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​The 1099-MISC Filing Date Is Just Around the Corner –Are You Ready?

12/14/2018

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 Article Highlights: 
  • Independent Contractors
  • Non-employee Compensation
  • 1099 Filing Requirement
  • Due Dates
  • Penalties
  • Form W-9 and 1099 Worksheet
      If  you engage the services of an individual (independent contractor) in your business, other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC).
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Because so many fraudulent tax returns were being filed right after e-filing opened up in January and before the old 1099-MISC due date at the end of February, the IRS had no way of verifying NEC. That opened the door for the IRS to be scammed out of millions of dollars in erroneous earned income tax credit (EITC). To plug that hole, the IRS moved the filing date for NEC 1099-MISCs to January 31 and no longer releases refunds for returns that include EITC until the NEC amounts can be verified.
Thus, the due date for filing 2018 1099-MISC forms for NEC is now January 31, 2019. That is also the same due date for mailing the recipient his or her copy of the 1099-MISC.
It is not uncommon to have a repairman out early in the year, pay him less than $600, use his services again later in the year, and have the total for the year be $600 or more. As a result, you may have overlooked getting the needed information from the individual to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.
The government provides IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.
The penalty for failure to file a required information return such as the 1099-MISC is $270 per information return. The penalty is reduced to $50 if a correct but late information return is filed no later than the 30th day after the required filing date of January 31, 2019, and it is reduced to $100 for returns filed after the 30th day but no later than August 1, 2019. If you are required to file 250 or more information returns, you must file them electronically.
In order to avoid a penalty, copies of the 1099-MISCs you’ve issued for 2018 need to be sent to the IRS by January 31, 2019. The forms must be submitted on magnetic media or on optically scannable forms (OCR forms). Note: Form 1099-MISC is also used to report other types of payments, including rent and royalties. The payments to independent contractors are reported in box 7 of the 1099-MISC, and the dates mentioned in this article apply when box 7 has been used. When the 1099-MISC is used to report income other than that in box 7, the due date to the form’s recipient is January 31, 2019, while the copy to the government is due by February 28, 2019.  
If you have questions, please call. This firm prepares 1099s for submission to the IRS along with recipient copies and file copies for your records. Use the 1099 worksheet to provide this office with the information needed to prepare your 1099s.
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Are You an S Corporation Stockholder?Are You Taking Reasonable Compensation in the Form of Wages?

12/1/2018

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Article Highlights:
 
