When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.
This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased.
You report your business income and expenses on Schedule C, an attachment to your personal income tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.
Limited Liability Company
If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). Usually, income is taxed to the owners individually, and earnings are subject to self-employment taxes. With the digital world is a large and diverse world of users, services, businesses and products. In order to protect our customers, our business and the reputation of our company, we have developed and implemented robust security measures in all our sites, applications and our digital platforms. We have also implemented measures to ensure the integrity of our data, we offer an extensive and quality general liability insurance services. We have implemented and continue to monitor our efforts to prevent, detect and mitigate cyber-attacks against our network and systems.
Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans, guaranteed installment loans for bad credit direct lenders
A corporation is a separate legal entity that can transact business in its own name and files corporate income tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed.
If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.
In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.
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Many people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case. If you are thinking about buying long-term care insurance, you’ll be interested to know that, within limits, premiums paid for qualified policies are deductible as an itemized medical expense. For 2019, premiums for qualified policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses, exceed 10% of your adjusted gross income.
The typical long-term care insurance policy will pay for the nursing home, home care, or other long-term care arrangements after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.
Premiums are eligible for a deduction only up to a specific dollar amount (adjusted for inflation) that varies depending upon the age of the covered individual. The IRS limits for 2019 are:
|Long-Term Care Insurance Premium Deduction Limits, 2019|
|40 or under||$420|
Source: Internal Revenue Service
These limits apply on a per-person basis. For example, a married couple over age 70 filing a joint tax return could potentially deduct up to $10,540 ($5,270 × 2). Keep in mind, however, that, for individuals under age 65, itemized medical expenses are deductible only to the extent that they, in total, exceed 10% of adjusted gross income (AGI).
As everyone’s situation is different, consider contacting your tax and legal professionals to discuss your personal circumstances.
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When you sell securities in a taxable investment account, you have to know your “basis” in the securities to determine whether you have a gain or a loss on the sale — and the amount — for tax purposes. Generally, your basis is the price you paid for the investment, adjusted for the costs associated with that purchase, any share splits, reinvested dividends, or capital gain distributions.
Although the cost basis calculation sounds straightforward enough, there’s more to the story.
Inherited and Gifted Securities
Though basis is usually derived from cost, inheritances are treated differently. Generally, the basis of inherited securities is reset at their date-of-death value. This reset is sometimes referred to as a “step-up in basis.”
With gifted securities, the person receiving the securities generally takes the basis of the person who gave them. However, if gift tax was paid, a basis adjustment may be necessary. And, if the securities’ fair market value on the date of the gift is less than their original cost, you use that lower value to determine any loss on a subsequent sale.
Stock Dividends and Splits
Instead of distributing cash dividends, companies sometimes distribute stock dividends. Stock dividends are generally not taxable. However, a basis adjustment needs to be made. If the new stock you receive is identical to the old stock — for example, you receive two new shares of XYZ common stock for each share of XYZ common stock you own — you simply divide the basis of your old stock by the total number of shares held after the distribution to arrive at your new basis for each share.
Stock splits also result in basis adjustments. For example, if a company has a “two-for-one split” of its stock, the original basis must be divided between the two new shares. Conversely, companies sometimes have “reverse splits,” such as when three shares are exchanged for one, in which case the basis in the original three shares is now the basis of the new share.
Keeping track of share basis through a series of mergers, spinoffs, etc., can be very complicated. Often, taxpayers must research the terms of the relevant transactions by contacting the company directly or logging on to the company’s website.
Selling Less Than Your Entire Holding
If you sell less than your entire holding in a particular stock and can adequately identify the shares you sold (“specific identification”), you may use their basis to determine your gain or loss. Adequate identification involves delivering the stock certificates to your broker or, if your broker holds the stock, telling your broker the particular stock to be sold and getting a written confirmation. If you can’t adequately identify the shares you sell, you may use the FIFO — “first in, first out” — method to determine your basis.
With mutual funds, you are also allowed to elect to use the “average basis” method of accounting for shares sold. With this method, the total cost of all the shares owned is divided by the total number of shares owned.
