As much as the Internet has changed our lives for the good, it has also opened us up to threats from crooks from all over the world. They are smart and always coming up with a new trick to separate you from your hard-earned dollars or with an illegal way to use your stolen ID. They apply for loans and credit cards with stolen IDs, file fraudulent tax returns, make purchases with stolen credit card info, and tap into your bank account with stolen account information, and the list goes on. As a result, everyone needs to be very careful and mindful of the tricks used by these scammers to not end up becoming a victim.
This office is committed to using safeguards that protect your information from data theft. To further protect your identity, you can also take steps to stop thieves. This article looks at a variety of tricks and schemes crooks use to dupe individuals, along with actions you can take to avoid being scammed, keep your computer secure, avoid phishing and malware, and protect your personal information.
The primary information ID thieves are looking for is your name, Social Security number, and birth date. So, constantly be aware of where you use that information, and always question anyone’s need for it when they ask. The fewer institutions that have your ID information, the lower the chances your data will be hacked. Treat personal information like cash — don’t hand it out to just anyone. Social Security numbers, credit card numbers, and bank and even utility account numbers can be used to help steal a person’s money or open new accounts. Every time you receive a request for personal information, you should think about whether the request is truly necessary. Scammers will do everything they can to appear trustworthy and legitimate.
Stolen IDs are also frequently used by cyber thieves to file fraudulent tax returns in your name, to take advantage of refundable tax credits such as the earned income tax credit, the child tax credit and the American Opportunity Education Credit, leaving you to deal with the IRS’s identity theft protocol.
What’s in Your Wallet or Purse
What is in your wallet or purse can make a big difference if it is stolen. Besides the credit cards and whatever cash or valuables you might be carrying, you also need to be concerned about your identity being stolen, which is a far more serious problem. Think about it: your driver’s license has 2 of the 3 keys to your identity. And if you also carry your Social Security card, bingo! An identity thief then has all the information needed.
Be aware that an unsolicited e-mail with a request to download an attachment or click on a URL could appear to be from someone you know, such as a friend, work colleague or tax professional. It could be that their e-mail has been hacked and someone else is sending the e-mail, hoping to trick you into some scam. Be alert for suspicious wording or content, and don’t click on any embedded links or attachments if there is any doubt.
Don’t assume Internet advertisements, pop-up ads, or e-mails are from reputable companies. If an ad or offer looks too good to be true, it most likely is not true. Take a moment to check out the company behind it. Type the company or product’s name into a search engine with terms like “review,” “complaint” or “scam.”
Only Access Secure Websites
Only provide personal information over reputable, encrypted websites. Shopping or banking online should be done only on sites that use encryption. People should look for “https” at the beginning of a Web address (the “s” stands for “secure”) and be sure “https” is on every page of the site.
Avoid Phishing Scams
The easiest way for criminals to steal sensitive data is simply to ask for it. Learn to recognize phishing e-mails, calls or texts from crooks that pose as familiar organizations such as banks, credit card companies or even the IRS. These ruses generally urge taxpayers to give up sensitive data such as passwords, Social Security numbers and bank account or credit card numbers. They are called phishing scams because they attempt to lure the receiver into taking the bait.
For example, you might get an e-mail disguised as being from your credit card company asking you to verify your password. Companies will never do that because only you have that information, which is why you have to change it if you forget it.
It is good practice to use security software. An anti-malware program should provide protection from viruses, Trojans, spyware and adware.
Set security software to update automatically so it can be upgraded as threats emerge. Also, make sure the security software is on at all times. Invest in encryption software to ensure data at rest is protected from unauthorized access by hackers or identity thieves.
You should never download “security” software from a pop-up ad. A pervasive ploy is a pop-up ad that indicates it has detected a virus on your computer. Don’t fall for it. The download most likely will install some type of malware. Reputable security software companies do not advertise in this manner.
Today’s children are probably more adept at using the Internet than their parents but are not mindful of the hazards. Educate your children about not giving out or posting online their Social Security numbers or birth dates. It may also be appropriate not to allow them to use a device that contains sensitive information such as tax returns, financial links, etc. It is not uncommon for crooks to use children’s IDs to file fraudulent tax returns. Also, block your children from freely downloading apps to their mobile devices without parental supervision.
Taxpayers have reported an increase in e-file problems because their children’s SSNs have already been used in a previously e-filed return, which results in the e-filed return being rejected.
Use strong passwords. The longer the password, the tougher it will be to crack. Most sites require a minimum of eight characters, with at least one number and one character. Many sources suggest using at least 10 characters; 12 is ideal for most home users. Mix letters, numbers and special characters. Try to be unpredictable — don’t use names, birthdates or common words. Don’t use the same password for many accounts, and don’t share them on the phone, in texts or by e-mail. Consider using a passphrase versus a password. And remember, legitimate companies will not send messages asking for passwords.
The fraudsters pop up whenever there are natural disasters, such as earthquakes or floods, trying to coax you into making donations that will go into the scammer’s pockets and not to helping the victims of the disaster. They use the phone, mail, e-mail, websites and social networking sites to perpetrate their crimes. The following are some tips to avoid fraudulent fundraisers:
Donate to known and trusted charities. Be on the alert for charities that seem to have sprung up overnight in connection with current events.
