BHB Advisors LLC, CPAs and Consultants

 

Based in Minnesota, BHB Advisors, LLC is a full service tax and accounting practice, offering the following services:

  1. Tax – planning and compliance work for individuals, corporations and partnerships
  2. Accounting Services and Financial Statements
  3. Consulting and Management Advisory Services

Our mission is to communicate, collaborate and cooperate with our clients to help get them where they want to be financially.

Our specialty is working with individuals and small to midsize companies in the Minneapolis and St. Paul area.

We hope that our website will offer you a glimpse of our expertise and help answer tax and accounting questions you may have.

Self – Employment & Taxes

A question on a lot of minds is "What does it mean to be self-employed for tax purposes?"

There are several factors that you must be aware of when you decide to open that business or strike out on your own.

  1. For income tax purposes, you will report your income and expenses on Schedule C of your Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses will be deductible against gross income (i.e., "above the line," and not as itemized deductions subject to the 2%-of-adjusted-gross-income floor). If you have any losses, the losses will generally be deductible against your other income, subject to special rules relating to hobby losses, passive activity losses and losses in activities in which you weren't "at risk."

 

  1. If you will be working from an office in your home, performing management or administrative tasks from a home office, or storing product samples or inventory at home, you may be entitled to deduct an allocable portion of certain of the costs of maintaining your home. And if you have a home office, you may be able to convert nondeductible commuting expenses (of going from your residence to another work location) into deductible transportation expenses. See an additional blog on deductible miles.

 

  1. You will also be required to pay self-employment taxes: a social security tax at a 12.4% rate on your net earnings from self-employment of up to $118,500 (reduced by any wages that you earn from employment), and a Medicare tax at a 2.9% rate on the excess. A portion of your self-employment taxes will be deductible as a trade or business expense (that is, as a deduction against gross income, not subject to the limits that apply to itemized deductions). Note: no SE taxes will be assessed on self-employment income under $400.

 

  1. You may be allowed to deduct your health insurance costs as a trade or business expense. This means your deduction for medical care insurance won't be limited by the normal 10%-of-AGI floor on itemized medical expenses. Your health care insurance can include your spouse and your children and still qualify for a deduction.

 

  1. Your income won't be subject to withholding tax. However, you will be required to pay estimated taxes quarterly. You should work with your tax advisors to minimize the amount of your estimated tax payments while avoiding any underpayment penalty.

 

  1. You will have to maintain complete records of your income and expenses. In particular, you should pay attention to recording your expenses in order to be able to take the full amount of the deductions to which you are entitled. Certain types of expenses, such as automobile, travel, entertainment, meals, and home office expenses, are subject to special recordkeeping requirements or limitations on their deductibility and require special attention. See our blog on record keeping for more information.

 

  1. If you hire any employees, you will have to get a taxpayer identification number and will have to withhold and pay various payroll taxes. Hiring employees and other independent contractors can lead to additional accounting obligations. The first of which is to decide whether the person should be hired as an employee or an independent contractor.  To determine if a person should be an employee or contractor please see the following client letter:  Employee – contractor letter.  If you hire someone as an independent contractor and pay them $600 or more, you may be required to send them and the IRS Form 1099 in the following year reporting the amount you paid them.  When you consider hiring, it is important to contact your tax advisor to discuss the matter in detail.

 

  1. You should consider establishing a qualified retirement plan. The advantage of a qualified retirement plan is that amounts contributed to the plan are deductible at the time of the contribution, and aren't taken into income until the amounts are withdrawn. Because of the complexities of ordinary qualified retirement plans, you might consider a simplified employee pension (SEP) plan, which requires less paperwork. Another type of plan available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements than a qualified plan is a "savings incentive match plan for employees," i.e., a SIMPLE plan. If you don't establish a retirement plan, you may still be able to make a contribution to an IRA.

