Family Loans — Tax Considerations

Obtaining financing to start or expand small businesses and buy homes can sometimes be difficult. If your child or grandchild is having a hard time getting a loan from a commercial lender, you may be willing to help out by lending the money yourself. Another thing you might need to consider is a debt consolidation for payday loans in case you have more than one loan.

Have a Written Agreement

Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues.

Having written documentation is also important in case the borrower fails to repay all or part of the loan. In that situation, you’d want to be able to show you’re entitled to write off the unpaid amount as a nonbusiness bad debt.

Charge Adequate Interest

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you.

You can avoid the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, in November 2019, the annual AFR (using a monthly compounding assumption) was:

  • 1.68% for a short-term loan (three or fewer years)
  • 1.59% for a mid-term loan (more than three but no more than nine years)
  • 1.94% for a long-term loan (more than nine years)

These are the minimum rates for intra-family loans initiated in November 2019. For a term loan, the rate can remain fixed for the life of the loan. For a demand loan (one that gives you the right to demand full repayment at any time), you have to charge a floating AFR to avoid imputed interest issues.

Exceptions

When you lend your child or grandchild no more than $100,000, the amount that can be added to your taxable interest income under the below-market interest rate rules generally can’t exceed the borrower’s net investment income. Even better, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also sidestep imputed interest on small loans of no more than $10,000 (all outstanding principal) provided the borrowed funds aren’t used to buy or carry income-producing assets.

 

Can You Take Advantage of the Research and Development Tax Credit?

You don’t have to wear a while lab coat to claim the federal research and development tax credit if you meet the four criteria outlined in Internal Revenue Code Section 41 and its regulations. Learn why failing to explore this credit may be leaving money on the table.

Many manufacturing companies fail to take advantage of the generous research and development (R&D) tax credit simply because they don’t have staff working in a lab. The Internal Revenue Service’s (IRS) definition of R&D is codified at Internal Revenue Code Section 41 and its related regulations — and it may not be exactly what you think it is.

From 2018 to 2027, the estimated value of R&D tax credits to be claimed by U.S. companies is estimated at $163 billion, with $148 billion of that going to corporations.

You can take advantage of this tax credit as long as your company performs activities such as the following:

  • Redesigns its production process to be more efficient.
  • Introduces artificial intelligence or robotics into your manufacturing process.
  • Develops software that enhances your company’s processes or procedures.
  • Designs, constructs or tests product prototypes.
  • Develops second-generation or improved products.

This list is not all-inclusive. According to the IRS, many activities may qualify if they are performed in the United States and meet the following four-part test.

Part 1. Permitted purpose

The IRS test is to create a new or improved product, business component or process that increases performance, function, reliability, composition or quality or that reduces costs for your company. It does not have to be new to your industry.

Development of internal use software may meet the permitted purpose test if it:

  • is an innovation that provides economically significant results;
  • requires a certain amount of economic risk and use of resources to develop when recovery of the cost is uncertain over a reasonable time; and
  • is not commercially available for the intended purpose, although commercially available software may be eligible if it is significantly modified.

Part 2. Technological in nature

The research must fundamentally rely on the hard or physical sciences, such as engineering, physics, chemistry, biology or computer science.

Part 3. Uncertainty eliminated

You must be able to demonstrate that you’ve attempted to eliminate any uncertainty about the usefulness of the development, improvement or design.

Part 4. Process of experimentation

You must be able to demonstrate during the research process that you’ve experimented and evaluated alternatives. This may have been done through research techniques like modeling, simulation, trial and error or some other method.

Documenting R&D Activities

Claiming the credit requires a lot of supporting documentation, however. It is worth taking the time to assess whether the amount of tax relief you’ll get is worth the effort. For example, you’ll need to determine how much of a credit your company is eligible for, how difficult it will be to document your company’s R&D activities, whether the credit can be used to offset alternative minimum tax liability and whether you can claim previously unused credits.