Ask if a caller is a paid fundraiser, who he/she works for and what percentages of the donation go to the charity and to the fundraiser. If any clear answers are not provided, consider donating to a different organization.
Don’t give out personal or financial information—including a credit card or bank account number—unless the charity is known and reputable. You might end up donating more than you had planned on.
Never send cash. The organization may never receive the donation, and there won’t be a record for tax purposes.
Never wire money to a charity. It’s like sending cash.
If a donation request comes from a group claiming to help a local community agency (such as local police or firefighters), ask the people at the local agency if they have heard of the group and are getting financial support.
Verify the charity — Check out the charity with the Better Business Bureau (BBB), Wise Giving Alliance, Charity Navigator, CharityWatch or IRS.gov.
Impersonating the IRS
Thieves will try to impersonate the IRS in an attempt to frighten you into making a quick payment, without checking on the validity of you owing any taxes.
The very first thing you should be aware of is that the IRS never initiates contact in any other way than by U.S. mail. So, if you receive an e-mail or a phone call out of the blue with no prior contact, then it is a scam. DO NOT RESPOND to the e-mail or open any links included in the e-mail. If it is a phone call, simply HANG UP.
Additionally, it is important for taxpayers to know that the IRS:
Never asks for credit card, debit card or prepaid card information over the telephone.
Never insists that taxpayers use a specific payment method to pay tax obligations.
Never requests immediate payment over the telephone.
Will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior written notification of IRS enforcement action involving IRS tax liens or levies. Some scammers even threaten immediate arrest if the payment is not made immediately — don’t be bullied by these criminals.
When in question, never make tax payments or provide any information without calling this office first.
Back Up Files
No system is completely secure. Back up important files, including federal and state tax returns, business books and records, financials and other sensitive data onto remote storage, a removable disc or a back-up drive.
If It Is Too Good to Be True, It Probably Isn’t True
Many e-mail scams are based around supposed foreign lotto winnings, foreign inheritances and foreign quick-buck investment schemes. Don’t let the lure of the dollar signs cloud your better judgement. The only one that makes out in these instances is the cyber crook.
Please call this office if you have any questions.
Qualified tuition plans (QTPs) provide a means for family members and others to save for the future educational needs of children. Investment earnings within a QTP account are tax deferred and not taxable when withdrawn if used to pay qualified tuition and certain other expenses.
Each individual’s contribution to a QTP (also sometimes referred to as a “Section 529 plan”) on behalf of a designated beneficiary is treated as a gift subject to the normal gift tax rules. Thus, no gift tax return is required for any contributor if the contribution is equal to or less than the amount of the gift tax annual exclusion for the year of the gift, which for 2019 is $15,000.
When a donor’s total contribution to a QTP for the year exceeds the annual exclusion amount, the donor may make a special election treating the contributed funds as if they had been contributed ratably over a five-year period starting with the year of the contribution.
Example: Grandpa Lee contributes $75,000 to granddaughter Whitney’s QTP in 2019. By using the election, grandpa’s contribution is treated as if the contribution was made equally over a five-year period – that is, as if he’d contributed $15,000 in each of 2019, 2020, 2021, 2022 and 2023. If grandpa makes any more QTP contributions during those years, those contributions would then exceed the annul gift limit and require a gift tax return to be filed. The same would be true if grandpa makes other gifts to Whitney.
To make the five-year election grandpa must file a Form 709, Federal Gift Tax Return, for the calendar year in which the contribution is made.
The election is available only with respect to contributions not in excess of five times the annual exclusion amount for the calendar year of the contribution. Any excess is treated as a taxable gift in the calendar year of the contribution. However, that does not necessarily mean any gift tax will be owed since there is also a unified gift and estate tax lifetime exclusion (currently in excess of $11 million) that will shield most taxpayers like grandpa from any gift tax.
If grandpa were married, he and grandma could make an election under the gift-splitting rules for the QTP contribution to be made one-half by each of them, thus allowing them to double up on the annual and the special 5-year amounts.
If in any year after the first year of the five-year period, the amount of the gift tax annual exclusion is increased for inflation, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made.
Example: In 2017 when the annual gift tax exemption was $14,000, grandpa made a $70,000 contribution to his granddaughter’s QTP and made the 5-year election. For 2018 the annual gift tax exemption was increased to $15,000. Thus, grandpa can make an additional $1,000 contribution for each of the remaining 4 years of the 5-year election period.
Change of Beneficiary
A change in the designated beneficiary, or a rollover to the account of a new beneficiary, is treated as a taxable gift if the new beneficiary is assigned to a generation below the generation of the old beneficiary. Such a transfer isn’t a taxable gift if the new beneficiary is a member of the family of the old beneficiary, and is assigned to the same generation, as the old beneficiary.
If the new beneficiary is assigned to a lower generation than the old beneficiary, the transfer is a taxable gift from the old beneficiary to the new beneficiary, regardless of whether the new beneficiary is a member of the family of the old beneficiary.
In addition, the transfer would be subject to the generation skipping transfer tax (GST) if the new beneficiary is assigned to a generation which is two or more levels lower than the generation assignment of the old beneficiary. The five-year averaging election may be applied to a transfer.