 

This list is simplified and far from exhaustive, if you have additional questions or you are considering starting your own business.  Please consult your advisors and see our blog “Starting a biz”

shopping cart

Starting a Business

Starting a business is a big decision; whether you are leaving a steady income stream or just beginning your career, venturing out on your own can seem like a daunting task.  Having an idea of what lies ahead can help.  What follows is a basic road map for the formation of a business.  Not every venture requires each step; having a trusted advisor to help along the way is invaluable.

First is the choice of entity: sole proprietorship, LLC, S corporation, and C corporation are the most common but there are others.  It is best to analyze this from both a legal perspective and a tax perspective to determine which one is the best fit.  This means meeting with an attorney and a CPA to discuss the options.  Make sure that you and your professional advisors are on the same page about the direction of the business; including the ultimate goal whether that is the sale of what you have built or a succession plan.

After the type of entity is chosen, the capital structure of the business should be developed.  This can be as simple as $100 from the owner to get things started or as complex as multiple equity offerings with different profit and loss allocations for each tier.  Deciding whether to pursue debt (loans) financing or equity (ownership) financing should be made in this step.  Your advisors will guide you through this and make recommendations along the way.

Next are some government filings.  In Minnesota you must establish the business with the Secretary of State's office.  Then you can obtain a federal employer identification number and other state identification numbers, sales tax, withholding tax, if necessary.

The next step to your business formation is to develop an accounting system.  It is best to determine and lay out some processes in the beginning of your formation.  These processes will make it easier to track income and expenses and give you an accurate and timely picture of the business' financial situation.  What you need will vary depending on the type and size of the business as well as the personal preferences of the owner(s) therefore it may be useful to contact your accounting advisor during this step.

Now it is time to solicit business… wait… that was most likely happening before and during all of these activities already.  This business is your and possibly some other partners/investors project.  Make sure that throughout the formation process the development of the business corresponds with your initial vision.  Your advisors should be able to answer any questions you have and help you to be comfortable with each step, all while remaining a valuable asset you can take with you to the next new step your venture brings.

 

Upcoming Tax Due Dates – Fall 2015

September 15th – 3rd quarter estimated tax payments are due for individuals required to pay estimated taxes.

September 15th – Partnership and Corporate income tax returns for 2014 that are on extension are due.

October 15th – Individual income tax returns for 2014 that are on extension are due.

Tax Concerns for the College Bound: Part 1 – Paying for College

First of all, congratulations on graduating high school and getting into college! College opens a whole new world for a student's growth and learning, along with a myriad of tax considerations.

One of the first concerns that comes up in a college discussion is the cost.  Many taxpayers will rely on government and private loans to pay the bill, but some students will qualify for scholarships, fellowships, and tuition discounts.  Here are some guidelines under these circumstances:

Taxable scholarships, fellowships, & tuition assistance

  1. Total received by a student who is not a degree candidate
  2. Any amount that was a payment for services performed
  3. Any amount used for room, board or other expenses that do not qualify as tuition, fees, and course requirements
  4. Other non-taxable income for school expenses that is used for nonqualified expenses such as room, board and travel.

In most cases, any amount that is considered taxable should be added to page one of the tax return as other income.

School Loans

In most cases, school loans are not considered taxable income and do not have to be reported on a tax return.

For those that rely on loans to pay for college, the interest component on the repayment is deductible on page 1 up to $2,500 per year subject to AGI thresholds.

Qualified Tuition Programs

Some students can take advantage of a qualified tuition plan commonly called a "529 Plan" to pay for college.  Qualified tuition plans are set up for the benefit of the student to pay education expenses. The benefit of these plans are the tax-free earnings of the account if the student uses the funds for qualified education expenses. In most cases, family members have been contributing to the plan for years before the student is expected to need the funds.  Distributions from this plan are tax-free when used for qualified expenses. However if a student takes a greater withdrawal from the plan than qualified expenses, part of the earnings may be taxable to the student.  The earnings portion that is not used for qualified expenses will also be subject to a 10% penalty unless an exception applies. When calculating the portion of the earnings that may be taxable you cannot include the expenses used to calculate education credits.  If a portion of the earnings from a qualified tuition plan is taxable because of a reduction of education expenses due to scholarships or used in the calculation of an education credit the 10% penalty does not apply.

