Which items do you think are taxable and which are not? The answers are below.
1. Workers compensation
2. Educational assistance
3. Cancelled debt
4. Expense reimbursements
5. Fringe benefits
6. Bartering
7. Hosting a party and receiving payment (such as a candle party)
8. Life insurance proceeds
9. Unemployment benefits
10. Federal income tax refund
Taxable: cancelled debt, fringe benefits, bartering, hosting a party, and unemployment benefits
Non-taxable: Workers compensation, education assistance of $5,250, expense reimbursements, life insurance proceeds, and federal income tax refund
There are always exceptions and the rules are constantly changing. If you ever have a question about the taxability of an item, do not hesitate to contact our office.
Wednesday, August 17, 2011
Thursday, July 28, 2011
Save Taxes by Taking the Home Office Deduction
The IRS allows business owners and employees to deduct expenses for using part of their home for business purposes. This can help to save income taxes as well as self-employment taxes. For every $1,000 of additional deductions, a self-employed person may save around $500! Here are the rules:
The first rule is that the area you use for business must be used exclusively and regularly for business. This means that the guest room that you use as an office cannot be used for even a single night to host your guests.
The second is that your home must be your principal place of business. To determine if your home is your principal place of business you must use it for administrative or management activities such as billing customers and recordkeeping.
If you are an employee there are other criteria that must be met as well. You must use your home for the convenience of your employer and you must not rent any part of your home to your employer.
What can be deducted exactly? You can deduct items such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, and depreciation of your house. Even if you itemize and deduct mortgage interest and property taxes on your tax return, it is more advantageous to someone who is self-employed to deduct a portion of these expenses as business expenses. The reason is to save self-employment taxes.
Although some believe the home office deduction will increase your chance of an audit, this should not discourage taxpayers from taking this valuable deduction. As long as you follow the rules and keep good records, you should not be concerned. Keeping good records and adhering to the rules applies to all other deductions as well.
The first rule is that the area you use for business must be used exclusively and regularly for business. This means that the guest room that you use as an office cannot be used for even a single night to host your guests.
The second is that your home must be your principal place of business. To determine if your home is your principal place of business you must use it for administrative or management activities such as billing customers and recordkeeping.
If you are an employee there are other criteria that must be met as well. You must use your home for the convenience of your employer and you must not rent any part of your home to your employer.
What can be deducted exactly? You can deduct items such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, and depreciation of your house. Even if you itemize and deduct mortgage interest and property taxes on your tax return, it is more advantageous to someone who is self-employed to deduct a portion of these expenses as business expenses. The reason is to save self-employment taxes.
Although some believe the home office deduction will increase your chance of an audit, this should not discourage taxpayers from taking this valuable deduction. As long as you follow the rules and keep good records, you should not be concerned. Keeping good records and adhering to the rules applies to all other deductions as well.
Thursday, July 21, 2011
Do You Watch Shark Tank?
You have probably heard of the show Shark Tank, which airs on ABC on Friday nights. The show is about entrepreneurs who pitch their products and ideas to a group of wealthy investors who are referred to as “sharks.” Hopefully, the sharks will bite and offer to invest some of their money in the fledgling businesses.
Many times the sharks pass up on investing in the new business, which is very eye-opening for the entrepreneurs. Other times, more than one shark wants to invest in the business because there is a lot of upside, and the risk seems worth it. There are some great business lessons to be learned by all of this.
Research the market: Are there enough people that are willing to buy your product? Even so, what price should you sell the product for and who is your target customer?
Business model: Is there enough profit to be made? Does it make sense to spend a lot of money for the return that is generated? Is it costly to acquire customers?
Careful with your funds: Some entrepreneurs invest so much money in their product that they are now broke. Worse yet is that the product may not even be viable. Even if the business is good, the entrepreneur is eager to sell and may end up taking a lowball offer just to recoup their own investment.
Lack of Experience: When a product is good, the problem that entrepreneurs may have is usually manufacturing, distribution, and additional capital. Instead of selling a piece of your company, an alternative is to work with qualified professionals, such as consultants, attorneys, accountants, and competent employees.
Businesses are started every day. Some are successful, but unfortunately, many are not. The key to increasing your chance of success is to plan and be well thought-out. Just like preparing to take a test as a student, you have to study ahead of time to increase your chances of getting an “A.”
Many times the sharks pass up on investing in the new business, which is very eye-opening for the entrepreneurs. Other times, more than one shark wants to invest in the business because there is a lot of upside, and the risk seems worth it. There are some great business lessons to be learned by all of this.
Research the market: Are there enough people that are willing to buy your product? Even so, what price should you sell the product for and who is your target customer?
Business model: Is there enough profit to be made? Does it make sense to spend a lot of money for the return that is generated? Is it costly to acquire customers?
