Archive for the "Accounting & Bookkeeping" Category

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”

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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.

 

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.

Good Recordkeeping

A new year has started and tax season is over, and maybe it was a little more difficult to gather all your information than you would have liked.  Before we get too far into the year, read these tips to make sure you are practicing good record keeping habits so that next year will be a piece of cake!

  1. Keep records in one location- One of the struggles come tax time is that records get filed in many different locations and taxpayers spend lots of unnecessary time searching all the places they could have put that one piece of paper. Instead, when you receive a receipt or record that is commonly used for your taxes, make a copy and keep it in a tax file. Doing this will ensure that all your tax records are together and you can just hand the whole file over to your preparer. Common records to keep will include, but are not limited to, medical and charitable receipts, property tax and interest statements, or any statements with the words “Tax Document” printed on the envelope.
  2. Use Excel Worksheets- When taxpayers begin to gather lots of receipts or data for the year, a good practice is to begin to record these receipts on an Excel spreadsheet.  This way you will be able to make sure that every expense has been recorded without searching through hundreds of individual receipts.  This will also enable you to compute quick totals instead of adding each expense individually with a calculator, which could take a lot of time and mistakes are easily made.  A good example of an expense to record with Excel would be business miles.
  3. Take advantage of Personal or Business Financial Software- Many different types of software such as Quicken, NeatDesk, QuickBooks, and Mint.com are available to help with personal financial needs in a range of prices from $0 to hundreds of dollars.  These kinds of software help to track and locate your finances using search features and other kinds of tracking options. Then come tax time, you can figure out exactly what you paid for deductable items such as vehicle registration fees.  They are also handy tools for budgeting and other personal finance needs.
  4. Create a System- Every person is different, some people prefer a fancy high tech computer to track everything, some love label makers and cubby holes, and some prefer a shoe box above all else.  Figure out what works for you and your lifestyle.
  5. Be Diligent- Good recordkeeping will save you money and stress in the long run.

 

For additional information check out this video from the IRS titled “Good Recordkeeping helps avoid headaches at tax time

Note: BHB Advisors is not affiliated with nor endorse any of the aforementioned software companies.

2014 Tax Season Resources

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

Engagement Letter

Questionnaire  – This is a “fill in” PDF form, but will need to be either printed to .pdf or paper to record your answers.

Organizer

If we did your return in 2013, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

 

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

 

  • Basic – For taxpayers without Schedule C business income or rental property.
  • Business Income – For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Rental Income – For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Complete – This is the complete version for taxpayers with multiple activities such as business, rental, or farm income.

If you have Adobe Acrobat see our instructions  for filling out your organizer in Adobe.

Reminders!

2014 4th Quarter Estimates – Due on January 15th, 2015.

2014 1099 Forms – Regarding anyone required to distribute 1099 forms for interest paid to an individual, payments to contractors totaling over $600, rents, etc. The due date for sending these forms is February 2nd, 2015.  If you need help or have any questions about the requirements please consult your tax accountant or see our article “1099 Filing Requirements.”

2014 Sales and Use Tax – If you signed up with the Minnesota Department of Revenue as an annual filer for sales and use tax, the due date for this return is February 5th, 2015.  If you signed up for sales and use tax you are required to file even if you did not incur a sales or use tax liability.  In this case, it is perfectly acceptable to file a zero return.  If you have questions please contact your tax accountant or see our article “Do you have a Use Tax liability?

2014 Trust Distributions – Fiduciaries of estates and some trusts have the option to treat certain distributions as made in the previous year.  If a distribution is made in the first 65 days of a year, an election can be made to treat that distribution as if it was made in the prior year.  The last day to make a 2014 distribution from a trust is March 6th, 2015.

2014 IRA Contributions – You have until April 15, 2015 to make your Traditional and Roth IRA contributions.

2014 HSA Contributions – April 15, 2015 is the last day you can make a contribution to your HSA for 2014.  The contribution limits are $3,300 for self-only or $6,550 for family coverage. Add an additional $1,000 if you were 55 or older at the end of 2014.