Education Savings Plans

Education savings plans also known as "Coverdell ESPs" are another option for paying for college. ESPs are similar to Qualified Tuition Plans. They also have tax free earnings if the distribution is used for qualified expenses however ESPs are not limited to higher education expenses but can also be used for elementary and secondary expenses as well.  They are subject to the same 10% penalty and rules for determining the taxability of earnings as Qualified Tuition Plans.  If a student has both a Qualified Tuition Plan and an Education Savings Plan, any distributions in excess of qualified expenses must be split between the two plans to determine taxability of earnings.

 

The big difference in QTPs and ESPs is in the requirements and limitations for contributions. If families are interested in making contributions for the benefit of a student please contact your tax advisor to determine which would be beneficial for your specific situation.

 

IRA's & Roth IRA's

If a student or the student's parents want to take a distribution from an IRA or Roth IRA to pay for school expenses they may do so and avoid any early withdrawal penalties if they are under age 59 ½.  The money still follows the taxability rules based on the type of account for the person taking the distribution, but the distribution will not be subject to the 10% penalty.  So be aware that although you won't incur a penalty, you could be changing your tax situation by increasing your taxable income and additional income tax may be due.

 

Now that you have figured out how to pay for college do you want to know what's deductible? See the second part of our College Bound Series: Tuition, Fees, & Course Requirements.

hat

Tax Concerns for the College Bound: Part 2 – Tuition, Fees, and Course Requirements

Regardless of how they are paid, via loan or out-of-pocket cash, there are education credits that are available for tuition, fees, and other course requirements.  Not everyone will qualify for these credits but if you do, they are advantageous to your tax situation.

These credits may be claimed by the student or the student's parents.  If a student is claimed as a dependent by their parent, then only the parent may claim the education credit. If a parent chooses not to claim the student as a dependent, then only the student may qualify for the credit.

Tax law allows for qualifying expenses paid by the student to be treated as if they were paid by the parent (and vice versa) for calculating the education tax credits.

The first of the education credits is the American Opportunity Credit.  Only expenses incurred in the first four year of the student's undergraduate studies will qualify for this credit.  To maximize this tax credit the student must have paid a minimum of $4,000 in tuition, fees, and course requirements and to have attended school at least half-time in a degree program.  The credit is calculated as a 100% of the first $2,000 of expenses and 25% of the next $2,000 for a maximum credit of $2,500.  The best thing about this credit is that it is 40% refundable (subject to certain exceptions) which allows for a reduction of tax liability and a refund if no liability is due.

The second education credit is the Lifetime Learning Credit. Students may qualify for this credit for both undergraduate and graduate work and are not required to be in a degree program. This credit is nonrefundable but will reduce the amount of tax you owe.  The maximum credit is $2,000 per tax return calculated as 20% of education expenses up to $10,000.

There is also a deduction available for education expenses called the Tuition and Fees Deduction.  This is a deduction of up to $4,000 of expenses before calculating AGI.

Each student may claim one of these education incentives but not more than one. All options are subject to AGI thresholds.

 

Travel

In most cases, travel as a form of education is not deductible. However study-abroad programs as a part of the tuition in a degree seeking program may qualify as education expenses allowable for education credits. Please consult your tax advisor for your specific situation.

 

Once a student begins college it is advisable to contact your tax preparer with any questions about the deductibility of education expenses to make sure that the law is applied correctly to your tax situation and to mitigate tax surprises.  For any students who plan to work while attending school please see part 3 of our College Bound series: Working Students.

books

Tax Concerns for the College Bound: Part 3 – Working Students

Any students who plan on working while taking classes should consider their filing requirements:

Filing Requirements: Dependents who earn less than $6,200 at their jobs may not need to file a federal tax return and therefore are not required to withhold federal taxes.  If a student is not required to file a federal return they are also not required to file a Minnesota return or withhold Minnesota tax from wages.