Example: Suppose Whitney had not used the funds from the QTP or has finished her higher education and had some funds left over in the plan, and grandpa (or the trustee of the account if grandpa is not the trustee) decides to change the account beneficiary to his great-granddaughter Annabelle. Since Annabelle is in a generation lower than Whitney, the change of beneficiary represents a gift from Whitney to Annabelle. However, the five-year averaging election may be applied to the gift.
Distributions from QTPs, including earnings on the amounts contributed to a QTP, aren’t taxed for income tax purposes if they are used to pay qualified higher-education expenses of the account beneficiary. In addition to tuition, eligible expenses include the following:
The purchase of computers or peripheral equipment, computer software, or internet access and related services that will be used primarily by the beneficiary while the beneficiary is enrolled at an eligible educational institution;
Room and board if the beneficiary is attending a qualified school at least half time; and
A special needs student’s expenses that are necessary to enable the student to enroll or attend an eligible educational institution.
When distributions exceed eligible expenses, the beneficiary of the QTP is the one who would include the nonqualified distributions in his or her income. The calculation of the taxable amount of the distribution can be complicated if the beneficiary received a tax-free scholarship. In some cases a 10% penalty also applies on the taxable distribution that is included in income.
While QTPs are generally intended to be used for higher education expenses, for years after 2017, up to $10,000 distributed from a QTP for tuition expense (but not for related other expenses) paid so the beneficiary can attend an elementary or secondary school (kindergarten through grade 12) is considered a qualified education expense that would be tax-free. However, some states have not recognized this provision, and so such distributions would be at least partially taxable for state purposes.
Direct Payment of Tuition
Some potential contributors to a QTP for family members may wish to pay for the tuition when it is actually incurred rather than saving for it in advance. If that individual makes the tuition payment directly to a qualified school, college or university the gift tax does not apply.
If you have questions related to QTPs in general or changing beneficiaries, please give this office a call.
Back in 2009 Congress created a tax credit for the purchase of electric vehicles as a stimulus for car companies to manufacture “green” vehicles and as an incentive for consumers to purchase electric vehicles. Although there is no specific date in the future when this credit will expire, there is a limit to the number of vehicles each manufacturer can sell that can qualify for the credit.
That limit is not a set number of vehicles, but rather a credit phaseout by manufacturer that is triggered when the manufacturer sells the 200,000th electric vehicle. Here is how the credit phase-out works:
The credit phases out beginning in the second calendar quarter following that in which a manufacturer sells its 200,000th plug-in electric drive motor vehicle for use in the U.S. The applicable percentage phase-out is:
50% for the first two calendar quarters of the phaseout period,
25% for the third and fourth calendar quarters of the phaseout period, and
0% for each later calendar quarter.
Example: Tesla, Inc., sold more than 200,000 vehicles eligible for the plug-in electric drive motor vehicle credit, reaching this sales level during the third quarter of 2018. Thus, a phase out of the tax credit available for purchasers of new Tesla plug-in electric vehicles was triggered beginning Jan. 1, 2019. This means the maximum credit available for the purchase of a Tesla, which was $7,500 before 2019, has begun to phase out and the maximum credits for 2019 are as follows for vehicles purchased:
Jan 1, 2019 through June 30, 2019: $3,750 (50% of $7,500).
July 1, 2019 through Dec 31, 2019: $1,875 (25% of $7,500).
After 2019, Tesla vehicles will no longer qualify for the credit.
During the fourth quarter of 2018, General Motors (GM) also reached a total of more than 200,000 sales of vehicles eligible for the plug-in electric drive motor vehicle credit and accordingly, the credit for all new qualified plug-in electric drive motor vehicles sold by GM have begun to phase out beginning April 1, 2019. Thus, the maximum credit for a GM plug-in electric drive motor vehicle is $3,750 for purchases in April through September of 2019, then dropping to $1,875 for purchases in October 2019 through March 2020, after which GM vehicles will not qualify for the credit.
If you are considering purchasing an electric vehicle, you may need to make that decision sooner than later since the credit for many popular models is beginning to phase out. Here are some things you should be aware of before making your decision to purchase an electric vehicle.
Not All Electric Vehicles Qualify for the Full Credit
The credit is not a flat $7,500; it is actually made up of two elements, a $2,500 per vehicle credit plus an additional $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours, but not in excess of $5,000, resulting in an overall credit of up to $7,500.
The amount of credit available for any qualifying vehicle, listed by manufacturer is available on the IRS website. Although most salespeople will know the amount of credit that is available for the vehicle you are interested in purchasing, you sometimes run into an overzealous one that might mislead you a bit. So, it is good practice to double check for yourself and that is quite easy to do on the IRS Website.
The following requirements must be met to qualify for the credit.
You are the owner of the vehicle. If the vehicle is leased, only the lessor and not the lessee, is entitled to the credit.
You placed the vehicle in service during your tax year.
The vehicle is manufactured primarily for use on public streets, roads, and highways.
The original use of the vehicle began with you.
You acquired the vehicle for use or to lease to others, and not for resale.
You use the vehicle primarily in the United States.