Many, if not all, manufacturers may find they can reduce their taxes by taking advantage of the federal R&D tax credit. In addition, many states have an R&D credit that is available to manufacturers. It’s worth investigating and we can help. Contact us today to determine whether you should be claiming this credit.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Worker Classification: Pay Attention

It isn’t easy deciding whether a worker should be treated as an employee or an independent contractor. But the IRS auditors will look at the distinction closely.

Tax Obligations

For an employee, a business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and remit those taxes to the government. Additionally, the employer must pay FICA taxes for the employee (currently 7.65% of earnings up to $137,700).*

The business must also pay unemployment taxes for the worker. In contrast, for an independent contractor, a business is not required to withhold income or FICA taxes. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply.

Employees Versus Independent Contractors

To determine whether a worker is an independent contractor or employee, the IRS examines factors in three categories:

  • Behavioral control — the extent to which the business controls how the work is done, whether through instructions, training, or otherwise.
  • Financial control — the extent to which the worker has the ability to control the economic aspects of the job. Factors considered include the worker’s investment and whether he or she may realize a profit or loss.
  • Type of relationship — whether the worker’s services are essential to the business, the expected length of the relationship, and whether the business provides the worker with employee-type benefits, such as insurance, vacation pay, or sick pay, etc.

In certain cases where a taxpayer has a reasonable basis for treating an individual as a non-employee (such as a prior IRS ruling), non-employee treatment may be allowed regardless of the three-prong test.

If the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Year-End Statements

Generally, if a business has made payments of $600 or more to an independent contractor, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.

Consequences of Misclassification

Where the employer misclassifies the employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold the employee’s income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.

Correcting Mistakes

Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program (VCSP). For employers that meet the program’s eligibility requirements, the VCSP provides the following benefits:

  • Workers improperly classified as independent contractors are treated as employees going forward.
  • The employer pays 10% of the most recent tax year’s employment tax liability for the identified workers, determined under reduced rates (but no interest or penalties).
  • The government agrees not to raise the issue of the workers’ classification for prior years in an employment-tax audit.

Your tax advisor can help you sort through the IRS rules and fulfill your tax reporting obligations. *Internal Revenue Service. For 2020, the Social Security tax rate is 6.2% and is applied to earnings up to $137,700. The Medicare tax rate is 1.45% on the first $200,000 and 2.35% above $200,000.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

What’s Taxable to an S Corporation Shareholder?

S corporation shareholders have an added reason to worry about their company’s annual performance: It has a direct impact on their own income taxes.

How It Works

Unlike a regular C corporation, an S corporation usually doesn’t pay federal income taxes itself. Instead, each shareholder is allocated a portion of the corporate income, loss, deductions, and credits on a special “K-1” tax form. The shareholder then must report the items listed on the K-1 on his or her personal tax return.

The K-1 allocations are based on stock ownership percentages. So, for example, if an S corporation has $100,000 of taxable business income for the year, a person who owns 75% of the stock in the corporation would be allocated 75% of that income, or $75,000.

This scheme can get complicated thats why we recommend the accountant Sydney services to help you in the process. Case in point: The K-1 may show more income than the shareholder actually received from the company during the year. That’s because the K-1 figure is based on the corporation’s actual taxable income — not on the distributions made to the shareholder.

Here’s an example: Tom starts a new corporation, electing S status. In the first year, Tom draws a $30,000 salary and receives no other distributions from the company. The company’s ordinary business income (after deducting his salary) is $10,000. Since Tom is the only shareholder, all the company’s $10,000 of income is allocated to him on his K-1. Tom must include both the $30,000 of salary and the $10,000 on his personal income tax return, even though all he actually received from the corporation was his salary.

This result seems harsh, but it’s not the end of the story. Special rules in the tax law prevent the same income from being taxed again. Essentially, Tom will be credited with already having paid taxes on the $10,000 so that any future distribution of the funds will not be taxable.

Tracking Basis

To determine whether non-dividend distributions are tax free, S corporation shareholders must keep track of their stock basis.* The computation generally starts with a shareholder’s initial capital contribution (or the stock’s cost if it was purchased) and changes from year to year as the shareholder is allocated corporate income, loss, etc. Non-dividend distributions that don’t exceed a shareholder’s stock basis are tax free.

