Haiti was a tragic event, as hundreds of thousands of people lost their lives. Many people have reached into their pockets to make donations – many by text messaging through their mobile phones.
When making qualified charitable donations, taxpayers who itemize realize a tax benefit during the year of their contribution. But, due to a recent special relief provision, taxpayers can actually deduct qualified contributions made this year for Haiti relief on their 2009 income tax return.
To qualify, contributions must be made after January 11, 2010 and before March 1, 2010. Donations must be made by cash, credit card, text messaging etc., but property donations do not count. Keep this in mind when filing your 2009 tax returns to realize a much quicker tax benefit than usual.
When making qualified charitable donations, taxpayers who itemize realize a tax benefit during the year of their contribution. But, due to a recent special relief provision, taxpayers can actually deduct qualified contributions made this year for Haiti relief on their 2009 income tax return.
To qualify, contributions must be made after January 11, 2010 and before March 1, 2010. Donations must be made by cash, credit card, text messaging etc., but property donations do not count. Keep this in mind when filing your 2009 tax returns to realize a much quicker tax benefit than usual.
Monday, January 11, 2010
Saving Energy Can Give You a Tax Break
If you purchased energy-saving equipment for your home during 2009, or will during 2010 you may be eligible for a tax credit. The credit is equal to 30% of the cost, usually up to a maximum of a $1,500 credit.
Specifically, there are two separate credits, with the first being the Nonbusiness Energy Property Credit. This credit applies to homeowners who purchase high-efficiency heating and air conditioning systems, water heaters, stoves, and the cost of installation. Additionally, energy-efficient windows, doors, insulation, and roofs may also qualify, but the installation costs don’t count. The credit is equal to 30% of the qualifying cost up to $5,000 for a maximum credit amount of $1,500.
The second credit is the Residential Energy Efficient Property Credit. This credit is for someone who is looking to invest large sums of money to save on energy costs. The credit amount is also equal to 30% of the cost of equipment, but there is usually no limit to the credit amount. Qualifying equipment includes solar hot water heaters, solar electric systems, geothermal heat pumps, and wind turbines.
To determine if the equipment you purchase qualifies for these tax credits, you will first need to check the manufacturer’s tax credit certification statement. Not all energy efficient equipment qualifies, which is why it is important to do your research before making a purchase.
Specifically, there are two separate credits, with the first being the Nonbusiness Energy Property Credit. This credit applies to homeowners who purchase high-efficiency heating and air conditioning systems, water heaters, stoves, and the cost of installation. Additionally, energy-efficient windows, doors, insulation, and roofs may also qualify, but the installation costs don’t count. The credit is equal to 30% of the qualifying cost up to $5,000 for a maximum credit amount of $1,500.
The second credit is the Residential Energy Efficient Property Credit. This credit is for someone who is looking to invest large sums of money to save on energy costs. The credit amount is also equal to 30% of the cost of equipment, but there is usually no limit to the credit amount. Qualifying equipment includes solar hot water heaters, solar electric systems, geothermal heat pumps, and wind turbines.
To determine if the equipment you purchase qualifies for these tax credits, you will first need to check the manufacturer’s tax credit certification statement. Not all energy efficient equipment qualifies, which is why it is important to do your research before making a purchase.
Frequently Asked Questions (and Answers)
I thought that it would be informative to list some of the questions that I have been recently asked, along with the answers. I can only guess about the future of the estate tax for 2010 and beyond, but I will have an answer about this once legislation is actually passed.
Q: What is the IRA contribution limit for 2009 and the due date?
A: The maximum amount is $5,000 with a catch-up contribution of $1,000 for taxpayers over age 50. There may be a limitation of the deductibility of traditional IRA’s if you have a retirement plan at work, and there is an income limitation for the contribution of Roth IRA’s. The due date is 4/15/10 for 2009 contributions.
Q: Is it better to file a separate tax return from my spouse?
A: Also known as “Married Filing Separately,” usually results in a higher amount of taxes being paid, but can be advantageous in certain situations. We always do an analysis to see if this is better for our married clients.
Q: Does an extension also extend the amount of time I have to pay my taxes?
A: An extension only extends the amount of time to file your return, but if you owe taxes, then you will incur penalties and interest.
Q: Do I need to keep receipts for my donations?
A: Yes, you need receipts for all donations, but if the donation was less than $250, a cancelled check is sufficient.
Q: Should I pay my property taxes ahead of time so that I can deduct that payment on my return?
A: It depends on which year you expect to be in a higher tax bracket. You must also take into consideration if you are not subject to the AMT tax, which leads to the next question.
Q: What is the AMT tax?
A: AMT, which stands for “Alternative Minimum Tax” is a tax that parallels the income tax. It was originally design to prevent wealthy individuals from paying zero income taxes. The most common difference between these two taxes is that the AMT does not allow for the deduction of state and local taxes. Taxpayers are responsible for paying whichever tax is greater.
Q: Do I have to make estimated tax payments, and If so, why?
A: Usually self-employed taxpayers, retirees, and anyone who has income from sources that do not have taxes withheld are required to make quarterly estimated tax payments. If you need to make estimated payments and do not, you may be subject to underpayment penalties.
Q: What is the IRA contribution limit for 2009 and the due date?
A: The maximum amount is $5,000 with a catch-up contribution of $1,000 for taxpayers over age 50. There may be a limitation of the deductibility of traditional IRA’s if you have a retirement plan at work, and there is an income limitation for the contribution of Roth IRA’s. The due date is 4/15/10 for 2009 contributions.
Q: Is it better to file a separate tax return from my spouse?
A: Also known as “Married Filing Separately,” usually results in a higher amount of taxes being paid, but can be advantageous in certain situations. We always do an analysis to see if this is better for our married clients.
Q: Does an extension also extend the amount of time I have to pay my taxes?
A: An extension only extends the amount of time to file your return, but if you owe taxes, then you will incur penalties and interest.
Q: Do I need to keep receipts for my donations?
A: Yes, you need receipts for all donations, but if the donation was less than $250, a cancelled check is sufficient.
Q: Should I pay my property taxes ahead of time so that I can deduct that payment on my return?
A: It depends on which year you expect to be in a higher tax bracket. You must also take into consideration if you are not subject to the AMT tax, which leads to the next question.
Q: What is the AMT tax?
A: AMT, which stands for “Alternative Minimum Tax” is a tax that parallels the income tax. It was originally design to prevent wealthy individuals from paying zero income taxes. The most common difference between these two taxes is that the AMT does not allow for the deduction of state and local taxes. Taxpayers are responsible for paying whichever tax is greater.
Q: Do I have to make estimated tax payments, and If so, why?
A: Usually self-employed taxpayers, retirees, and anyone who has income from sources that do not have taxes withheld are required to make quarterly estimated tax payments. If you need to make estimated payments and do not, you may be subject to underpayment penalties.
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