Careful with your funds: Some entrepreneurs invest so much money in their product that they are now broke. Worse yet is that the product may not even be viable. Even if the business is good, the entrepreneur is eager to sell and may end up taking a lowball offer just to recoup their own investment.
Lack of Experience: When a product is good, the problem that entrepreneurs may have is usually manufacturing, distribution, and additional capital. Instead of selling a piece of your company, an alternative is to work with qualified professionals, such as consultants, attorneys, accountants, and competent employees.
Businesses are started every day. Some are successful, but unfortunately, many are not. The key to increasing your chance of success is to plan and be well thought-out. Just like preparing to take a test as a student, you have to study ahead of time to increase your chances of getting an “A.”
Friday, June 3, 2011
Did You Get a Surprise After Filing Your Return?
Everyone loves to receive a much larger than anticipated tax refund, but what if you unexpectedly had to pay? There could be several reasons why, but it’s not too late to fix it for 2011.
Your filing status or dependents may have changed, perhaps from married to single, which usually causes you to pay more income taxes. Maybe you cannot claim your children as dependents anymore. For 2010, each exemption decreased your taxable income by $3,650.
Your business did very well and additional taxes were not paid. If you are self-employed, not only will you owe income taxes on each dollar of earnings, but you may be subject to self-employment tax, which is an additional 15.3%.
Taxable income has increased and certain deductions and credits have been phased-out. Once your income goes beyond $100,000 many tax credits, such as the child tax credit, are reduced. Real estate losses may also become reduced as well.
To prevent a negative surprise for 2011’s tax return, check your current withholdings to make sure that enough taxes are being withheld each paycheck. If you need to increase your withholdings, simply print out form w-4 from www.irs.gov or ask your employer and submit it to them with the additional amount you would like withheld. Any amount can be specified, such as $100. If you need help estimating, please contact our office.
Your filing status or dependents may have changed, perhaps from married to single, which usually causes you to pay more income taxes. Maybe you cannot claim your children as dependents anymore. For 2010, each exemption decreased your taxable income by $3,650.
Your business did very well and additional taxes were not paid. If you are self-employed, not only will you owe income taxes on each dollar of earnings, but you may be subject to self-employment tax, which is an additional 15.3%.
Taxable income has increased and certain deductions and credits have been phased-out. Once your income goes beyond $100,000 many tax credits, such as the child tax credit, are reduced. Real estate losses may also become reduced as well.
To prevent a negative surprise for 2011’s tax return, check your current withholdings to make sure that enough taxes are being withheld each paycheck. If you need to increase your withholdings, simply print out form w-4 from www.irs.gov or ask your employer and submit it to them with the additional amount you would like withheld. Any amount can be specified, such as $100. If you need help estimating, please contact our office.
Penny Wise, Pound Foolish
What do I mean by penny wise, pound foolish? Saving a penny, but it costs you a dollar. Here are a few examples:
Extreme Couponing: I watched an episode of extreme couponing and the first thought that came to my mind, aside from obsessive, is that the coupon clippers spend way too much time trying to save money. If an average family spends around $150 to $200 on groceries weekly, but they spend 30 hours a week couponing, aren’t they missing out on actually earning money? Multiply 30 hours by a minimum of $15/hour working and the result is $450. Even if $150 out of that goes towards taxes, it makes sense to try to earn more money than trying to save $150 by cutting coupons all day. One thought – my family cuts coupons, but we spend around 20 minutes a week maximum.
Not Investing in Yourself or Your Business: Aside from retirees, most individuals make the most income from earnings as a business owner or an employee. Don’t hesitate to intelligently invest money to further your career to produce more income, or to invest money into your business to produce more profits. Investing can be in the form of items designed to produce more income, such as marketing, or to reduce expenses, such as updating your equipment.
Spending Too Much on Items That Are Tax Deductible: Just because you can save taxes by paying loan interest, or by purchasing a new vehicle and equipment for your business, does it really make economic sense to do so? Spending a dollar to save a quarter is definitely penny wise, pound foolish.
Doing It Yourself or On the Cheap: Should you really do your own plumbing if you have never done it before just to save some money? It may end up costing you more when a real plumber has to fix your mess! I also see this with tax and accounting matters, but I am biased in this area, of course.
I still remember the first time I heard the penny wise, pound foolish saying (actually it was a partner at a large public accounting firm, and he said, “penny wise, dollar dumb,” but it still means the same thing). Think before trying to save!
Should Both Parents Work?
The birth of a child is one of the most amazing, memorable times of a person’s life. I remember the birth of our first daughter, Alana, and how I truly understood the expression, “walking on air.” The births of each of our other children were equally as amazing.
With the birth of a child, or perhaps your second, or third, or fourth in my case, comes an important question. Does it make sense for both parents to return back to work? There are many factors to think about, financial and non-financial, but here are some of the financial elements:
Daycare Expenses: The cost can vary significantly, but a typical range can be $800 to $1,200 per month per child. If you have one child in daycare and are paying $12,000 per year, the cost may make sense, depending upon income, but what about two children in daycare with expenses of $24,000 per year?