Note that S corporation shareholders may be eligible to deduct up to 20% of their S corporation pass-through income. Eligibility depends on taxable income and other factors. S shareholders will want to consult their tax advisor to see if they can take advantage of the deduction to lower the taxes on their business income.

*Most distributions made from an S corporation are non-dividend distributions. Dividend distributions can occur if the company was previously a regular C corporation (or in other limited situations).

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Will the SECURE Act Affect Your Retirement Planning?

The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) was signed into law on December 20, 2019. The Act will likely impact large numbers of working Americans as well as those already retired. In general, the Act is intended to increase access to tax-advantaged retirement plans and to help prevent older Americans from outliving their assets.

Here are some of the changes that could affect your planning.

Delayed Deadline for Taking Required Minimum Distributions

Tax law has generally required individual retirement account (IRA) owners and retirement plan participants to begin taking required minimum distributions (RMDs) from their accounts once they reach age 70½. The new law pushes back the age at which these distributions must begin to age 72 for IRA owners and plan participants born on or after July 1, 1949. This change allows individuals to take advantage of their retirement account’s tax-deferred nature for a longer period.

No Age Limit for Making Traditional IRA Contributions

Beginning with the 2020 tax year, the new law eliminates the 70½ age limit for making annual contributions to traditional IRAs. This is a plus for those people who continue to work past age 70½ and want to keep saving for retirement on a tax-deferred basis.

Penalty-Free Birth and Adoption Distributions

The new law also expands the exceptions to the 10% penalty for early withdrawals from IRAs and other tax-deferred retirement plans by adding an exception for “qualified birth or adoption distributions” up to $5,000. The new law defines a “qualified” birth or adoption distribution as a withdrawal from an IRA or other eligible retirement plan made during the one-year period beginning on the date the IRA owner’s or the plan participant’s child is born or the adoptee’s adoption is finalized. If desired, parents may replenish their retirement savings by repaying the amount distributed.

Restrictions on Stretch IRAs

The new law places severe restrictions on the use of “stretch” IRAs. A stretch IRA generally permitted beneficiaries to take their RMDs from an inherited IRA over their life expectancy. Thus, beneficiaries were able to stretch payments from the inherited IRA over many years and potentially pass on the inherited IRA to their own beneficiaries. The SECURE Act changes the RMD rules for beneficiaries of IRA owners (and plan participants) who passed away in 2020 or later. Under the SECURE Act, the use of stretch IRAs is restricted to a limited group of IRA beneficiaries. The specific details on who is eligible to use stretch IRAs is complex, and IRA owners who base their estate plans on the use of a stretch IRA should consult with a financial professional to see how they might be impacted.

Small Business Retirement Plans

Good news if you own a small business — the SECURE Act provides incentives to make it easier for you to establish a retirement plan. Starting in 2020, eligible employers that establish a 401(k) or SIMPLE IRA plan with automatic enrollment may qualify for a new tax credit of $500 per year for up to three years. In addition, the existing credit for small employer plan startup costs has increased to as much as $5,000 per year for three years. Previously, the annual credit maximum was $500. Employers also have more time to establish a qualified retirement plan. Previously, a qualified plan, such as a profit-sharing plan, had to be adopted by the last day of the employer’s tax year to be effective for that year. The SECURE Act allows a qualified plan to be adopted as late as the employer’s tax filing deadline (plus extensions).

Your financial and tax professionals can provide more details about these and other important SECURE Act changes and how they may affect your retirement planning.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

“Extender” Legislation Impacts Individuals and Small Businesses

Tax Tip: Extenders - Ketel Thorstenson, LLP

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with a modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy-efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualified employees with respect to the family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

4 Areas to Consider When Transitioning Employees to Working From Home

For businesses that haven’t traditionally embraced remote employees, it may be difficult to get up to full speed with the current turn of events.  To make the inevitable transition less overwhelming, we assembled a handy checklist of actions to consider while adjusting to the new workplace reality. Make sure that your managed it services department will help you every step of the way, if you do not have a managed it services, be sure to get one.