Credit for Multiple Vehicles
The credit is a per vehicle credit, thus if a taxpayer purchases multiple plug-in electric drive motor vehicles the taxpayer can claim the credit for each one.
Off-Road Vehicles & Golf Carts
Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for the credit.
Allocation Between Business and Personal Use
When a taxpayer uses a qualified plug-in electric drive motor vehicle both personally and in the taxpayer’s business, the credit is divided (allocated) between personal use and business use and creates two separate credits, with the tax treatment of the two being quite different.
Personal Credit – The personal portion of the credit is non-refundable, meaning the personal portion of the credit can only offset a taxpayer’s tax liability and any excess not used in the year of purchase is lost. Thus, taxpayers need to be mindful of just how much benefit the credit provides and not necessarily expect to benefit from the full amount of credit for the vehicle.
Business Credit – The business use portion of the credit, on the other hand, becomes a business credit and any unused portion for the current year can be carried back to the prior tax year where it can offset tax liability in that year and result in a refund. If there is still unused credit it can carry forward for up to 20 years to offset future tax liabilities.
Credit Reduces Basis
For both the personal and business credit, the basis of the vehicle is reduced dollar for dollar by the amount of the credit. For a taxpayer claiming only the personal credit, this only becomes an issue when the vehicle is subsequently sold, since when determining the gain or loss on the sale the cost of the vehicle is reduced by the amount of any credit claimed. This is rarely an issue since vehicles are seldom subsequently sold for a profit. However, for a vehicle used for business, the credit reduces the depreciable basis of the vehicle. Also, no credit is allowed for any portion of a business vehicle expensed under Sec 179.
Business Standard Mileage
If a taxpayer uses a vehicle for business, they can choose between deducting actual expenses such as fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. The IRS does not distinguish between fuel powered cars and electric cars, and both are allowed to use the same standard amount, even though the rate includes fuel costs. The business mileage rate for 2019 is 58 cents per mile, up from 54.5 cents per mile for 2018.
Call this office to determine how much benefit you will derive from the plug-in electric drive motor vehicle credit based upon your specific use of the vehicle, whether it is personal, business or a combination of the two.
Because people are living longer now than ever before, many individuals are serving as care providers for loved ones (such as parents or spouses) who cannot live independently. Such individuals often have questions regarding the tax ramifications associated with the cost of such care. For these individuals, the cost of such care may be deductible as a medical expense.
Incapable of Self-Care
For the cost of caring for another person to qualify as a deductible medical expense, the person being cared for must be incapable of self-care. A person is considered incapable of self-care if, as a result of a physical or mental defect, that person is incapable of fulfilling his or her own hygiene or nutritional needs or if that person requires full-time care to ensure his or her own safety or the safety of others.
Generally, the entire cost of care at a nursing home, home for the aged, or assisted-living facility is deductible as a medical expense, provided that the person who lives at the facility is primarily there for medical care or is incapable of self-care. This includes the entire cost of meals and lodging at the facility. On the other hand, if the person is living at the facility primarily for personal reasons, then only the expenses that are directly related to medical care are deductible; the cost of meals and lodging is not a deductible medical expense.
A common alternative to nursing homes is in-home care, in which day helpers or live-in caregivers provide care within the home. The services that these caregivers provide must be allocated into (nondeductible) household chores and (deductible) nursing services. These nursing services need not actually be provided by a nurse; they simply must be the same services that a nurse would normally provide (e.g., administering medication, bathing, feeding, and dressing). If the caregivers also provide general housekeeping services, then the portion of their pay that is attributable to household chores is not deductible.
The emotional and financial aspects of caring for a loved one can be overwhelming, and as a result, caregivers often overlook their burdensome tax and labor-law obligations. Sadly, these laws provide for no special relief from these tasks.
Is the Caregiver an Employee?
Because of the way that labor laws are written, it is important to determine if an in-home caregiver is an employee. The answer to this question can be very subjective. Caregivers’ services can be obtained in a number of ways:
Agency-provided caregivers are employees of the agency, which handles all the responsibilities of an employer. Thus, loved ones do not have any employment-tax or payroll-reporting responsibilities; however, such caregivers generally come at a substantially higher cost than others.
Self-employed caregivers pay all their expenses, are responsible for their own income reporting and taxes, and are not considered employees under federal or state law. The IRS lists 20 factors that it uses to determine whether an individual is an employee; the main factors are financial control, behavioral control, and the relationship between the parties. The household workers are typically classified as employees.
Household employees are subject to Social Security and Medicare taxes. The employer is thus responsible for withholding the employee’s share of these taxes and paying the employer’s share of payroll taxes. Fortunately for these employers, the special rules for household employees greatly simplify the payroll-withholding and income-reporting requirements. Any resulting federal payroll taxes are paid annually in conjunction with the employer’s individual 1040 tax return. Federal income-tax withholding is not required unless both the employer and the employee agree to do so. However, the employer is still required to issue a W-2 to the employee and to file that form with the federal government. The employer also must obtain federal and state employer ID numbers for reporting purposes. Some states have special provisions for the annual reporting and payment of state payroll taxes; these may be similar to the federal requirements. The employer’s portion of all employment taxes (Social Security, Medicare, and both federal and state unemployment taxes) related to deductible medical expenses are also deductible as a medical expense.
