The new Tax Act nails down some stricter guidelines pertaining to the deductibility of business meals and entertainment expenses. Below is a summary of how the deductibility rules will change:
Expenses primarily for the benefit of the taxpayer's employees:
(Example: Office Holiday Parties)
- 100% deductible
- Still 100% deductible
Expenses primarily for the benefit of clients:
(Example: Event Tickets)
- 50% deductible (tickets to charitable events were 100% deductible)
- No deduction for client entertainment expenses
(Example: Employee Travel Meals)
- 50% Deductible
- 50% Deductible
Meals Provided for Convenience of Employer
(Example: Meal served to employees for working late on the business premises)
- 100% deductible
- 50% deductilbe (nondeductible after 2025)
Understanding the new rules and updating your books accordingly will be key when projecting your taxable income in 2018. Our firm suggests establishing three (3) separate sub-accounts for expenses relating to meals and entertainment:
1) 100% deductible (i.e. holiday office party, etc.)
2) 50% deductible (i.e. employee meals when traveling, etc.)
3) Nondeductible (i.e. taking a client to a sporting event, etc.)
Tracking all of these expenses will still be essential for business owners to measure profitability and cashflow, however the different categories will help them understand how each transaction affects their taxable bottom line.
We may be in the thick of preparing 2017 taxes, but clients should be sure to start tracking these 2018 expenses efficiently! Call our office if you need assistance mapping your chart of accounts!
The question many people run into around this time of the year is:
Should I attempt to file taxes on my own, using one of the popular software programs out there? Or find a local CPA firm to assist?
It’s a great question – and there is no universally right answer.
Let’s look at a few deciding factors:
There are some people out there that saw the title of this blog post and immediately knew they didn’t need to read any further. Online software programs have undeniably made filing a tax return easier for those with minimal amounts of activity. It’s those that have a certain amount of complexity who may wish to consult a CPA firm. Comfort level is the best way to measure whether or not a tax return has become too complex to attempt on your own.
Many people think about the ramifications of taxes for the same amount of time that it takes to complete their tax return, if at all. As CPAs, taxes are our profession – we advise beyond simply tax prep, on a year-round basis to many of our clients. Many people do not realize the benefit they’re missing out on by not having a CPA at their disposal when life decisions need to be made. For CPAs, preparing an individual’s taxes is a process that is used to become familiar with a client’s complete financial picture. With this familiarity, advisors are able to assist in planning for the future - an example being how the new tax law will impact you personally when it's time to file your 2018 tax return.
Major Life Events
Piggy backing off of Support, there are certain major life events that can have a big impact on the way you file your taxes. Examples of such events are endless – think purchasing a new home, retirement, getting married, having a child, etc. Online tax programs will certainly ask you about major life events, but the conversation unfortunately stops there.
1099 Brokerage statements are not always easily understood. From classifying
income/capital gains correctly to making sure tax-exempt amounts are not taxable to the
proper taxing authority, investments in many cases create complexity on an individual’s return.
What deductions can you take? Are large purchases expensed or capitalized? Have you
accounted for depreciation? Rental Properties tend to make individuals hit the “uncomfortable”
stage when preparing their own returns, whereas CPAs can ensure each property’s tax
treatment is accurate and deductions are maximized.
There are numerous scenarios that could create an income source that individuals are unfamiliar
with. This is usually a sign that a CPA firm should be consulted.
These are factors to consider when deciding whether or not using an online tax software makes sense for you. Whether you are someone who feels comfortable handling your own tax situation, or someone looking to build a relationship with an advisor, be sure to do your research!
No one wants to leave money on the table (or rather in the government’s hands) that is rightfully theirs! Minimize that tax liability and maximize those refunds!
Whether it was your first year running a business or you’re a seasoned vet, preparing documentation to have your business tax return completed is never fun. Some may have been extremely organized throughout the year, but the reality is that most of us are consumed by the daily activities our company requires. In either case, it’s best to know what your accountant needs from you ahead of time, to avoid the back and forth during “busy season.”
Think about your financial statements, both your balance sheet and income statement in particular; your accountant needs to understand (and confirm) the details of these reports. For example, if your balance sheet states that the business had $1,000 in cash as of December 31, 2017, your accountant would expect to verify that amount with statements from the financial institution holding those funds.
In another instance, take your Fixed Assets (vehicles, buildings, machinery, etc.); if the balance of your Fixed Assets increased $10,000 during the year, your accountant needs to verify the activity that took place. Information such as the purchases made during the year can be extremely important to a business’s tax return, and ultimately to your taxable income.