Commuting: If you take mass transportation into NYC from NJ, you may have to pay for parking at the local train station, the PATH train to NYC, and possibly the subway. If you drive into NYC the toll is $8. That comes to $40 a week in tolls and approximately $2,000 a year!
Dining Out: Almost everyone likes to go out to lunch a couple of times a week to break up the monotony of work. If you spend $10 twice a week, this adds up to $1,000 a year. Also, if both parents work, then you may be more likely to order take-out more often during the week due to time constraints. This may add another $1,000 to $3,000 a year.
Taxes: My favorite subject. This really depends upon your bracket, but even with a parent in the 15% federal tax bracket, once payroll taxes and state taxes are included, at least a quarter of your earnings will go towards taxes. Although, you do get a credit of around $600 for each child in daycare up to a maximum amount of $1,200.If you have two kids in daycare and work in NYC, you can easily spend $40,000 for the privilege of working! Unless you are able to work from home, have a flexible schedule, and even have a grandparent help out, working doesn’t sound so appealing.
With the birth of a child, or perhaps your second, or third, or fourth in my case, comes an important question. Does it make sense for both parents to return back to work? There are many factors to think about, financial and non-financial, but here are some of the financial elements:
Daycare Expenses: The cost can vary significantly, but a typical range can be $800 to $1,200 per month per child. If you have one child in daycare and are paying $12,000 per year, the cost may make sense, depending upon income, but what about two children in daycare with expenses of $24,000 per year?
Commuting: If you take mass transportation into NYC from NJ, you may have to pay for parking at the local train station, the PATH train to NYC, and possibly the subway. If you drive into NYC the toll is $8. That comes to $40 a week in tolls and approximately $2,000 a year!
Dining Out: Almost everyone likes to go out to lunch a couple of times a week to break up the monotony of work. If you spend $10 twice a week, this adds up to $1,000 a year. Also, if both parents work, then you may be more likely to order take-out more often during the week due to time constraints. This may add another $1,000 to $3,000 a year.
Taxes: My favorite subject. This really depends upon your bracket, but even with a parent in the 15% federal tax bracket, once payroll taxes and state taxes are included, at least a quarter of your earnings will go towards taxes. Although, you do get a credit of around $600 for each child in daycare up to a maximum amount of $1,200.If you have two kids in daycare and work in NYC, you can easily spend $40,000 for the privilege of working! Unless you are able to work from home, have a flexible schedule, and even have a grandparent help out, working doesn’t sound so appealing.
Tuesday, March 8, 2011
My Customer/Tenant Didn’t Pay Me. Can I Deduct This on My Tax Return?
I get asked this question a lot, mostly from business owners. The answer to this question is that it depends. First a quick accounting lesson of cash vs. accrual. I promise not to keep it too technical!
If you are a cash basis taxpayer, then you record income or sales once you get paid, either by cash, check, or credit card. You also record expenses when you pay them, even if with a credit card.
For an accrual basis taxpayer, you record income when it is earned. For example, if you are a consultant and you sent an invoice to your client in January for December’s work, then you record the income from the invoice during December. The same goes for expenses, as it generally doesn’t matter when you paid your bill, but when you incurred the expense. This means that if you ordered supplies in December, but paid for them in January, you can deduct the expense in December.
Now to answer the original question: A cash basis taxpayer cannot deduct as an expense an outstanding invoice that was not paid by their customer, or tenant, if they are a landlord. Remember, the invoice was not included as income. On the other hand, an accrual basis taxpayer can deduct an expense for non-payment from a customer or tenant, as long as it is deemed uncollectible.
Most small business clients and landlords are on the cash basis method of accounting. It is much easier for record keeping purposes, and especially for income tax purposes.
If you are a cash basis taxpayer, then you record income or sales once you get paid, either by cash, check, or credit card. You also record expenses when you pay them, even if with a credit card.
For an accrual basis taxpayer, you record income when it is earned. For example, if you are a consultant and you sent an invoice to your client in January for December’s work, then you record the income from the invoice during December. The same goes for expenses, as it generally doesn’t matter when you paid your bill, but when you incurred the expense. This means that if you ordered supplies in December, but paid for them in January, you can deduct the expense in December.
Now to answer the original question: A cash basis taxpayer cannot deduct as an expense an outstanding invoice that was not paid by their customer, or tenant, if they are a landlord. Remember, the invoice was not included as income. On the other hand, an accrual basis taxpayer can deduct an expense for non-payment from a customer or tenant, as long as it is deemed uncollectible.
Most small business clients and landlords are on the cash basis method of accounting. It is much easier for record keeping purposes, and especially for income tax purposes.
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