Starting a Business? 3 Things You Must Know
Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where we can help.
Employer Identification Number (EIN)
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012 you can only apply for one EIN per day. The previous limit was 5.
State Withholding, Unemployment, and Sales Tax
Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).
Payroll Record Keeping
Payroll reporting and record keeping can be very time consuming and costly, especially if it isn't handled correctly. Also keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:
Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.
Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.
If you need help setting up the paperwork for your business, give us a call. Letting our experts handle this part of your business will allow you to concentrate on running your business.
Sell Your Home But Keep the Profits
If you're looking to sell your home this year, then it may be time to take a closer look at the exclusion rules and cost basis of your home in order to reduce your taxable gain on the sale of a home.
The IRS home sale exclusion rule now allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime, as long as you meet the following Ownership and Use tests. However, it cannot be used more frequently than every 24 months.
During the 5-year period ending on the date of the sale, you must have:
- Owned the house for at least two years - Ownership Test
- Lived in the house as your main home for at least two years - Use Test
- During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
Tip: The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.
If you own more than one home, you can exclude the gain only on your main home. The IRS uses several factors to determine which home is a principal residence: place of employment, location of family members' main home, mailing address on bills, correspondence, tax returns, driver's license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.
Tip: As we mentioned earlier, the exclusion can be used repeatedly, every time you reestablish your primary residence. When you do change homes, let us know your new address so we can ensure the IRS has your current address on file.
Note: Only taxable gain on the sale of your home needs to be reported on your taxes. Further, loss on the sale of your main home cannot be deducted. Ask us for details.
Improvements Increase the Cost Basis
Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home and thereby reduce the capital gain.
Additions and other improvements that have a useful life of more than one year can be added to the cost basis of your home.
Examples of Improvements
Examples of improvements include: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.
Example: The Kellys purchased their primary residence in 2002 for $200,000. They paved the unpaved driveway, added a swimming pool, and made several other home improvements adding up to a total of $75,000. The adjusted cost basis of the house is now $275,000. The house is then sold in 2012 for $550,000. It costs the Kellys $40,000 in commissions, advertising, and legal fees to sell the house.
These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain in this case is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on the Kelly's 2012 personal tax return.
Tip: Residential Energy Efficient Property Credit. This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit expires on December 31, 2016 and is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property.
Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; fuel cell property qualifies only when installed on or in connection with your main home located in the United States.
Not all energy-efficient improvements qualify so be sure you have the manufacturer's tax credit certification statement, which can usually be found on the manufacturer's website or with the product packaging.
Please contact us for more information about residential energy tax credits.
Partial Use of the Exclusion Rules
Even if you do not meet the ownership and use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. If one of these situations applies to you, please call us for additional details.
Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the filing due date. However, you should keep records proving your home's cost basis for as long as you own your house.
The records you should keep include:
- Proof of the home's purchase price and purchase expenses
- Receipts and other records for all improvements, additions, and other items that affect the home's adjusted cost basis
- Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997
Tax considerations surrounding the sale of a home can be confusing. If you have any questions on taxes related to the sale of your home, give us a call.
The Best Financial Tool for Business Owners
What if there were a tool that helped you create crystal-clear plans, provided you with continual feedback about how well your plan was working, and that told you exactly what's working and what isn't?
Well, there is such a tool. It's called the Budget vs. Actual Report and it's exactly what you need to be able to consistently make smart business decisions to keep your business on track for success.
Clarifying Your Plan
The more clear you are about your business goals, the more likely you are to achieve them. Creating a budget forces you to examine the details of your goals, as well as how even a single business decision affects all other aspects of your company's operations.
Example: Let's say that you want to grow your sales by 15% this year.
Does that mean you need to hire another salesperson? When will the business start to see new sales from this person? Do you need to set up an office for them? New phone line? Buy them a computer? Do you need to do more advertising? How much more will you spend? When will you see the return on your advertising expenditure?
Navigating the Ship
Once you clarify your goals, then you start making business decisions to help you reach your desired outcome. Some of those decisions will be great and give you better than expected results, but others might not.
This is when the Budget vs Actual Report becomes an effective management tool. When you compare your budgeted sales and expenses to your actual results, you see exactly how far off you might be with regard to your budget, goals, and plans.
Sometimes you need to adjust your plan (budget) and sometimes you need to focus more attention to the areas of your business that are not performing as well as you planned. Either way, you are gleaning valuable insights into your business.
It's like sailing a boat. You may be off-course most of the time, but having a clear goal and making many adjustments helps you reach your destination.
Just Do It
We often know what we need to do but don't take the necessary action. It may seem like a huge hassle to create a budget and then create a Budget vs. Actual Report every month, but as with any new skill, it does get easier.
Turn your dreams into reality. Give us a call and we'll guide you through the budgeting process.