  • S Corporation Compensation
  • Reasonable Compensation
  • Factors Determining Reasonableness
  • In the Spotlight
  • Sec. 199A Deduction
S corporation compensation requirements are often misunderstood and abused by owner-shareholders. An S corporation is a type of business structure in which the business does not pay income tax at the corporate level and instead distributes (passes through) the income, gains, losses, and deductions to the shareholders for inclusion on their income tax returns. If there are gains, these distributions are considered return on investment and therefore are not subject to self-employment taxes.
However, if stockholders also work in the business, they are supposed to take reasonable compensation for their services in the form of wages, and of course, wages are subject to FICA (Social Security and Medicare) and other payroll taxes. This is where some owner-shareholders err by not paying themselves a reasonable compensation for the services they provide, some out of unfamiliarity with the requirements and some purposely to avoid the payroll taxes.
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
If the S corporation does not pay its working stockholders a reasonable compensation for their services, then the IRS generally will treat a portion of the S corporation's distributions as wages and impose Social Security taxes on the deemed wages.
There is no specific method for determining what constitutes reasonable compensation, and it is based upon facts and circumstances. Generally, it is an amount that unrelated employers would pay for comparable services under like circumstances and based upon the cost of living in the area where the business is located. The following are just some of the many factors that would be taken into account in making this determination:
  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation
The problem here, of course, is that it is easy for the IRS to list contributing factors used by the courts in determining reasonable compensation and leave it to the corporation to quantify these factors into a reasonable salary but still have the ability to challenge the selected amount later if an auditor, off the top of their head, decides the compensation is unreasonable.
The IRS has a long history of examining S corporation tax returns to ensure that reasonable compensation is being paid, particularly if no compensation is shown being paid to employee-stockholders.
Reasonable Compensation in the Spotlight – With the passage of tax reform, reasonable compensation will be in the spotlight because of the new deduction for 20% of pass-through income. This new Sec. 199A deduction is equal to 20% of qualified business income (QBI) and will figure intro the shareholder’s income tax return. The QBI for the stockholder of an S-corporation is the amount of net income passed through to the stockholder and designated as QBI on the K-1, but the stockholder may not include the reasonable compensation (wages) he or she was paid as QBI. Thus, wages paid to stockholders actually reduce the QBI because the S corporation deducts the wages as a business expense, therefore reducing the corporation’s net income and QBI. But that does not mean wages can be arbitrarily adjusted to maximize the Sec. 199A deduction.
IRC Sec. 199A Deduction – Here are some details about how the 199A deduction works and the impact of the reasonable compensation wages on the Sec. 199A deduction.
  • The S corporation’s employee-stockholder’s wages are NOT included in qualified business income (QBI) when computing the 199A deduction. Thus, the larger the wages, the smaller the K-1 flow-through income (QBI) and thus the smaller the 199A deduction, which is 20% of QBI. In this case, an S corporation would tend to pay the stockholder a smaller salary to maximize the flow-through income and, as a result, the 199A deduction.
  • If married taxpayers filing a joint return have taxable income that exceeds $315,000 ($157,500 for other filing statuses), the 199A deduction begins to be subject to a wage limitation, and once the taxable income for married taxpayers filing a joint return exceeds $415,000 ($207,500 for other filing statuses), the 199A deduction becomes the lesser of 20% of the QBI or the wage limitation. For these high-income taxpayers, an S corporation will tend to pay stockholders less wage income for them to benefit from the Sec. 199A deduction.
  • If an S corporation is a specified service trade or business, the Sec. 199A deduction phases out for married taxpayers filing a joint return with taxable income between $315,000 and $415,000 (between $157,500 and $207,500 for other filing statuses). And although the wage limitation is used in computing the phase out, once the taxpayer’s taxable income exceeds $415,000 ($207,500 for other filing statuses), the taxpayer will receive no benefit from the wage limitation and therefore would again want to minimize their reasonable compensation to minimize FICA taxes. Specified service trades or businesses (SSTBs) include those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, and financial services (for more information on what constitutes an SSTB, please call).
Of course, taxpayers cannot pick and choose a reasonable level of compensation to minimize taxes or maximize deductions. Therein lies a trap for taxpayers who do not consider the factors related to reasonable compensation. There are commercial firms that have the data necessary to determine reasonable compensation and specialize in doing so. These firms can be found by searching the Internet for “reasonable compensation.” Even the IRS has employed these firms to provide reasonable compensation data in tax court cases.
 If you want additional information related to reasonable compensation, please give this office a call.
 
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2018 year - end Tax Considerations for Businesses

11/13/2018

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Legislative changes and other tax concerns that may affect planning...
​
​This guide reflects the tax considerations and developments that we believe may create risk or opportunity for businesses in 2018 and beyond. It is not a holistic list of all tax issues that may affect your business, but it is designed to help you make informed decisions related to year-end tax planning.

The end of 2017 was filled with uncertainty as Congress worked on significant tax law changes, finalized and signed into law H.R. 1 (PL 115-97) on Dec. 22, 2017, commonly known as the Tax Cuts and Jobs Act (TCJA). As the end of 2018 approaches, taxpayers are still waiting on administrative guidance for some measures passed into law as part of the TCJA, while Congress considers additional changes under Tax Reform 2.0. 

Even though taxpayers anticipate administrative guidance or legislative changes to eliminate uncertainty, action may be required before year-end to fully take advantage of benefits or mitigate unintended consequences enacted as part of the TCJA.

The following is a list of major tax law changes enacted as part of the TCJA that impact 2018 and beyond:
  • A temporary reduction in personal income tax rates and limitation on state and local tax deductions
  • Reduced tax rates for repatriated foreign earnings
  • A move toward a territorial tax system for foreign corporate subsidiaries engaged in foreign business activities
  • Reduced corporate tax rates and repeal of the corporate alternative minimum tax
  • A qualified business income deduction for many owners of pass-through businesses
  • Limitations on business interest deductions
  • Changes favorable to capital cost recovery for full expenses of all depreciable assets, including qualifying used assets.