You may be thinking, “Wait a minute – the household employers I know pay in cash and do not pay payroll taxes or issue W-2s to their household employees.” This observation may be accurate, but such behavior is illegal, and it is not right to ignore the law. Think about what could happen if one of your household employees is injured on your property or if you dismiss such an employee under less-than-amicable circumstances. In such circumstances, the household employee will often be eager to report you to the state labor board or to file for unemployment compensation.
Note, however, that gardeners, pool cleaners, and repair people generally work on their own schedules, invest in their own equipment, have special skills, manage their own businesses, and bear the responsibility for any profit or loss. Such workers are not considered household employees.
Here are some additional issues to consider:
Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in a given week. However, live-in employees are an exception to this rule in most states.
Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.
Separate Payrolls – Business owners may be tempted to include their household employees on their companies’ payrolls. However, any payments to household employees are personal expenses and thus are not allowable as business deductions. Thus, business owners must maintain separate payrolls for household employees; in other words, personal funds (not business funds) must be used to pay household workers.
Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When a household employee is hired to work on a regular basis, the employer and employee each must complete Form I-9 (Employment Eligibility Verification). The employer must carefully examine the employee’s documents to establish his or her identity and employment eligibility.
If you have questions related to eldercare or about how your state deals with related employment issues – or if you would like assistance in setting up a household payroll system – please contact this office.
Now that most tax refunds are deposited directly into taxpayers’ bank accounts, the dream of opening your mailbox and finding an IRS refund is all but gone. However, the IRS still sends letters that can increase taxpayers’ heart rates; because of extensive computer matching, the IRS does most of its auditing through correspondence.
When the IRS detects a potential issue with your tax return, it will contact you via U.S. mail; this is called a CP-series notice. Please note that the IRS’s first contact about a tax delinquency or discrepancy will never be a phone call or email. Such calls and emails are a common tool for scammers; if you get one, simply hang up the phone or delete the email. If you are concerned about the validity of a given message, please call this office.
Most commonly, CP notices describe the proposed tax due, as well as any interest or penalties. The notice will also explain the examination process and describe how you can respond.
These automated notices are sent out year-round, and they are quite common. As the IRS tries to close the tax revenue gap, it has become more aggressive in its collection efforts. In addition, as many taxpayers now use low-quality tax mills or do-it-yourself software, the number of notices sent because of preparer error have increased. Missed checkboxes, misunderstandings of available credits, and overlooked income all add up to more errors.
The first step in this automated process involves matching what you reported on your tax return to the data that third parties (e.g., employers, banks, and brokers) reported. When this information does not agree, the automated collection effort begins.
Don’t Panic – These notices often include errors. However, you do need to respond before the 30-day deadline or else face significant repercussions. The notice may even be related to suspected ID theft. For instance, someone may have gained access to your tax ID (or that of your spouse or one of your dependents) and tried to file a return using the stolen ID. The first step is to determine which type of notice you have received.
A CP2000 notice is very different from the other CP notices (which deal with issues such as identify theft, audits, and the earned income credit). The CP2000 notice includes a proposed—almost always unfavorable—change to your tax return, and it gives you the opportunity to dispute the proposed change. Procrastinating or ignoring this notice will only cause the IRS to ratchet up its collection efforts, which in turn will make it more difficult for you to dispute the proposed adjustment.
Sometimes, the IRS will be correct. You may have overlooked a capital gain or income from a second job. It is also possible that the IRS has caught someone else using your SSN to work or otherwise stealing your identity. Quite frequently, however, the IRS is incorrect, simply because its software isn’t sophisticated enough to pick up all the information that you report on the schedules attached to your return.
When you receive an IRS notice, your first step should be to immediately contact this office and to provide us with a copy of the notice. We will review the notice to determine whether it is correct, and then we will consult with you to determine how best to respond.
Starting a small business can be one of the most exciting and rewarding events in someone’s life. But it can also be extremely stressful. If you’re thinking about becoming an entrepreneur, you might have more questions swirling around in your mind right now than you can count. Don’t despair. This is completely normal. After all, it shows you’re serious about your business venture and care enough to want to do things the right way. Before moving forward with a new business idea, ensuring you know the answers to the following vital questions is crucial.
1. Does your startup idea meet a need?
Before starting a small business, you need to know if your product or service will meet a need those in your target market have. It doesn’t matter how special your potential product or service offerings are to you. If you can’t convince others to care about them, your small business won’t be a success.
2. Is your plan feasible?
Learning things on the fly isn’t smart in the business world. Rather than taking a blind leap of faith, determine if your plan is actually feasible before moving forward. For instance, will you be able to afford to put your plan into action? Will your loved ones commit to the ways this venture might affect them? Starting a small business isn’t for the faint of heart. Do you have the ambition and determination to see your vision through?
3. How much financing do you need?
Not adequately estimating financing needs is a common mistake of entrepreneurs. To avoid this pitfall, strive to perform an accurate cost analysis. Approximate both foreseen and unexpected expenses for the first year. Also, determine how long it will take you to become profitable. When creating a cost analysis, be realistic. Don’t count on things going perfectly. Despite your best efforts, they most certainly won’t.