Tax-Deferred and Tax-Exempt Investments
Cost basis is generally not an issue with securities held in tax-deferred investment accounts, such as traditional individual retirement accounts (IRAs) or employee retirement accounts. With these accounts, you are not taxed on capital gains but will be taxed at ordinary income tax rates on distributions you receive. (Qualified Roth distributions are an exception.) Also note that though interest on municipal bonds may be tax exempt, any gain realized from selling such bonds could be taxable, so it’s important to keep the information you’ll need to determine your basis.
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You sold one of your stock investments at a profit, so now you’ll have to report a capital gain on this year’s income tax return. Since another stock you own has been losing ground lately, you’re thinking of selling it to claim a capital loss on your return to offset your gain.
However, because you believe the company will bounce back eventually, you’re reluctant to part with your stock. What would happen if you sold your stock to claim the loss and then bought it back again right away?
At first glance, it might appear to be the perfect plan. But it won’t work because of the tax law’s wash-sale rules. These rules prevent you from claiming a capital loss on a securities sale if you buy “substantially identical” securities within 30 days before or after the sale. If you want to claim the loss, you’ll have to wait more than 30 days to repurchase stock in the company.
Gone for Good?
Wondering what happens to wash-sale losses you can’t deduct? They don’t just disappear from your tax calculations. Instead, you’re allowed to add the losses to the cost basis of the shares you reacquire. This increase in cost basis will mean a smaller capital gain (or a larger loss) when you eventually sell your shares.
Keep track of any share purchases you make through a stock dividend reinvestment plan or by having mutual fund distributions automatically reinvested. Selling shares of the same stock or mutual fund at a loss within 30 days of the automatic purchase (before or after) will trigger the wash-sale rules, and part of your loss will be disallowed.
Is There a Plan B?
Is there any way you can take your tax loss and still maintain your position in the stock? You may be able to double up on the loss securities, then wait 30 days and sell your original securities at a loss. Be sure to consult your tax advisor before taking this, or any, action.
If you’re one of the millions of American households who own either a traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to start an IRA if you don’t already have one. The IRS allows you to contribute to an IRA up to April 15, 2019, for the 2018 tax year.
This checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy.
Which Account: Roth IRA or Traditional IRA?
There are two types of IRAs available: the traditional IRA and the Roth IRA. The primary difference between them is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax-free .1
In choosing between a traditional and a Roth IRA, you should weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement.
If you need the immediate deduction this year — and if you qualify for it — then you may wish to opt for a traditional IRA. If you don’t qualify for the deduction, then it’s almost certainly a better idea to fund a Roth IRA.
Case in point: Your ability to deduct traditional IRA contributions may be limited not only by income but by your participation in an employer-sponsored retirement plan. (See callout box below.) If that’s the case, a Roth IRA is likely to be the better solution.
On the other hand, if you expect your tax bracket to drop significantly after retirement, you may be better off with a traditional IRA if you qualify for the deduction. You could claim an immediate deduction now and pay taxes at the lower rate later. Nonetheless, if your anticipated holding period is long, a Roth IRA might still make more sense. That’s because a prolonged period of tax-free compounded earnings could more than makeup for the lack of a deduction.
|Traditional IRA Deductible Contribution Phase-Outs|
|Your ability to deduct contributions to a traditional IRA is affected by whether you are covered by a workplace retirement plan.
If you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (MAGI) is:
If you are not covered by a retirement plan at work but your spouse is covered, your 2017 deduction for contributions to a traditional IRA will be reduced if your MAGI is between $189,000 and $199,000.
If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot claim the deduction.
|Roth IRA Contribution Phase-Outs|
|Your ability to contribute to a Roth IRA is affected by your MAGI. Contributions to a Roth IRA will be phased out if your MAGI is:
If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot make a contribution.
Should You Convert to Roth?
The IRS allows you to convert — or change the designation of — a traditional IRA to a Roth IRA, regardless of your income level. As part of the conversion, you must pay taxes on any investment growth in — and on the amount of any deductible contributions previously made to — the traditional IRA. The withdrawal from your traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% additional federal tax normally imposed on early withdrawals.