Additionally, in response to changes in federal tax law, 2018 has brought about significant changes at the state and local level as states move to conform or decouple from these changes.

We have compiled to these guides to help companies make informed decisions related to year-end tax planning. In a year with many changes, many introducing additional complexities, planning becomes all the more important. Contact us anytime for further assistance at (209) 230-9015

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Paycheck Checkup Time—Your Tax Filing Secret Weapon

11/5/2018

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Checking on your taxes for the year and reviewing tax reform is so important, even the IRS is sending out reminders! The “Get Ready” campaign launched on IRS.gov this week, which encourages taxpayers to gear up for a successful tax season.
The number one trick the IRS is promoting: Do a paycheck checkup! But what is that, anyway? Let’s break it down.

Covering your withholding bases. For most employee paychecks, your employer calculates how much you’ve earned, shaves off a bit to cover your tax obligation, and sends you the rest. You are ultimately responsible for how much gets sent to the IRS, though: If too much is sent, you’ll get a refund after you file. If too little is sent, you’ll owe taxes after you file.
Why is this important to review? Well, with the Tax Cuts and Jobs Act of 2017 officially in effect, many people’s taxes have changed quite a bit. A withholding amount that covered your taxes last year might not this year, or you may be withholding much more than necessary.

​With the end of the year coming up quickly, it’s more important than ever to take a second look at your paychecks—if you haven’t been withholding enough money throughout the year, you still have enough time to set aside the taxes you owe before you’re surprised with a bill after you file in a few months.
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So how can I tell if my withholding amount needs adjusting? JP Income Tax can calculate your withholding amount, and there are several different tools available. We have an estimator that not only calculates your taxes owed or refund amount, but we can also explains how tax reform affected you this year.  The IRS also has a withholding calculator on their website to help taxpayers determine if they need to adjust their Form W-4.

Turns out my withholding is way off. What should I do? No need for alarm! If you haven’t had enough taxes withheld from your paychecks over the year, put a plan in place to save up the remainder of your taxes owed by mid-April next year. If you’ve had too much withheld, you’ll be getting that back in a refund when you file—hooray!

Either way, you should have us check your Form W-4, update your withholding allowances, and turn it in to your employer. That way, the last paychecks you receive for the year will have accurate numbers, and you’ll have a fresh start in the new year. So what else can you do to get ready for your tax return? Ask us about Tax Reform - you can then come back in January to get this thing done!
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5 Changes that Affect your 2018 Federal Income Tax Return

2/7/2018

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There were several important updates to the tax code in 2017, which could affect your Federal income tax return preparation. From tax bracket adjustments to higher available standard deductions, these new laws could mean a larger tax refund check in 2018.

What's new about Federal Income Tax Returns
​

1) Increase in Standard Deductions

The standard deduction is changing on your 2017 Federal income tax return. The increase will put a modest amount of money back in the pockets of anyone who chooses this method of paying taxes.
  • $50 for single filers
  • $100 for married couples, filing jointly
For this year, single filers are entitled to a standard deduction of $6,350, while married couples can claim double that amount. The head of the household standard deduction has been set to $9,350.

2)  Higher Personal-Exemption Allowance 

If you choose to itemize your taxes, you will also receive a higher threshold for deductions. The personal-exemption allowance has been increased $4,050 to $4,150.
​

3) Removal of Seniors’ Medical Expense Exemption

Senior citizens could be negatively impacted by changes to this year’s tax code. On past itemized Federal income tax returns, seniors were permitted to deduct medical expenses that totaled more than 7.5 percent of their adjusted gross income (AGI). This exemption ends this year, which will allow seniors to only claim the deduction for expenses over 10 percent of their AGI.

4) Alternative Minimum Tax Exemption Amounts Rise with Inflation

The Alternative Minimum Tax (AMT) is designed to ensure that wealthier Americans pay their fair share of taxes. Its income exemption limits are rising this year, too.
  • For single filers, it will be $55,400
  • Married couples filing jointly will see their income exemption increase to $86,200
The AMT will phase-out at $123,100 for individuals and $164,100 for married couples.