Tax Court Ruling Benefits Small Business Owners
Owners of closely held businesses, including family owned and other small businesses can now pass assets to heirs with minimal taxation thanks to a recent tax court ruling (Wandry v. Commissioner, US Tax Court March 26, 2012).
Under current regulations ownership of the business can be transferred to heirs using yearly and lifetime exemptions ($5,120,000 in 2012), as well as gifting $13,000 per year per heir. The catch is that there must be a professional appraisal of the business, but the IRS can contest the appraised value after the gift is given, and if the IRS finds the value is significantly higher there may be tax consequences.
Here's what happened.
In 2001 Albert and Joanne Wandry (the donors), and their children formed Norseman Capital, LLC. In 2004, the Wandrys gifted $261,000 of business interests to each of their four children. Each of their five grandchildren received $11,000. The terms specified that the gifts should be equal to the dollar amount of their exemptions, which at the time were $1 million lifetime and an $11,000 annual exclusion.
The Wandrys' assignation statement stipulated that an independent appraiser would provide valuation for the company, but that if the IRS challenged the valuation and it was determined to be different in a court of law, then the gifted interests would be adjusted to reflect this. This is known as a defined value clause.
In 2006, the IRS audited the couple's gift tax returns. It appraised the valuation higher than that of the independent appraiser the Wandrys used and said that the gifts now exceeded the exclusion limits. The IRS also argued, among other things, that the defined value clause used in the case was contrary to public policy in part because it discouraged any attempt to collect the tax due.
The tax court disagreed however, and dismissed the argument stating that there was no distinction between a defined value clause in Wandry from that where there was a charitable donee. It also stated that the intent was to make gifts that were equal to their exemptions. As such, there was no additional dollar amount per se, and therefore no tax liability.
Wandry was groundbreaking for a couple of reasons. First, in that the defined value clause had hitherto only been used to reallocate fixed dollar amounts of business interests to charities and not the donors and their children and grandchildren; and second in that when the IRS appraises the business value at a higher amount the difference would not be subject to gift tax, provided the Wandry formulaic model is used.
The lifetime exemption is scheduled to revert to $1 million in 2013, so you might want to consider transferring business assets in 2012 while the exemption is still high. Keep in mind however, that while it's likely the Wandry case will stand, the IRS has a three month window in which to appeal.
Questions? Give us a call today. We're happy to help!
Start Planning Now for Next Year's Tax Return
This year's tax deadline may have come and gone already but it's never to early to start planning for next year. With that in mind, here are eight things you can do now to make next April 15 easier.
1. Adjust your withholding. Why wait another year for a big refund? Now is a good time to review your withholding and make adjustments for next year, especially if you'd prefer more money in each paycheck this year. If you owed at tax time, perhaps you'd like next year's tax payment to be smaller.
Give us a call if you need assistance in adjusting your withholding.
2. Store your return in a safe place. Put your 2011 tax return and supporting documents somewhere secure so you'll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a helpful guide for next year's return.
3. Organize your recordkeeping. Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.
4. Review your paycheck. Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items. These payroll adjustments can make a big difference on your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.
5. Consult a tax professional early. If you are planning to use a tax professional to help you strategize, plan and make financial decisions throughout the year, then contact us now. You'll have more time when you're not up against a deadline or anxious for your refund.
6. Prepare to itemize deductions. If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2012 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings. If you need help with tax planning for 2012 give us a call. We can help you prepare an approach that works best for you.
7. Strategize tuition payments. The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires.
Each household's financial circumstances are different so it's important to fully consider your specific situation and goals before making large financial decisions. Feel free to contact us any time you have questions or concerns. We can help you stay abreast of tax law changes throughout the year--not just at tax time.
Are Your Social Security Benefits Taxable?
How much, if any, of your Social Security benefits are taxable? It depends on your total income and marital status. Generally, if Social Security benefits are your only income, your benefits are not taxable and you probably do not need to file a federal income tax return.
If you receive income from other sources in addition to Social Security and your modified adjusted gross income is not more than the base amount for your filing status, then your benefits will also not be taxed. (See below for more on base amounts.)
This quick computation will help you determine whether some of your benefits are taxable:
First, add one-half of the total Social Security you receive to all your other income, including any tax-exempt interest and other exclusions from income.
Then, compare this total to the base amount for your filing status.
The 2012 base amounts are:
- $32,000 for married couples filing jointly
- $25,000 for single, head of household, qualifying widow/widower with a dependent child or married individuals filing separately who did not live with their spouses at any time during the year
- $0 for married persons filing separately who lived together during the year
According to the Social Security Administration, less than one-third of all current beneficiaries pay taxes on their benefits.
Call us today if you need help understanding the taxability of your Social Security benefits.
Tax Impacts of Early Retirement Distributions
Taxpayers may sometimes find themselves in situations when they need to withdraw money from their retirement plan early. What they may not realize is that that transaction may mean a tax impact when they file their return. Here are 10 facts you should know about the tax implications of an early distribution from your retirement plan.