The decision to convert or not ultimately depends on your timing and tax status. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your income is unusually low and you still have many years to retirement, you may want to convert.
If possible, try to contribute the maximum amount allowed by the IRS: $5,500 per individual, plus an additional $1,000 annually for those age 50 and older for the 2018 tax year. Those limits are per individual, not per IRA.
Of course, not everyone can afford to contribute the maximum to an IRA, especially if they’re also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer’s matching contribution, that additional money may be more valuable than the amount of your deduction. As a result, it might make sense to maximize plan contributions first and then try to maximize IRA contributions.
Review Distribution Strategies
If you’re ready to start making withdrawals from an IRA, you’ll need to choose the distribution strategy to use: a lump-sum distribution or periodic distributions. If you are at least age 70½ and own a traditional IRA, you may need to take required minimum distributions every year, according to IRS rules.
Don’t forget that your distribution strategy may have significant tax-time implications if you own a traditional IRA because taxes will be due at the time of withdrawal. As a result, taking a lump-sum distribution will result in a much heftier tax bill this year than taking a minimum distribution.
The April filing deadline is never that far away, so don’t hesitate to use the remaining time to shore up the IRA strategies you’ll rely on to live comfortably in retirement.
1Early withdrawals (before age 59½) from a traditional IRA may be subject to a 10% additional federal tax. Nonqualified withdrawals from a Roth IRA may be subject to ordinary income tax as well as the 10% additional tax.
It’s a given that businesses need to be profitable to survive. A key element in making a profit is pricing. Here are some suggestions that can help you get your pricing right.
Identify Your Costs
If you don’t know what your product’s or service’s total costs are, you can’t price them accurately. What makes up the total cost? The components may include:
- Cost of materials or merchandise
- Labor costs, including salaries plus benefits
- Overhead costs, such as taxes, rent, insurance, marketing, utilities, and transportation
Determining how much you need to charge just to cover your costs is an essential first step in setting prices. Be sure to reevaluate your costs regularly. If you are experiencing difficulty moving certain products at an acceptable profit, your costs could be too high.
Know Your Customers
Customers generally fall into distinct categories. Some are very price sensitive. Others focus less on price and more on convenience. The implied status or exclusivity of certain goods and services is very important to certain other customers. Once you identify the type of customer you are targeting, it becomes easier to set your prices accordingly. One way through which you can gain their trust is by showing them you protect their privacy, as I recently read on Salesforce that, information protection is one of the highly valued and relevant factors to which customers pay a close detail.
Know Your Competitors
Knowing what your competitors charge for similar products or services helps you position your business in the marketplace. For example, if you determine your competitors focus on low prices, you can decide if you want to differentiate your business by focusing on superior service.
Leveraging service as a value proposition may justify charging higher prices than your competition. Or there may be other differentiators that allow you to charge higher prices, such as exclusive merchandise or highly knowledgeable employees.
Experiment and Monitor
Look for ways you can sell options, service contracts, and add-ons to a primary product or service, perhaps by offering several “packages” at different prices. Or consider applying discounts based on the quantity ordered.
Continuously monitor your prices and your profitability. Knowing which products or services are making you money allows you to make data-driven decisions about inventory and pricing.
Tax-Saving Tips for LGBT Couples
The issues around marriage equality caused lots of debate, but it was federal tax laws that finally prompted the Supreme Court to take a look. Prior to the 2013 United States v. Windsor decision, same-sex couples who were legally married in states or countries that recognized their union were unable to take advantage of certain federal benefits. For example, individuals in same-sex marriages were ineligible for the insurance benefits of their spouses who worked in government, and they could not receive social security survivor’s benefits or file joint tax returns.
The 2013 United States v. Windsor decision and the 2015 Obergefell v. Hodges decisions changed these practices, and LGBT couples became eligible for federal tax savings that were previously unavailable. The Amazon Best Selling book, The Great Tax Escape, offers a comprehensive look at making the most of these programs to enjoy greater tax savings.