This exercise isn’t just true with Cash and Fixed Assets, and the preparation of these documents for tax prep isn’t the only advantage! When reviewing your company’s financials at year-end, a lot can be uncovered – surprising results, areas of improvement, or perhaps even input errors. Many accounting software programs, or even excel, have the ability to look at the $ and % change of each account over a time period.
Let’s say you are reviewing your 2017 profit & loss and comparing it to 2016 – maybe there’s a large variance year over year in a fairly predictable expense account. This leads to further investigation, which leads to the finding of a misclassified check that was paid back in February! The point is that reviewing your financial statements not only helps you prepare for what your accountant is going to request, but it also gives you the business owner a chance to reflect on the financial results from a year of hard work!
Here is a list of some common documentation items that business owners should provide to their accountant come tax time:
- Bank Statements
- Inventory list (as of 12/31 of the current tax year)
- Fixed Asset purchases (vehicles, machinery, equipment, etc.)
- Depreciation schedules (if you are switching accountants, just ask your prior accountant for a copy)
- Credit Card Statements
- Loan Statements
- Payroll Reports
- Income allocations per state
- Estimated Tax Payments you made throughout the year
Of course, there may be more or less depending on the complexity of your business. In any case, being prepared will always streamline the process! We at Sturgill & Associates look forward to making sure our clients are maximizing their tax efficiency and minimizing their tax liability this upcoming tax season! Call us today to discuss a projection of what your tax return will look like this year!
Many small business owners have a co-owner or multiple owners, which requires attention. Owning a business with others can certainly present challenges, and one of the most difficult is when one owner needs to transfer their interest in the company.
Do you know what would happen if you or your business partner passed away? Got divorced? Went bankrupt? Obviously, these are not the most appealing situations to think about, which is why so many owners are uninterested in updating and/or establishing their buy-sell agreement.
Definition: A buy-sell agreement is a contractual document that outlines what happens if a business owner needs to transfer his or her interest in the company. Think of buy-sell agreements like prenups for business owners; contingencies are clearly outlined for EVERY different outcome, which includes financial implications.
1) Contingency – a Buy/Sell agreement specifically outlines how the remaining partners of a business will acquire (purchase) the shares of the departing owner (whether it be due to death, termination or sale). Think about the implications of purchasing a shareholder’s interest – it may be costly. This is why many businesses choose to fund their buy-sell agreement with insurance.
2) Insurance – A buy/sell agreement can mention the idea of “key person” insurance, which is a policy that insures against the loss of, you guessed it, a key person. More specifically, the policy insures against the potential loss of revenue from a partner unexpectedly passing away.
3) Protection – Agreements clearly define succession plans. This reduces the chance of confusion upon the departure of one of the business’s partners.
4) Triggering Events
The buy/sell agreement (when prepared properly) will lay out exactly what happens in each of the scenarios listed above.
Do you have a solid grasp on your buy/sell agreement? Do you even have a buy/sell agreement? If the answer to either of those questions is no, you’re not alone! Some business owners had agreements created at the inception of their business, but have not updated it since. This is a mistake! These agreements must be updated as your business evolves.
We want to help you feel more comfortable about the future of your business – eventually, every owner will exit their business, the question is whether it will be on their terms or not.
Call us today to find out how we can help you!
Business valuations tend to be overlooked by business owners until there’s an immediate need for one to be performed. A business valuation is a process and a set of procedures used to estimate the value of an entire entity or an owner’s interest in a business.
Some common cases where a business valuation is necessary include:
As you can see, there are many scenarios in which a business valuation is called for, and plenty more in addition to the ones that are listed. When one of those situations arise, you will be advised to have a business valuation performed.
However, what if you as an owner decided that you’d like to value your business annually? What if you already had a solid indication of what your business is worth before that immediate need? The last common case from the list above is highlighted for a reason. Doesn’t it seem like a business valuation, especially on an annual basis, would help you identify whether your business is growing, stagnant, or declining in value?
Over the course of a year, many changes can occur within a business, the economy, and specific industries. When trying to grow a company, it is imperative that business owners understand how these dynamic forces impact their business’s value. In addition to changes that are considered “out of an owner’s control,” monitoring how internal decisions within the company changed the value of the overall business is a must. Measuring progress on an annual basis by reviewing the changes of a business valuation allows owners to adjust and continue operating at maximum efficiency.