Organization

  • Access your staff members and/or roles that are able to work remotely, those that can’t work remotely, and those where remote work may be possible with some modifications.
  • Conduct an employee survey to determine the availability of computers that can be used for working remotely, as well as availability to high-speed internet access.
  • Create company guidelines covering remote employees, including inappropriate use of company assets and security guidelines.
  • Develop and conduct work-at-home- training for using remote access, remote tools, and best practices.
  • Select a video-conferencing platform for services, such as ZoomCisco WebExor Go To Meeting.
  • Develop a communications plan to involve remote employees in the daily activities of the organization.

 Security

  • Create and implement a company security policy that applies to remote employees, including actions such as locking computers when not in use.
  • Implement two-factor authentication for highly-sensitive portals.
  • If needed, confirm all remote employees have access to and can use a business-grade VPN, and that you have enough licenses for all employees working remotely.

Staff

  • Institute a transparency policy with your staff and communicate frequently.
  • Check-in on your staff, daily if possible, to confirm they are comfortable with working from home. Find and address any problems they may be experiencing.
  • Make certain each staff member has reliable voice communications, even if this results in adding a business-quality voice over IP service.
  • Don’t attempt to micro-manage your staff. Remember their working conditions at home won’t be ideal, and they will need to work out their own work patterns and schedules.
  • Create a phone number and email address where staff members can communicate their concerns about the firm, working at home, or even the status of COVID-19.

Infrastructure

  • Ensure that you have ample bandwidth coming in to your company to handle all of the new remote traffic.
  • Make sure you have backups of your services so your staff is able to keep working in the event extra traffic causes your primary service to go down.

You may need to adjust or expand this list to match the specific needs of your firm and the conditions affecting your organization.  Use this list to get you started and to help guide you through the process.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Pros and Cons of a Paperless Business

Has your bank, broker, credit card company, or maybe even your phone or utility company sent you information about getting your statements online instead of through the mail? Going paperless has its advantages — not the least of which may be seeing your countertop for the first time in months. But it also has its drawbacks. Before you completely eliminate paper statements, look at both the pros and cons.

The Benefits

When customers manage their accounts online, companies can save substantial amounts of money in printing and mailing costs. That’s why many companies offer incentives, such as reducing interest rates or fees or making donations to environmental groups, to encourage customers to go paperless. And fewer mailings mean there’s less risk that someone could steal personal documents from your mailbox and use the information fraudulently.

The Drawbacks

While companies claim financial information sent electronically is more secure, not everyone agrees. When they happen, security breaches can put your personal information at risk. And it may be easier to miss the e-mail or forget about reviewing statements or paying bills when you don’t have them right in front of you.

Another potential drawback: Retrieving statements that are more than a few months old may be difficult, although many companies say they’re working on archiving several years’ worth of documents.

Going paperless may be to your advantage, but weigh everything carefully before you sign up.

Take charge of your financial future. Give us a call, today, to find out how we can assist you and your business.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Stretching QuickBooks Online: What You Can Do With Apps

QuickBooks Online has worked well for countless businesses as is. But if you need more than it offers in some areas, there’s likely to be an app for that.

You’d be hard-pressed to find two small businesses in the U.S. that have exactly the same needs when it comes to financial management. Fortunately, QuickBooks Online is powerful and flexible enough to please hundreds of thousands of small businesses.

As companies grow, they often find that the core features, user interface, and navigational tools that QuickBooks Online offers still suit them just fine. Still, they need to move beyond the tools offered in one or more areas.

That’s why QuickBooks Online has dozens of add-on applications – apps – that focus on one specific area of QuickBooks Online and extend what’s offered there. Since they’re all cloud-based, you have access to them anywhere, anytime, on a PC or mobile device, once you’ve set up an account.

To see what’s available, just click on the Apps link in the left vertical toolbar.

Figure 1: You can choose from dozens of integrated applications built specifically to add features and flexibility to individual areas of QuickBooks Online.