Out of State: If a student goes to school in a state other than Minnesota but is a dependent or considers Minnesota to be their home then they would have nonresident filing status for earned income in the state where they attend school.  States outside of Minnesota have different filing requirements for nonresident income earned in their state.  Here are a few state requirements that may come in handy.

Scenario – A Minnesota resident that can be claimed as a dependent and is going to school and earning wages in the following state:

  1. Wisconsin – A Wisconsin tax return is due if the student earned more than $1,000 from a Wisconsin sources.
  2. North Dakota – Per a reciprocity agreement, any wages earned from a company in North Dakota will be taxed as if they were earned in Minnesota and the Minnesota filing requirements apply.
  3. South Dakota – South Dakota does not have an income tax
  4. Iowa – If Iowa sourced income is $1,000 or more an Iowa return will be due. Exception: if the total income of the student is under $9,000 they do not have to file in Iowa.
  5. Illinois – Students must file in Illinois if they earned income from any Illinois sources.
  6. Indiana – Students must file in Indiana if they earned income from any Indiana sources.
  7. Michigan – Per a reciprocity agreement, any wages earned from a company in Michigan will be taxed as if they were earned in Minnesota and the Minnesota filing requirements apply.
  8. California – If a student has both California source income and total income that is more than the standard deduction ($6,200) they would be required to file in California.
  9. New York – If a student has New York source income and adjusted gross income in excess of $3,100 they are required to file a return in New York.

DISCLOSURE: For the sake of the discussion, these requirements are simplified, do not take into account any unearned income and are based on the published figures for the 2014 tax year.  If you have specific questions on your tax situation please consult your tax preparer.


college

Capital Equipment Sales Tax Exemption

Starting July 1, 2015 the Minnesota Department of Revenue will allow businesses an exemption from sales tax at the time of purchase for capital equipment used to manufacture, fabricate, or refine products. Currently, businesses are required to first pay the sales tax then file a request for a refund using Form ST11 so the new law will have a positive effect on cash flow and reduce tax compliance.

To qualify for this exemption, a business will need to provide the vendor with a completed Form ST3  citing the reason for exemption as "Capital Equipment."

Cash Transaction Reporting Requirement

The IRS would like to remind businesses, including sole proprietors, that they are required to report any cash transaction exceeding $10,000.  A transaction can include more than one payment if a payment is one of a series of connected transactions.  The transaction must be reported on Form 8300 within 15 business days. Cash includes: coins, currency, cashier's checks, bank drafts, traveler's checks, and money orders.

Data Breach at IRS

A new data breach was revealed last month.

Hackers used taxpayer's personal information obtained from sources outside the IRS to acquire past tax return data through the IRS "Get Transcripts" online service.  These breaches occurred between February and May of this year.  They attempted to obtain the data of approximately 200,000 taxpayers, and succeeded on more than 104,000.  It is alleged that the hackers obtained the information to file more believable false tax returns to obtain refunds.  The IRS is mailing out notices to the 200,000 taxpayers alerting them that criminals attempted to access their prior tax returns; the IRS will only send this information through the mail.  For the 104,000 taxpayers who had their data retrieved, the IRS will provide credit monitoring services.  All 200,000 will be marked in the IRS system to protect them against a subsequent false return being filed later this summer or early next filing season.

Deductible Miles

In 2015 the mileage rate for business miles is 57.5 cents per mile.

Taking a mileage deduction is a great opportunity to offset business income. However it is important to keep good records of your miles for substantiation.  It's also important to know which miles are deductible and which are not.

This is a basic chart for employees and business owners whose main office is not the person's home:

deductible miles

As shown, commuting from home to work is never deductible, but travel from your main office or home to a temporary work location is deductible.  Make sure you substantiate your deductible miles by keeping a log of the miles traveled using either the total miles or the beginning and ending odometer readings before and after making the trip.  You should also state the date, location, and reason you made the trip on your log.  Without a substantiating log, your mileage deduction may be disallowed by the IRS upon audit.  Click for an example mileage log.