1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 1/2 are generally considered early or premature distributions.
2. Early distributions are usually subject to an additional 10 percent tax.
3. Early distributions must also be reported to the IRS.
4. Distributions you roll over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
6. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
7. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
9. There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home (up to $10,000), for certain medical or educational expenses, or if you are totally and permanently disabled.
For more information about the tax related impacts of early distributions from retirement plans, please contact us. We're here to help you!
8 Facts to Know if You Receive an IRS Letter
The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with simply, without having to call or visit an IRS office. Here are eight things you should know about IRS notices and letters.
1. There are a number of reasons why the IRS might send you a notice. Notices may request payment, notify you of account changes, or request additional information. A notice normally covers a very specific issue about your account or tax return.
2. Each letter and notice offers specific instructions on what action you need to take.
3. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
4. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
5. If you do not agree with the correction the IRS made, it is important to contact us before responding.
6. Most correspondence can be handled without calling or visiting an IRS office. Please have a copy of your tax return and the correspondence available when you call us.
7. It's important to keep copies of any correspondence with your records.
8. IRS notices and letters are sent by mail. The IRS does not correspond by email about taxpayer accounts or tax returns.
If you have received a letter or notice form the IRS and have questions or concerns don't hesitate to call us.
Cutting Expenses Key To Profitability: Some Tips
It looks like the economy may finally be looking up. Still, this is no time to loosen the purse strings in terms of your business expenses. Rather, why not re-double your efforts to cut costs and boost your profitability?
Excessive expenses cause debt, which in itself can be very costly. So any money-saving actions you take will be doubly rewarding.
More Effective Money Management
To cut expenses significantly, it's necessary to poke into every corner of your company's finances. Inventory is a good place to start. If you sell multiple units of the same item and reorder regularly, you should be using QuickBooks' inventory-tracking tools. Go to Edit | Preferences | Items & Inventory | Company Preferences.
Figure 1: Make sure that these settings are correct. If you need advanced features like FIFO costing, serial number and lot-tracking or inventory management at multiple locations, contact us about upgrading to Enterprise Solutions.
You should be stocking your inventory to match the pace of sales. You don't want to be caught short, nor do you want to be sitting on too much and tying up money unnecessarily. QuickBooks can help, but you'll need to calculate the sweet spot for each item. Several built-in reports can help, including:
Figure 2: To maintain profitable inventory levels and minimize expenses, you'll need to study QuickBooks' related reports regularly. When you're making buying decisions, consider factors like reorder turnaround time and seasonal sales upticks.
- Inventory Valuation Summary. Displays the current asset and retail value of each item and inventory as a whole
- Inventory Valuation Detail. Shows how individual transactions have affected the value of your inventory
- Inventory Stock Status By Item. Helps you set up smart reordering procedures
- Open Purchase Orders. Outlines each purchase order and its expected delivery date
Ratio reports, like profit over sales, can also be very telling. QuickBooks does not supply these, but we can help you create them in Excel.
Using Available Tools
The efforts you make toward reducing expenses in other ways can result in more savings than you might think. Here are some actions you can take that will accelerate your cash flow:
Use QuickBooks' budgeting tools. This doesn't need to be as onerous as you might expect – you can start by pulling in your real data from the previous year as a base. Build in line items for ongoing accounting support like QuickBooks maintenance. Click on Company | Planning & Budgeting | Set Up Budgets.
Figure 3: Selecting this option simplifies your task.
Minimize your April 15 obligation with year-round tax planning. Work with us throughout the year on the next year's taxes to, for example, make smarter quarterly payments, and we'll help you reduce your tax bill by making better decisions every day.
Get discounts by paying invoices early. Set up a custom field in vendor records to track this.
Figure 4: Get to know which vendors offer early discounts -- and take advantage of them.
Analyze the cost-effectiveness of your transportation. Can you replace some in-person sales calls with web-based communication? Make sure that your delivery routes and sales call paths are efficient.
Change product/service prices to build in your own cost increases. Do it across the board, in small increments. It may not even be that noticeable to customers.
Talk to us about establishing a line of credit. We'll help you determine if this is a viable option for emergencies. It's cheaper than using credit cards.
Cross-train employees. Have employees train each other on their tasks where it makes sense. You can avoid costly temp help and relieve overworked departments.
Don't try to change everything at once. Establishing these new procedures will require some extra work. And you may not notice a reduction in expenses immediately. But over time, you will see a positive change -- one that will give you extra dollars and hours to invest in making your company flourish.
Tax Due Dates for June 2012
Employees - who work for tips. If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.
Individuals - If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. (U.S. citizens living in the U.S. should have paid their taxes on April 17.) If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline.
Individuals - Make a payment of your 2012 estimated tax if you are not paying your income tax for the year through withholding (or will not pay enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2012.
Corporations - Deposit the second installment of estimated income tax for 2012. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.
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