5) Tax Bracket Updates

Each year, the government adjusts tax brackets based on fluctuations in inflation. Since inflation is relatively low, there is only a modest increase in the thresholds for each tax bracket.
  • The lowest tax bracket will rise only $50
  • The highest tax bracket will increase $3,550
The 2018 tax bracket changes are not expected to make a significant impact on the majority of Americans.
These five tax code adjustments are just a few of the many changes that could affect your tax return. If you would like to know more this year’s Federal tax laws, contact us today.

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CBO: Senate Tax Bill Is Even Worse For Low-Income People Than Thought

12/5/2017

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The Congressional Budget Office just released a new analysis of the Senate's tax bill. The CBO examined the combined effect of changes in tax law with reductions in federal spending, like changes in "Medicaid, cost-sharing reduction payments, the Basic Health program, and Medicare."

The agency subtracted changes in federal spending for different income groups from the change in federal revenues allocated to each group. Essentially, the analysis looked at how much effect increased taxes from a group and decreased spending on the same group had on overall deficit estimates.

The groups hit hardest — the ones providing a reduction to federal deficits — are the poorest
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According to the estimates, anyone making less than $30,000 a year would feel the pinch starting in 2019, with the greatest "savings" to the government (again, a combination of either increases in payments or decreases in money spent on a group in services) coming from those who make less than $10,000 a year.

By 2020, everyone making $40,000 or less a year would also be contributing to lowering the deficit by paying more in taxes and/or receiving less in services, creating a net savings for the federal government. In that year, the groups making between $10,000 and $20,000 and between $20,000 and $30,000 would each be contributing double what the under-$10,000 group did in savings.

By 2027, everyone making less than $75,000 would provide a net savings to the government, whether through higher taxes, lower amounts spent on services, or both.


Congressional Budget Office Reconciliation Recommendations of the Senate Committee on Finance
Positive numbers in the table mean savings to the government and a loss to the people in a group. Negative numbers mean a loss to the government or a net gain for those in the group.

The groups getting the most are those making between $100,000 and $500,000. Groups above that will get less in total, but there will also be fewer in each group, so their average benefit could be (and likely will be) significantly higher.

Just in case you thought the tax bill was designed to help everyone. (Here's the full table from the CBO report below.
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Year-End Tax Planning: Explore 2017’s Key Areas

12/1/2017

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As we approach the end of 2017, it’s once again time to explore strategies for reducing your company’s tax bill.
Because every business is different, it’s important to work directly with your Enrolled Agent, CPA and/or Tax Professional to determine the right moves for you. Nonetheless, here are some key areas to explore when looking for savings.

Deferrals and accelerations

If you expect your tax rate to be the same or lower in 2018, you’ll likely benefit by deferring income to next year and accelerating deductions into this year. There are several ways to do so, including:
  • Delaying billings or prepaying expenses (for cash-basis companies),
  • Postponing the performance of services until after year end or deferring taxes on qualifying advance payments (for accrual-basis companies),
  • Making contributions to qualified retirement plans, and
  • Deferring payment of year-end bonuses to nonowner employees. (Accrual-basis companies can deduct bonuses on their 2017 returns provided they pay them by March 15, 2018.)

​On the other hand, if you expect to be in a higher tax bracket next year, you may be better off shifting some income to this year by accelerating income or deferring deductions. Keep in mind that tax reform may affect your tax rate or other tax attributes this year or next, so be sure to monitor congressional developments in the coming months. (See “How will tax reform impact year-end planning?”)

The 10% solution

If your construction company uses the percentage-of-completion method to account for long-term contracts, consider electing the “10% method” on your 2017 return (if you haven’t already done so on a previous return).
This method allows you to defer recognition of gross profits on jobs that are less-than-10% complete as of the last day of the tax year. Be aware that, once you make the election, you’re required to defer profits on all eligible jobs, this year and in future years, unless you apply to the IRS for a change in accounting method.