4. Where will your company be located?
The type of small business you want to start will largely determine where it should be located. For example, you wouldn’t attempt to open a ski lodge in sunny, balmy Florida. Generally, you’ll want to find a location with lots of foot traffic. If you’re a new entrepreneur looking to break into an already crowded market, locating your business near your competitors might be a good idea. According to Biz Brain, you’ll already have a built-in market in the location. But if you’re competing in a saturated market with major brand-name competition, locating your business a short distance away from your competitors may be your best bet.
5. Who will comprise your customer base?
If you’re thinking about starting a small business, you likely already have a vague idea about who will comprise your customer base. However, delving into the profiles of potential clients of your company is a smart idea. During this research, you can study characteristics such as age, gender, buying triggers and general preferences. This should help you fine-tune your marketing efforts and target your products or services to the people who would most benefit from them.
6. When can you expect to be profitable?
The old adage is that you should expect to wait at least a year until your startup becomes profitable. But times are changing. Innovations in technology and communication mean entrepreneurs can start companies with little to no overhead nowadays. This rings especially true for service-oriented companies. Therefore, having an astute business plan is essential. A good business plan will help you predict when you may start turning a profit.
7. What setbacks can you anticipate?
The road to small business success can be a bumpy one, so anticipating setbacks is important. One of the most common ones is failing to meet revenue expectations. This can sometimes be blamed on overestimating the amount of business your company will generate in the early days of its existence. A second setback startups can face is losing vital employees. If you plan to start a sole proprietorship, this isn’t an issue. But if you’re launching a business venture with one or more partners, someone might decide to jump ship. To prevent your company from disintegrating into shambles, develop an exit plan that can be utilized if a partner wants to get out.
8. Do you need solid advisors?
Starting a small business can be overwhelming. This is especially the case if you try to do everything yourself. Surprisingly, the CountingWorks What Small Business Owners Value Most in 2019 survey reveals that 60% of small business owners handle their budgeting themselves. Unfortunately, the U.S. Small Business Administration Office of Advocacy’s 2018 Frequently Asked Questions says only about half of small businesses survive past five years. To boost your chances of long-term success, surround yourself with solid advisors. For instance, experienced financial advisors can help you with accurate budgeting. Legal advisors can assist you with contracts and permits.
9. How will you lure the best talent to your company?
Obviously, offering prospective employees a competitive salary can help you lure the best talent to your company. But when you’re just starting a business, this might not be an option. To compensate for this, providing employees with growth bonuses is a good alternative. Offering employees flexible scheduling options and wellness perks such as an onsite gym, a break room stocked with healthy snacks, and standing desks may also attract promising talent to your company.
10. Should you start more than one company at once?
Do you have multiple ideas for new small businesses? Perhaps you’re eager to get more than one startup running at the same time. While this might be tempting, starting out with one company is best. You can put all your energy into getting it profitable and stable. This will prevent you from spreading yourself and your resources too thin. You can always branch out later if your first business takes off.
Starting a business can be quite an undertaking. Therefore, planning correctly and thoroughly is critical. Before you can enjoy small business success, you’ll need to learn the answers to the above questions.
Generally speaking, tax return mistakes are a lot more common than you probably realize. Taxes are naturally complicated, and the paperwork required to file them properly is often convoluted. This is especially true if you’re filing your taxes yourself — and all of this is in reference to a fairly normal year as far as the IRS is concerned.
The 2018 tax year, however, certainly does not qualify as a “normal year.”
With the passage of the Tax Cuts and Jobs Act, even seasoned financial professionals are having a hard time digesting all of the changes that they and their clients are now dealing with. All of this is to say that if you’ve just discovered that you’ve made a BIG mistake on your tax return this year, the first thing you should do is stop and take a deep breath. It happens. It’s understandable. There ARE steps that you can take to correct the situation quickly — you just have to keep a few key things in mind.
Fixing Tax Return Mistakes: Here’s What You Need to Do
All told, you have three years from the date that you originally filed your tax return (or two years from the date you paid the tax bill in question) to make any corrections necessary to fix your mistakes. If nothing about your return ultimately changes, you probably don’t have anything to worry about — in fact, there’s a good chance that the IRS will catch the mistake and fix it themselves. This is especially true in terms of math errors, or if you’ve left out an important document. The IRS will probably send you a letter letting you know what happened and what you need to do to correct it.
If fixing the mistake ultimately results in you owing more taxes, you should pay that difference as quickly as possible. Penalties and interest will keep accruing on that unpaid portion of your bill for as long as it takes for you to pay it, so it’s in your best interest to take care of this as soon as you can afford to do so.
If you’ve made a much larger mistake (like if you understated or overstated your income, for example), you’ll need to file what is called an amended tax return. This is essentially your “second chance” at getting things right, and the timetable above still applies. Understand, however, that ALL errors must be corrected in the amended return. This means that if you find three errors that will reduce your tax liability and two that actually increase it, you are legally required to correct all five. You can’t correct only the mistakes that benefit you.