Take a look around this page, and click on any of them to get more information. All of the apps listed were designed to fit QuickBooks Online, but if you’re new to integrated applications or wondering whether a specific one would be a good match for your business, we can help you decide – and get started with it.

QuickBooks Online’s apps cover a lot of ground. Each falls into one of several categories, including billing and collections, expense management, time tracking, and customer relationship management. We’ll look at three of them here.

Bill.com automates your accounts payable and receivable. It began its life as a billing app (hence the name), adding receivables a few years ago. Though you could use it as a sole proprietor, its features are more fully utilized in a team setting. You email, fax, or upload incoming bills to your Bill.com account, where they can be entered, routed to the appropriate staff person, approved, and processed (transmitted directly to a vendor bank account or remitted via paper check). The ability to store all related documents in the cloud and maintain a strict audit trail add to the site’s security. Automated invoices, reminders, and payments simplify your receivables workflow. Bill.com also provides a close, real-time look at your current cash flow and also projects future scenarios.

Concur Travel and Expense has very tight integration with QuickBooks Online; it shares, for example, customer, vendor, and employee records, as well as job data and expense types. Your employees can either enter expense data manually or use a smartphone to take pictures of receipts, which can then be uploaded directly into Concur and automatically attached to their expense reports, along with any credit card charges (which can also be sent directly). Once you’ve approved an expense report, Concur handles the background bookkeeping and transfers funds into your employees’ bank accounts.

Figure 2: Your mobile employees can create and submit expense reports on the road using the mobile Concur app. iPhone, iPad, Android, and Blackberry are also supported.

Method CRM marries your QuickBooks Online data to your customer relationship management tasks. Lists of your customers, vendors, items, etc. and their associated records are available in the app, as are transactions like invoices, payments, and vendor bills. When prospects fill out forms on your website asking for product and/or service information, a new lead/sales opportunity is created in Method CRM. If a lead becomes a customer, that data is shared with QuickBooks. The app is exceptionally customizable, down to the actual design (should you decide to tackle this, though, let us work with you from the start).

There are many other types of apps that can be integrated with QuickBooks Online, including:

– Constant Contact: Email marketing

 

– TSheets Time Tracking: Timesheets and time tracking

 

– Bigcommerce: Online shopping cart management

 

– F|G Receivables Manager: Smart accounts receivable management

 

– Shoeboxed: Scans and categorizes paper receipts

Figure 3: You can upload or drag and drop files, forward emails, or send paper receipts through U.S. Mail in a prepaid envelope to Shoeboxed.

These apps are easy to use for the most part, but whenever you’re moving data in and out of QuickBooks Online, you need to have a clear understanding of the source and destination. We’ll be happy to assist as you move beyond the boundaries of QuickBooks Online.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

As a Corporation You Need to Follow the Rules

When you started your business, you may have formed a corporation to protect your personal assets from lawsuits against your company. However, you must also operate your business like a corporation — or risk losing the liability protection you expect to have, a good tip will be to have legal advice from experts such as NJ Legal.

No matter how long you’ve been in business, always treat your corporation as a separate legal entity. The corporation’s name should appear on company letterhead, checks, and invoices. Contracts should be made in the corporation’s name, not yours or another individual’s.

Avoid mixing your personal affairs and your corporation’s business. Maintain separate bank accounts and credit cards, and keep careful records of corporate transactions. File tax returns and pay any corporate taxes due on time.

Meet and Document

Hold shareholder and director meetings according to a regular schedule and keep official minutes of those meetings. Corporate minutes provide documentation of key financial and legal decisions, such as

  • Authorization for a substantial loan to or from the corporation as many local business owners in Darwin have done.
  • Adoption of a retirement plan or approval to make a contribution to an existing plan (e.g., a profit sharing contribution)
  •  Issuance of stock
  •  Purchase of real property or approval of a long-term lease

By observing the formalities, you can protect yourself and have the records you may need if the IRS, a creditor, or a company insider challenges critical decisions that were made.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v