Depreciable incentives

A good strategy for generating deductions in 2017 may be to take advantage of depreciation-related tax breaks. It’s a particularly opportune time to acquire assets that qualify for “bonus depreciation.” Currently, this tax break allows you to deduct 50% of the cost of certain depreciable assets, on top of regular depreciation deductions. This percentage is scheduled to drop to 40% in 2018 and to 30% in 2019, after which the deduction faces elimination.
Bonus depreciation is available for new assets that fall into one of four categories:
  1. Tangible depreciable property with a recovery period of 20 years or less,
  2. Water utility property,
  3. Computer software, or
  4. “Qualified improvement property.”

​Qualified improvement property includes any improvement to the interior of a nonresidential building that’s placed in service after the building was first placed in service (other than elevators, escalators or internal structural framework).

Another option is Section 179 expensing, which allows you to deduct 100% of the cost of qualified depreciable assets, such as equipment and vehicles. One advantage it has over bonus depreciation is that Sec. 179 expensing is available for both new and used assets. On the other hand, there’s a cap on expensing ($510,000 in 2017) and the deduction is phased out once a company’s total purchases exceed a certain threshold ($2.03 million in 2017).

Tax credits

Tax credits are always a worthy area of exploration. There are a couple of noteworthy ones to look into.
First, consider the research credit (sometimes called the R&D credit). It isn’t limited to pharmaceutical, biotech, software and manufacturing companies. If you commit resources to developing new construction techniques, improving business processes or other innovations, you may be eligible for the credit — which can reach as high as 6.5% of qualified research expenditures.
Second, don’t overlook the domestic production activities deduction. It allows you to deduct up to 9% of your income from “qualified production activities,” including many activities related to constructing or substantially renovating real property located in the United States.

The big tax picture

​These are just a few of many year-end strategies to consider. Again, work with your Enrolled Agent, CPA and/or Tax Professional to develop a comprehensive strategy based on your company’s overall situation. In addition to year-end moves, discuss longer-term strategies that may improve your tax picture. These include re-evaluating your entity choice and changing your accounting method.

How will tax reform impact year-end planning?


As you review your year-end tax planning options, be sure to consider the potential impact of tax reform. As of this writing, both the White House and members of Congress have proposed reducing corporate and individual tax rates and revising a variety of deductions, credits, exemptions and other tax benefits.

If it appears that your tax rate will drop in 2018, for example, the benefits of deferring income and accelerating deductions will be even greater. On the other hand, if you believe your effective tax rate will go up next year, it may make sense to shift some income into 2017. 

But don’t assume that lower tax rates automatically translate into lower taxes. Some proposals would reduce the number of individual income tax brackets from seven to three, while reducing the top rate from 39.6% to 33%. As a result, many taxpayers would enjoy lower tax rates, but some would experience an increase. For example, taxpayers currently near the top of the 28% bracket would find themselves in the 33% bracket under the proposed tax table, an increase of 5%.
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November/December 2017 Tax Tips

11/30/2017

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Year-end planning for mutual funds

If you’ve sold mutual fund shares at a gain during the year, there are some year-end moves you can make to soften the tax blow. One strategy is to “harvest” capital losses (by selling investments that have declined in value) and using those losses to offset the gain. You can even buy back the investments after deducting the loss, so long as you wait at least 31 days.

​Another strategy is to ensure that mutual fund shares with the highest cost basis are sold first, minimizing your gains. To do this, use the “specific identification” method for calculating basis and inform your broker which shares you wish to sell. Absent such instructions, the first-in, first-out method will be applied by default, which may increase your capital gains.

Beware deduction limits

A basic precept of year-end tax planning is to defer income to next year and accelerate deductions into the current year. But as you consider your options, keep in mind that deduction limitations for high-income taxpayers may reduce the effectiveness of this strategy.

​The limits apply to deductions for taxes paid, interest paid, charitable gifts, job expenses and certain miscellaneous deductions. They don’t apply to medical expenses, investment interest expense, or casualty, theft and gambling losses.


Tax-free capital gains?

For taxpayers in the middle and upper ordinary-income tax brackets, long-term capital gains are taxed at rates ranging from 15% to 23.8% (including the 3.8% tax on net investment income). Taxpayers in the 10% and 15% ordinary-income brackets, however, enjoy a 0% tax rate on long-term capital gains. One way to take advantage of tax-free capital gains is to transfer stock or other investments to family members in the two lowest tax brackets — for instance, single filers with taxable income of $37,950 or less in 2017 ($75,900 for married couples filing jointly).