An amended return can be used to correct a variety of issues, including but not limited to ones like:
Overstating or understating your income
Changing an incorrect filing status
Accounting for dependents
Taking care of discrepancies in terms of deductions or tax credits
If any of the above apply to the error you’ve just discovered, you can — and absolutely should — file an amended return.
A sudden increase in your tax liability notwithstanding, it’s again important to understand that even “major” errors on your income taxes aren’t really worth stressing out about. The IRS understands that sometimes mistakes happen, and they have a variety of processes in place designed to help make things right.
This does, however, underline how valuable it can be to partner with the right financial professional to do your taxes next year. You’ve got a career and a life to lead — you’re probably not going to be up to date on every small change that rolls out in the tax code. A financial professional will, as it is literally their job to do so.
If nothing else, this will help generate some much-needed peace-of-mind regarding the accuracy of your return. You won’t have to worry about whether or not the IRS is going to find some big mistake down the road because you’ve dramatically reduced the chances of those mistakes happening in the first place.
With the shortage of affordable housing these days, many homeowners are renting out rooms in their homes, providing themselves with some additional cash. Questions that are often raised in regard to room rentals include: Is the income taxable? If so, how is it reported? What deductions are allowed? Can a loss be claimed? Answers to these questions follow.
If a taxpayer rents rooms or other space in a home and the rented portion does not have facilities (a bathroom and a kitchen) that would make it a dwelling unit on its own, the taxpayer and the renter may be considered to be occupying one dwelling unit. Thus, the “landlord” is mixing personal expenses with business expenses, a situation in which the tax code does not permit a loss.
As a result, the income and expenses are treated under the same rules as vacation home rentals and are reported on Schedule E, with prorated expenses deductible against the rental income in a specific order and no loss being allowed.
The deductions are claimed in the following order:
If the result is a loss, the expenses are only allowed until the income is reduced to zero.
But some unusable expenses may be carried over to the next year, where again they and the next year’s expenses will be limited to the next year’s rental income.
Because the expenses are taken in a specific order, home mortgage interest and property taxes paid for the home (which, for many taxpayers, would be deductible anyway) are first deducted from the rental income. Next come the operating expenses, of which only $1,300 of $1,417 is deductible in this example because that amount reduces the rental income to zero. Thus, $117 of the operating expenses and the depreciation are not deductible.
Any reasonable method for dividing the expenses may be used. The two most common methods for allocating expenses, such as mortgage interest and heat for the entire house, are based on the number of rooms in and square footage of the home.
If you have questions related to renting a room or a vacation home, or about short-term rentals of your home, please give this office a call.
Although Congress, as part of the recent tax reform, promised to do away with the alternative minimum tax (AMT), it only did so for C corporations; as a result, the AMT still applies to individuals.
Congress originally developed the AMT in 1969 as a means to prevent high-income individuals from using tax shelters to reduce their taxes. For the AMT, federal income tax is calculated without certain deductions and tax preferences. This tax applies if it is greater than the regularly computed income tax. Although it has since been indexed to inflation, the AMT at one point began to apply to middle-income taxpayers, who are not the intended targets of this punitive tax.
The AMT computation includes a tax-exempt amount, but this amount begins to phase out for taxpayers whose adjusted gross income (AGI) exceeds a certain threshold (depending on their filing status). Although the tax reform did not eliminate the AMT, it did mute that tax considerably by increasing the AMT exemptions and by substantially raising the exemption-phaseout thresholds, as illustrated below. The exemptions and AGI phaseout thresholds will be inflation-adjusted in future years.
AMT EXEMPTIONS ($)
Married Filing Jointly or Surviving Spouse
Single or Head of Household
Married Filing Separately
EXEMPTION-PHASEOUT AGI THESHOLDS
Married Filing Jointly or Surviving Spouse
Single or Head of Household
Married Filing Separately
These are the tax deductions and preferences that most often affect the average taxpayer:
Some itemized deductions are allowed for the regular tax computation but not for the AMT computation.
Tier II miscellaneous itemized tax deductions are not allowed for the AMT computation; in addition, for the years 2018 through 2025, they are also not allowed for the regular tax computation. This category primarily includes employee business expenses, investment expenses, and legal fees. As these expenses aren’t currently deductible in either tax calculation, there is no adjustment for the AMT calculation.
The AMT computation does not allow the itemized deduction for interest on home-equity debt; such debt also is not deductible in the regular computation through 2025, which eliminates another difference in the two computations.
Employee incentive stock option tax preferences are also handled differently in the two computations, as is discussed in more detail later in the post.
As a result of the increased exemptions, the higher AGI thresholds for the exemption phaseout, and the reduction or elimination of differences in deductions, the AMT typically no longer affects average taxpayers.
Incentive stock options
Employers sometimes grant employees qualified stock options (i.e., incentive stock options), as motivation to become more involved in the company’s success and to share in the company’s stock appreciation.
For these options, the employer grants the employee an opportunity to purchase the company’s stock at a preset price on a future date. An option is usually accompanied by a vesting schedule that details the date when the options can be exercised (i.e., when the stock can be purchased). Once the employees has held these shares for more than a year—and for at least two years after the option was granted—any subsequent gains from sales of the stock are subject to the capital-gains tax instead of the ordinary (less favorable) income tax.