Owners tend to get bogged down in the daily operations of their business, and rightfully so! Running a business demands an extreme amount of time and energy – so the question is, why not take a step back once a year and make sure your efforts are adding value?!
Our firm prepares business valuations for companies of all shapes and sizes, and we would be happy to help any business owner get a better understanding of what their number one asset is worth!
Student Loans are a headache! Many people find it necessary to borrow money in order to continue their education – the struggle begins once the lender starts asking for that money back! Although student loan interest is deductible on your tax return (up to $2,500), most would agree the burden of paying off student loans isn’t worth the deduction. However, additional relief of up to $5,000 is now being offered by the Maryland Higher Education Commission (MHEC)! Here are the details of the program:
The relief being offered is in the form of a Maryland Income tax credit. The credit of up to $5,000 is for those that have “qualifying” undergraduate student loan debt AND are a Maryland resident. What you need to know:
What exactly is “qualifying” debt?
1) Original loan must have been at least $20,000 AND used to pay for undergraduate education
2) $5,000 of the original loan must still be outstanding
How do you apply for the credit?
1) You must complete an application and submit it to the MHEC by September 15th of the tax year for which you are applying – THAT MEANS NEXT FRIDAY for those seeking relief this tax season!
2) You will need to provide proof of the loan, an official copy of your college transcript, and a copy of your most recent Maryland tax return. These items must be submitted with the application!
How much credit can you qualify for?
1) The maximum credit is $5,000
2) The MHEC has a pool of funds totaling $5 million, so depending on how many people apply, credits may be limited
3) The MHEC will prioritize the relief given based on each applicant’s information:
a. Debt to income ratios
b. Alumnus of a college located in Maryland
c. How much credit was award in a prior year
d. State tuition eligibility
This is an opportunity for many people to use their burdensome student loans for a potential benefit - take advantage! And as always, feel free to reach out to us with any questions you may have about the program.
The possibility of working for yourself or simply creating some “side” income is an idea that many people spend their entire lives dreaming about. If you are on the brink of bringing a product or service to market, you are probably filled with excitement – and rightfully so! Although it’s certainly not the glossy part of starting a new business, it’s important to keep certain tax/business tips in mind during the early stages.
1) The structure of your business - The type of structure chosen for your business will determine which tax forms to file. A sole proprietorship or single member LLC is an example of a business with one owner. If your business is going to have more than one owner, the structure would be considered a partnership or corporation. Outlined below are the tax forms filed for each type of structure:
Sole Proprietorship or Single Member LLC
Schedule C (attached to Form 1040 in your personal tax return)
Partnership (General, LLP, LLC)
2) Paying business related taxes – When running a business, there are four general types of business taxes that you will encounter: Income Tax, Self-Employment Tax, Employment Tax, and Excise Tax. In many cases, the type(s) of tax a business pays depends on the business structure that is set up. Business owners will want to consider making estimated tax payments to avoid large tax bills at the end of the year, and in some cases penalties.
3) Getting an Employer Identification Number (EIN) – Your business may need to set up an EIN for federal tax purposes. If necessary, an EIN can be applied for online here.
4) Choosing an accounting method – As dreadful as it sounds, an accounting method is essential to properly reporting a business’s income and expenses. Taxpayers must use the method they choose consistently. The most common methods used for accounting are cash and accrual:
Cash Method: Report income when the business receives money and deduct expenses when the business spends money.
Accrual Method: Report income when the business “earns” it and deduct expenses when the business “incurs” it. An example would be when a plumber performs a service, but is not paid immediately by the customer when the invoice is delivered. The plumber has “earned” the income, so it will be reported as such under the accrual method.
Ensuring that your product or service is providing maximum value to your customers is more than enough work to keep you busy. That’s why many successful business owners stress the need for surrounding your business with worthy advisors - they can focus on those areas that owners sometimes put to the side. Our business’s goal is to help you focus on yours! Reach out to us and we will be happy to show you how we can help!
Identity theft has been making headlines frequently in recent years. The motive behind stealing someone’s identity is to use their personal information for financial gain. In the world of taxes, identity theft is when someone uses another person’s Social Security number (SSN) or Employer Identification Number (EIN) to file a tax return in efforts to acquire a refund that is not rightfully theirs.
In the case of having your identity stolen, you will be notified by the IRS that a tax return using your SSN has already been filed. The IRS has recognized this issue and has made continuous efforts to seize identity theft with a strategy of prevention, detection and victim assistance - the agency has saved millions of dollars in refunds from getting into the wrong hands.