​A few caveats:
  • Consider potential gift tax consequences before transferring assets.
  • Watch out for the “kiddie tax.” Generally, if you transfer capital assets to a dependent child under the age of 19 (24 for a full-time student), any unearned income (including capital gains) in excess of $2,100 will be taxed at the parents’
  • The 0% rate applies only to the extent that capital gains increase the recipient’s taxable income to the top of the 15% bracket. Additional long-term capital gains are taxed at 15% until the highest bracket is reached; then they’re taxed at 20%.


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Final Regulations Update: 2018 Tax Filing Due Dates

11/26/2017

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On July 18, 2017, the Internal Revenue Service issued final and temporary regulations that updated the due dates and rules for extensions of time to file for certain tax returns and information returns. These regulations are applicable for returns filed on or after July 20, 2017, however, many of the statutory changes were effective
December 31, 2015, and those statutory changes supersede these final regulations.


These final regulations reflect the statutory changes of several bills passed by Congress late in 2015 that contained provisions that affect items that aren’t related to the main bill. The “Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015” and the “Protecting Americans from Tax Hikes Act of 2015” both contained such items.

Whenever a regular tax filing date falls on a Saturday, Sunday, or a legal observed holiday in the District of California, the due date for returns is pushed to the next business day.  In 2018, several due dates will be adjusted because of this rule: the Individual and FBAR due date; the C Corporation due date; the Form 1041 due date and extended due date; and the Partnership extended due date.

For calendar year tax returns reporting 2017 information that are due in 2018, the following due dates will apply.

        Forms
                                                                                                               2018 Filing Due Date (Tax Year 2017)
  1. Form W-2 (electronic or mail)                                                     January 31st
  2. Form 1065 – Partnerships                                                             March 15th
  3. Form 1120S – S Corporations                                                      March 15th
  4. Form 1040 – Individuals                                                                  April 17th
  5. FinCEN 114 – FBAR (will be allowed to extend)               April 17th
  6. Form 1041 – Trusts and Estates                                                 April 17th
  7. Form 1120 – C Corporations                                                        April 17th
  8. Form 990 Series – Tax Exempt Org                                           May 15th
  9. Form 5500 Series – Employee Benefit Plan                         July 31st
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        Forms                                                                                                               2018 Extended Due Dates
  1. Form 1065 Extended Return                                                       September 17th
  2. ​Form 1120S Extended Return                                                    September 17th
  3. Form 1041 Extended Return                                                       October 1st
  4. Form 1120 Extended Return                                                       October 15th
  5. Form 1040 Extended Return                                                       October 15th
  6. FinCEN 114 (Extended with Form 1040)                             October 15th
  7. Form 990 Series Extended Return                                           November 15th
  8. Form 5500 Series Extended Return                                        November 15th
  
For fiscal year filers:
  • Partnership and S Corporation tax returns will be due the 15th day of the third month after the end of their tax year. The filing date for S Corporations is unchanged.
  • C Corporation tax returns will be due the 15th day of the fourth month after the end of the tax year. A special rule to defer the due date change for C Corporations with fiscal years that end on June 30 defers the change until December 31, 2025 – a full ten years.
  • Employee Benefit Plan tax returns are due the last day of the seventh month after the plan year ends.

It is important to check when tax returns are due for all states in which taxpayers operate, because individual states may not conform to the Federal filing dates.


Changes include:
  • Filers of U.S. Return of Partnership Income (Form 1065) will have a longer extension period, a maximum of 6 months, rather than the current 5 month extension, leaving the former (2015 and prior years) extended due date in place (September 15th for calendar year taxpayers.)
  • U.S. Income Tax Return for Estates and Trusts (Form 1041) will have a maximum extension of five and a half months, two weeks longer than the former (2015 and prior years) five month extension.
  • Annual Return/Report of Employee Benefit Plans will have a maximum automatic extension of three and a half months.
  • Report of Foreign Bank and Financial Accounts (FinCEN 114, FBAR) will be due on the same due date as the individual Form 1040 and permitted to extend for six months, thus aligning the FBAR reporting with the individual tax return reporting. Additionally, the IRS may waive the penalty for failure to file a timely extension request for any taxpayer required to file for the first time.
  • Filers of Form 990 (series) will now have an automatic 6 month extension period, ending on November 15th for calendar year filers, rather than a 3 month period.