Choosing Your Filing Status
The first tax-related issue to consider after you are married is how you will file your returns. Depending on your income, “married filing separately” could offer larger savings than “married filing jointly”. There is a phenomenon knows as “the marriage penalty”. This references the tax increase that many couples face when filing joint returns versus single returns.
Tax specialists can assist with significantly reducing tax liability through a combination of smart financial planning, examination of the impact of each filing status, and a review of all possible deductions. Filing status is expected to be particularly relevant for the 2018 tax year, as new tax regulations with revised tax brackets may reduce or eliminate the marriage penalty.
Quick Tips to Avoid Tax Filing Pitfalls
Completing your tax returns after you are married is not necessarily more complicated than filing as single, but there are a few differences to keep in mind. Small errors can lead to major frustration if your returns are rejected or you have to file an amended form. These are the most common pitfalls – and how to avoid them:
- You must either choose “married filing jointly” or “married filing separately”. Other filing statuses are not permitted, including “head of household”. (Note: There is an exception available for married couples who have lived apart for six months or more.)
- Your spouse cannot be listed as your dependent.
- If you choose “married filing separately”, only one spouse can claim each dependent child.
- Married couples must choose the same option with regard to itemizing deductions versus claiming the standard deduction.
Your Certified Tax Coach can provide the guidance you need to complete your returns correctly.
New Options for Reducing Estate Taxes
The underlying issue that prompted United States v. Windsor was the application of federal estate tax regulations. In short, married couples pay far less when a spouse dies than they would if no marriage existed. The individual who brought the suit wanted the same benefits as married couples who are opposite-sex. Today, all married couples can enjoy the tax savings that come with careful estate planning. Your Certified Tax Coach is an excellent resource for putting a tax minimization strategy in place to protect your wealth after one partner passes away.
For more tips on how LGBT couples can increase tax savings, visit our consultation form for your copy of our new release, The Great Tax Escape.
Here’s an idea: Why not purchase a motorhome or recreational vehicle and deduct it as a business expense?
As long as you use it for business this could be a really sweet deal. And if you just happen to use it for pleasure once or twice, that’s no big deal, right?
You won’t be the first person to think of this and if you don’t follow the IRS rules, you won’t be the last to experience the consequences. The courts and the IRS have battled this discussion out several times. Both have been challenged trying to confirm when the motor home is a business vehicle and when it is a business lodging facility.
Does it matter?
It does. The business aspects of owning a motorhome will qualify for tax deductions, but this comes with a set of rules.
Bear this in mind: if you travel for business and plan to deduct your motorhome as a lodging facility, be sure to count the number of nights you use it for business purposes and use that to measure the number of permissible deductions.
On the other hand, if you use your motor home or RV as a second home, you would deduct the business percentage of its use for business travel without having to consider Section 280A impediments.
It can be complicated, so be sure you understand the guidelines.
Before you can deduct the business expenses associated with your motorhome you need to determine what it actually costs to operate the business-related usage. Along with depreciation and interest or lease payments, be sure to add insurance to the equation.
Take into consideration all of the expenses associated with maintaining your RV. Here are a few other expenses to include in your calculation:
- Motor oil
- Car Washes
- Licensing Fees
- Property Tax
Of course, you’ll only be limited to deducting your business-related expenses. Will painting or wrapping your recreational vehicle with advertisements qualify when deducting personal miles?
You know the answer….
It will not.
Maintain Good Records
The best way to ensure you maximize your allowable deductions on your motorhome or RV is to keep impeccable records. Keep a mileage log and record every single trip—business and pleasure. Make sure you have accrued more than 50 percent business nights.
Even if you think you have a great memory, don’t store this information in your head. Record every single night you use your motorhome for business or personal lodging.
Last but certainly not least, keep IRS Section 280(f)(4) top of mind. This section says the use of your motorhome for overnight business lodging produces deductions for business travel and that business travel is not subject to the vacation home rules.
For a clear explanation of tax deductions for motorhomes or RVs, contact one of our tax professionals. Better to plan ahead than to clean up a mess after the fact.
Recently, the U.S. Tax Court denied a taxpayer’s claimed deductions for over $27,000 of charitable contributions because the taxpayer had failed to properly document them.