However, do not completely rely on the IRS to keep your information save. Understand and implement tips such as these to protect yourself against having your identity stolen:
1. Taxes. Security. Together. This is an IRS awareness program launched 2015 to inform people about ways to protect their personal data. Visit this link to learn more: www.IRS.gov/TaxesSecurityTogether.
2. Protect your Records. Taxpayers should not carry their Social Security card on them unless it is necessary for a specific situation. The same goes with providing your SSN – there are instances that require it, but question if that instance should call for such information. At home, protect personal computers with anti-spam and anti-virus software. Passwords should be changed routinely for online accounts.
3. Don’t Fall for Scams. Impersonating banks, credit card companies and even the IRS in hopes of stealing personal data is extremely common. Recognizing and avoiding those inauthentic communications is pivotal in protecting your information. It is important to note, the IRS WILL NOT call a taxpayer threatening a lawsuit, arrest or to demand immediate payment.
4. Report Tax-Related ID Theft. Reporting an ID Theft case is important – according to the IRS, if you are unable to e-file your return because someone already filed using your SSN:
File a tax return by paper and pay any taxes owed.
File an IRS Form 14039, Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. Include it with the paper tax return and/or attach a police report describing the theft if available.
File a report with the Federal Trade Commission using the FTC Complaint Assistant.
Contact Social Security Administration at www.ssa.gov and type in “identity theft” in the search box.
Contact financial institutions to report the alleged identity theft.
Contact one of the three credit bureaus so they can place a fraud alert or credit freeze on the affected account.
Check with the applicable state tax agency to see if there are additional steps to take at the state level.
5. IRS Letters. You may receive a letter asking for verification of your identity by calling a special number or visiting an IRS Taxpayer Assistance Center. This would happen in the instance of what the IRS considers, a “suspicious return.”
6. IP PIN. If your identity theft is confirmed, the IRS may issue you an IP PIN. The IP PIN consists of six unique digits that the taxpayer uses to e-file their return. For each year thereafter, they will receive an IRS letter with a new IP PIN.
7. Report Suspicious Activity. Fairly obvious, but if you suspect or know of an individual or business that is committing tax fraud, you should visit the following site and take the indicated steps: How to Report Suspected Tax Fraud Activity.
One of the largest issues we hear about from our clients is fictitious communication from The IRS – the agency does not initiate contact via social media or text message. Initial contact will usually come in the mail. Utilize the aforementioned tips to ensure you are doing everything you can to keep your identity safe. In the unfortunate circumstance that a tax return is fraudulently filed with your information, reach out to us and we will be happy to help!
The idea of working from home is undoubtedly admirable. In addition to not having a commute, the costs that come with using a home office can really help self-employed individuals with their tax bill. These expenses are classified into two categories:
Direct Expenses: relating to costs that are incurred specifically for the space that is considered the "home office." For example, the costs of painting or repairing the home office, depreciating the furniture and fixtures used in the office, etc.
Indirect Expenses: relating to costs that are incurred for the entire house. Such as, utility
costs, depreciation, insurance, mortgage interest, real estate taxes, etc. The allocable share of
these costs will be applied as a home office deduction. For example, if your home’s total footage is 1,000 Sq ft. and your home office is 200 Sq ft., 20% of the total indirect expenses would be deductible.
Of course, there are plenty of rules (discussed below) that one must satisfy in order to utilize such tax deductions. If you meet any of these three tests, you will be able to deduct your home office expenses.
Principal place of business: You're entitled to home office deductions if you use your home
office, exclusively and on a regular basis, as your principal place of business. Your home office is
your principal place of business if it satisfies either a "management or administrative activities" test, or a "relative importance" test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.
Note: With your home office serving as a “principal place of business,” the costs of traveling between your home and other work locations are considered deductible transportation expenses.
Home office used for meeting patients, clients, or customers: You're entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the home office.
Separate structures: You're entitled to home office deductions for a home office, used
exclusively and on a regular basis for business, that's located in a separate unattached
structure on the same property as your home-for example, an unattached garage, artist's studio,
workshop, or office building.
In last week’s blog post, we discussed the tax effects of selling your home. As a refresher, when selling your primary residence, a capital gains exclusion of $250,000 (single) or $500,000 (married) is applicable – subject to certain rules. When selling a home that contains a home office, that same exclusion will not apply to the portion of your profit equal to the amount of depreciation you claimed on the home office. This can be an important factor when deciding whether or not to establish a home office for tax purposes.