The catch for incentive stock options is that, in the year when the employee exercises the option and purchases the stock, the difference (often referred to as the “bargain element”) between the stock’s current market value and the price that the employee paid as part of the option is treated as a tax preference. Thus, this difference is added to the employee’s AMT income but is not included in the regular tax income. In the past, this usually triggered the AMT, which meant that the employee had to pay tax on the phantom income in the year of the option, even though there was no actual stock sale. As a result, many employees have shied away from taking full advantage of incentive stock options; rather than holding the stock for the required qualifying period, they have been selling the stock in the year when they exercised the option, resulting in the profit being classified as ordinary income.
(Note that nonqualified stock options are not eligible for the beneficial tax treatment that incentive stock options are afforded. When a nonqualified option is exercised, the bargain element is included in the employee’s wages as ordinary income for the year when the option is exercised. However, this ordinary income is not a preference item for AMT purposes. Most employees who exercise nonqualified stock options immediately sell the stock so that they have money to pay the payroll taxes related to the resulting ordinary income. The paperwork that the employer provides when awarding the option states whether the option is qualified or nonqualified.)
The changes in the AMT present low- to moderate-income taxpayers with an opportunity to exercise incentive stock options without triggering the AMT.
If you hold incentive stock options, it may be possible to develop a plan—perhaps a multiyear plan—that will allow you to exercise your options without incurring phantom income in the AMT calculation. Please call our office for assistance in developing such a plan.
Tax reform made a lot of changes, some of which impacted employees’ fringe benefits. This article reviews the most frequently encountered fringe benefits, including those that were and were not impacted by tax changes. These changes can affect both a business’s bottom line and its employees’ deductions.
Benefits Impacted by Tax Reform
Qualified Transportation Fringe Benefits — Qualified transportation fringe benefits include parking, transit passes, commuter (van pool) transportation, and bicycle commuting.
Qualified parking — The tax-free fringe benefit for qualified parking is still available to employees and is capped at $265 per month for 2019, up from $260 in 2018.
Transit Passes — The tax-free fringe benefit for transit passes is also still available to employees, up to $265 per month for 2019, an increase from $260 in 2018.
Bicycle Commuting — Unfortunately, tax reform did away with the $20-per-month tax-free reimbursement for the cost of an employee commuting to work on a bicycle.
Commuting — Tax reform killed the monthly commuting fringe benefit (which was $260 in 2018) except when necessary for ensuring the safety of an employee. When allowed, the maximum amount is the same as the transit pass fringe benefit.
However, even though they are excludable fringe benefits for employees, after 2017, employers can no longer deduct their expenses for parking or mass transit passes or commuter highway vehicle transportation provided to their employees.
Moving expenses — Before 2018 and after 2025, taxpayers who move because of a change in work location who meet certain distance and time requirements are able to deduct their moving costs in excess of any tax-free reimbursement from their employer. However, that deduction is suspended for 2018 through 2025, and any employer reimbursement is taxable and included in the employee’s W-2.
There is one exception: moving expenses are still deductible for military members on active duty for moves pursuant to military orders.
Achievement awards — Employee achievement awards are excludable from income only to the extent that the award does not exceed $400 for any one employee or $1,600 for a qualified plan award. A qualified plan award means an employee achievement award awarded as part of an established written plan or program of the business that does not discriminate in favor of highly compensated employees.
Tax reform added the provision that to be tax-free, the award must be a tangible item. So awards of the following would be taxable to the employee recipient: cash, cash equivalents, gifts cards, gift coupons, gift certificates (other than if the employer pre-selected or pre-approved a limited selection), vacations, meals, lodging, tickets for theater or sporting events, stock, bonds, or similar items.
Benefits Not Impacted by Tax Reform
Group Term Life Insurance — The first $50,000 of group term life insurance coverage provided by an employer is a tax-free fringe benefit that does not add anything to the employee’s overall tax bill. But the cost of employer-paid group term coverage in excess of $50,000 is treated as taxable income and added to the employee’s W-2. The cost of that insurance coverage is based on an IRS table and is frequently higher than the employer is actually paying for the insurance, which creates phantom income.
For older employees, the after-tax cost of the additional coverage frequently exceeds the cost for an individual term policy. It may be appropriate for certain employees to only utilize the first $50,000 in coverage and acquire an individual policy for any additional needed coverage.
Dependent Care Benefits — Employers can establish dependent care assistance plans for the exclusive benefit of their employees. The payments received under the plan that are used by employees to pay dependent care expenses are excludable from employees’ income, up to the lower of:
The employee’s earned income (for married employees, this is the earned income of the lower-paid spouse) or
$5,000 ($2,500 for married filing separate).
Dependent care assistance that exceeds the limits must be included in an employee’s income for the year the dependent care is provided, even though it is not paid to the employee until later.
Qualified Educational Assistance Programs — If an employer has a written qualified educational assistance program, an employee may receive, on a tax-free basis, up to $5,250 each year for any form of instruction or training that improves or develops his or her capabilities, whether or not it is job-related or part of a degree program. However, no deduction or credit may be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.
These are just a few of the fringe benefits that may have tax consequences. Please give our office a call if you have any questions related to them or other possibly excludable fringe benefits.