Individual taxpayers and business owners claiming deductions must be able to substantiate them according to specific rules established by the IRS. Watch out for these common pitfalls.
Donations. Cash contributions of less than $250 require a bank record or written receipt indicating the name of the organization and the date and amount of the contribution. For noncash donations, you need a receipt and a record showing the donee’s name and a description of the gift. If the value of any gift equals $250 or more, you also need a contemporaneous written acknowledgment, a statement of whether the charity provided any goods or services in exchange for the gift, and, if so, a description and a good faith estimate of the value. Additional rules apply to contributions of noncash property of more than $500.
Hobbies. Deductions for hobby expenses are strictly limited. If you wish to claim the full extent of any expenses, you must be prepared to show that your activity qualifies as a business. The IRS will presume it’s a business if you can show a profit in three of the past five years. If that isn’t the case, then you should be prepared to produce evidence to satisfy a number of more subjective tests to avoid application of the tax law’s “hobby loss” restrictions.
Divorce. Alimony payments are tax deductible, but payments for child support are not. Taxpayers should retain their final divorce decree and any agreements for child support and/or separate maintenance in case the IRS questions claimed deductions. Also, retain any agreements regarding who will claim exemptions for dependent children. For capital gains purposes, save cost records for both jointly owned and settlement property.
Business expenses for travel, meals, and entertainment, and transportation. Generally, you must retain documentation to establish the amount, time, place, and business purpose for each expenditure. Specific expense categories may have additional requirements.
Business use of an automobile. Maintain records for the cost of the car and any improvements; the date you started using it for business; the mileage, destination, and business purpose for each trip; and the total mileage for the year. When you use the actual expense method rather than the IRS standard mileage rate, you also need records of your operating costs, such as gas, oil, repairs, maintenance, and insurance.
Home office. Be prepared to produce records that substantiate your claimed expenses and show regular and exclusive business use of that part of the home.
To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.
Business owners need to be prepared for unexpected events that could potentially threaten their ability to operate. Fire, floods, lawsuits, or the sudden death of a key employee are just some of the potential hazards they may face.
Having the right insurance coverage can help minimize the impact of such events. The following is a brief overview of various types of insurance that every business owner should consider.
This basic insurance financially protects the physical assets of your business, such as land, buildings, inventory, furniture, documents, machinery, and similar items. Coverage can vary widely, so be sure you know what is — and what is not — covered by your policy. Also, make certain that your coverage is for replacement cost rather than original cost.
General Liability Insurance
General liability insurance is a must in today’s lawsuit-happy society. It protects your business assets in case of a lawsuit for something your business did (or didn’t do) that caused injury or property damage. Liability insurance covers such claims as bodily injury, property damage, personal injury, and damage from slander or false advertising.
Umbrella insurance is intended to protect a business from a major catastrophe or lawsuit. Typically, umbrella insurance steps in and provides the difference between your underlying general liability coverage and the actual cost of damages resulting from a lawsuit or disaster.
Business Interruption Insurance
This type of insurance reimburses you for the loss of income resulting from an insured catastrophic event, such as a fire. The policy covers the profits you would have earned if no interruption had occurred. And it pays for expenses that you continue to incur even though your business is not operating normally, such as debt payments, taxes, and salaries.
Key Person Insurance
You’ll need key person life insurance to protect your business in case you, a partner, or other key employee dies. If you operate your business with multiple partners, you should consider using life insurance to fund a buy-sell agreement. Disability insurance is also a must for you and your key people.
Errors and Omissions (Professional Liability) Insurance
If you are in the business of giving advice, making educated recommendations, designing solutions, or representing the needs of others, you may want to consider errors and omissions insurance. This type of coverage protects you against claims that something you did on a client’s behalf was incomplete or inadequate, cost your client money, or caused harm in some way.
Errors and omission insurance may be appropriate if you run a consulting business, design software or websites, sell real estate or insurance, operate a career placement business, etc.
The bottom line is that no business can afford to operate without adequate insurance coverage in this day and age.
Whether you have questions about insurance, taxes, or general business best practices, give us a call today. We have the training and experience you need.