Home office deductions can be tricky, and each person’s situation is different. We understand that self-employed individuals want to run a thriving business, while minimizing their tax bill – reach out to us and make sure you’re taking advantage of ALL of your allowable deductions!
Selling a property - whether it be your primary residence or a vacation home – can be an exciting, yet overwhelming process. From marketing the property, to signing all the paperwork, you are likely going to be accompanied by a headache or two during the process. However, fear not, because we at Sturgill & Associates are going to act as a dose of aspirin, and take care of at least one of those headaches!
Is the profit from the sale of my proprety taxable?!
Good question! And the answer is, it depends!
You are selling your Primary Residence:
The sale of your home in which you occupy as your primary living space has a “Capital Gains Exclusion” up to $250,000 for single individuals, and $500,000 for those Married Filing Joint.
For example, if you purchased your home in 2010 for $200,000 and sold it today for $400,000, the profit from that sale would be completely tax-free. Note that if you were married filing jointly, you could have sold that same property for $700,000, and had $500,000 of tax-free profit.
However, to qualify for this tax break, there are three tests you must meet:
- Ownership: The property must have been owned for at least two
years during the five years prior to the date of sale - continuity does
not matter. For example, using the same scenario as above - if you
lived in that $200,000 home for 12 months in 2010, lived somewhere
else from 2011 to 2013, and returned in 2014 - the 2 out of 5 year test
would still be met.
- Use: The home must be used as your principal residence for at least
two (2) of the five (5) years prior to the date of sale.
- Timing: You have not excluded the gain on the sale of another home
within two (2) years prior to this sale.
You are selling your second (or vacation) home:
The sale of a second home will result in capital gains taxes on the net proceeds from the sale - net proceeds is defined as the sales price minus closing costs and what you paid for it (basis). The term basis is usually referencing the property’s original cost, however it is important to keep track of what you spent on improvements (i.e. kitchen remodel, new central AC unit, etc.) because those items add to your basis.
For example, you bought a vacation home for $200,000 and remodeled the kitchen for $20,000 - if that was the only improvement you made to the property, your basis would then be $220,000. Now you go to sell that property for $300,000, with closing costs of $15,000 and a basis of $220,000, your profit subject to capital gains tax would be $65,000. If the property was sold for less than it’s basis resulting in a loss, the loss is NOT deductible.
It is important to note that the above mentioned “improvements” to a property are also applicable to a primary residence. Large equipment replacements and/or renovations to your home also increase the basis you have in your principal residence.
As always, situations arise that are more complex than the examples above. We are here to help! Reach out to us and we will be more than happy to assist you in the process. Remember to leave us a comment or Direct Message on Facebook telling us what topic you want to read about next week!
It’s wedding season (or just around the corner)! According to the popular wedding site, The Knot, the most popular months for weddings are August, September, and October. A lot of thought goes into weddings these days - from flowers and color schemes, to meal courses and DJs. It’s not surprising that many couples struggle to plan beyond their wedding day, and even less surprising that they may not understand how their tax situation will be impacted by marriage.
Here are some basic considerations to keep in mind:
- Inform the Social Security Administration (SSA) - when filing an income tax return, the
names and Social Security numbers on your form must match your records at the SSA
- You can report the change by filing Form SS-5
- You must notify the IRS by filing Form 8822. You should also inform the U.S. Postal Service
by visiting your local post office.
- Provide your employer with a new Form W-4
- This is required – keep in mind, if both you and your new spouse are employed, your
combined income may push you into a higher tax bracket
- This IRS tool will help you fill out a new Form W-4:
Married Filing Jointly
- Couple will report their combined income and deductions (even if one spouse has no income or
- You can be held jointly liable for all the taxes, interest, and penalties incurred on income
earned by your spouse
Married Filing Separately
- Alternative status to Married Filing Jointly – can be beneficial in specific situations
- Separate filers are often excluded from tax breaks that joint filers are eligible for
Same – Sex Couples and Domestic Partners
- According to the IRS, “If you are legally married in a state or country that recognizes same-
sex marriage, you generally must file as married on your federal tax return."
- This is true even if the couple currently resides in a jurisdiction that does not recognize
- Registered Domestic Partners, however, are not considered married for Federal tax purposes
It is also important to note that even newlyweds married in the upcoming most popular wedding months, will file using one of these statuses for the current tax year. For example, if you get married anytime in 2017 (1/1 - 12/31), you will be considered “married” by the IRS for the entire 2017 tax year.
You are now ready for marriage (as far as taxes go)! Enjoy your wedding day and all that comes with it!
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