UPDATES

2015 Standard Mileage Rates

Business: 57.5 cents per mile (56 cents per mile in 2014)

Medical and Moving: 23 cents per mile (23.5 cents per mile in 2014)

Charitable: 14 cents per mile (same in 2014)

 

Expiring deductions

The extender package was passed on December 16th that extends over fifty expiring provisions through 2014.  Since this was a one year extension, Congress will have to vote on the expiring provisions again next year.

 

179 Deduction

The amount of allowable federal 179 expense was decided upon with the extender package that was passed on December 16th.  The allowable deduction is maxed out at $500,000 and decreases dollar for dollar once a business has placed in service more than $2 million dollars of qualifying assets.

 

Minnesota Refund

Because of mid-year law changes, many taxpayers received different refunds than what was originally reported on their tax return.  It is possible for taxpayers to look up and print a copy of Form 1099-G stating what they received as a refund.  The MN DOR states however that information about refunds paid in 2014 won't be available until January 31st 2015.  You can look up your refund here.

The Truth About Business Gifts

We are quickly approaching the holiday season and companies are planning their gift lists.  Here is the truth about business gifts…

Business gifts are deductible to only $25 per recipient per year with married couples being considered one recipient.  You may want to give a great customer a lovely Christmas basket that cost you $100, and of that kind gift, $75 may be subject to tax because it is not deductible.

Promotional materials or small items under $4 with a logo do not qualify as a gift and should remain classified as a promotional expense.

Gifts are a great way to thank your clients or customers and encourage their continued support, but take the time to weigh the cost benefit before filling out your Harry and David order forms.

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The Skinny on Deducting Meals

hamburger

One of the most common questions I get asked by clients is how much they can deduct for meals.  To answer the question I am going to break this down.

Are meals ever deductible?

Yes! The caveat with deducting your meals is whether they are directly related to or associated with your business activity.  Additionally, you must be able to prove that the purpose of the meal was business and that there is more than a general idea that you will be engaged in business with them in the future.  Some examples of non deductible meals:

  1. Deciding not to bring your lunch from home and grabbing a sandwich does not constitute a business activity and is not deductible.  If you were traveling to and from clients and needed to stop for lunch because you could not reasonably go home or bring your lunch, you may have grounds for a deduction.
  2. Generally meals with business associates and coworkers are not deductible unless you can establish a clear business purpose.
  3. Having a meal with someone with the hope that they may be a client or customer someday does not make the meal deductible.

Additionally, you will need to keep records of your expense and business purpose should your deduction be challenged.  Using a spreadsheet or writing the information right on the receipt doesn’t take very long and could save you hours in the future.

Most meals are only 50% deductible

Even when your meals are legitimate and deductible most are only deductible up to 50%.  This means that it is important for companies to discuss and decide the appropriateness of using this deduction.  Spending $5,000 on meals throughout the year could result in an additional $2,500 of taxable income and depending on your tax rate, the numbers can add up.

Exceptions to the 50% limit

There are circumstances where meals are fully deductible:

  1. As a fringe benefit.  You can deduct the cost of meals served on the premises for the convenience of the employer.  An applicable scenario would be a lunch meeting where the employer provides lunch so that they can continue working.
  2. As compensation. You can deduct the full cost of meals if they are added as taxable income to the employee’s wages.
  3. As a promotional activity.  Meals provided to the general public as part of a promotional event can be fully deductible.  A promotional event would include the snacks at a retailer’s open house event.
  4. At special occasions. If you provide meals for your employees at a social or recreational event such as a holiday party or summer picnic, the cost of the meals is fully deductible.

The deduction for meals is a nice way for business owners to conduct their activities in a more enjoyable and stress free atmosphere as well as providing a nice benefit to employees.  Because it is an attractive deduction it has the propensity to be misused and abused.  The IRS can easily disallow your deduction if you cannot provide appropriate support for your deduction upon audit.  My advice is to add this deduction to your business toolkit: use it when it is appropriate for good business practice but remember its limitations.