​If you have any questions about these new due dates and the impact on your tax filings, please contact one of our qualified tax professionals for further assistance.


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Reasons To File Early

1/29/2017

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When Filing a Tax Return Immediately May Make Sense

The 2017 tax filing season officially begins this week as the IRS starts accepting tax returns. There are many reasons to consider filing your tax return early. Here are some of the most common:

Get your refund. There's no reason to let the government hold your funds interest-free, so file early and get your refund as soon as possible. While new legislation delays receiving refunds for tax returns claiming The Earned Income Credit and the Additional Child Tax Credit until after February 15th, the sooner your tax return is in the queue, the sooner you will receive your refund.
Minimize your tax identity fraud risk. Once you file your tax return the window of opportunity for tax identity thieves closes. Tax identity thieves work early in the tax-filing season because your paycheck's tax withholdings are still in the hands of the IRS. If they can file a tax return before you do, they may be able to steal these withholdings.
Avoid a dependent dispute. One of the most common reasons an e-file is rejected is when you submit a dependent’s Social Security number that has already been used by someone else. If you think there is a chance an ex-spouse may do this, you should file as early as possible.
Deliver your return to someone who needs it. If you are planning to buy a house or anticipate any other transaction that will require proof of income you may wish to file early. This is especially important if you are self-employed. You can then make your filed tax return available to your bank or other financial institution.
Beat the rush. As the tax filing deadline approaches, the ability to get help becomes more difficult. So get your documentation together and schedule a time to get your tax return filed. It can be a relief to have this annual task in the rearview mirror.

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​Proving Noncash Charitable Contributions

2/29/2016

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Article Highlights:
  • Noncash Charitable Contributions
  • Establishing Donation Value
  • Fair Market Value
  • Documentation Requirements
  • Appraisal Requirements
 
One of the most common tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost-new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and become grossly out of style, the more extensively used piece of clothing could actually be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and in some cases requires the value to be established by a qualified appraiser.
 
Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial noncash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items.
 
The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a recent United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”
 
The IRS requires the following documentation for noncash contributions based on the total value of the donation:


  • Deductions of Less Than $250 - A taxpayer claiming a noncash contribution with a value under $250 must keep a receipt from the charitable organization that shows:
1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property.
Note: The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).
 
  • Deductions of at Least $250 But Not More Than $500 - If a taxpayer claims a deduction of at least $250 but not more than $500 for a noncash charitable contribution, he or she must keep an acknowledgment of the contribution from the qualified organization. If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution. The acknowledgment(s) must be written and must include:
1. The name of the charitable organization,
2. The date and location of the charitable contribution,
3. A reasonably detailed description of any property contributed (but not necessarily its value), and
4. Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits).
If the charitable organization provided goods and/or services to the taxpayer, the acknowledgement must include a description and a good-faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so, and in this case, the acknowledgment does not need to describe or estimate the value of the benefit.
 
  • Deductions Over $500 But Not Over $5,000 - If a taxpayer claims a deduction over $500 but not over $5,000 for a noncash charitable contribution, he or she must attach a completed Form 8283 to the income tax return and must provide the same acknowledgement and written records that are required for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include:
  1. How the property was obtained (for example, purchase, gift, bequest, inheritance, or exchange),
  2. The approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and
  3. The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more (this requirement, however, does not apply to publicly traded securities).
If the taxpayer has a reasonable case for not being able to provide information on either the date the property was obtained or the cost basis of the property, he or she can attach a statement of explanation to the return.
  • Deductions Over $5,000 – These donations require time-sensitive appraisals by a “qualified appraiser” in addition to other documentation. When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.
Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, privately traded stock, land, and buildings. For example, say you donated $5,300 of used furniture to 3 different charitable organizations during the year (a bedroom set valued at $800, a dining set worth $1,000, and living room furniture worth $3,500). Because the value of the donations of similar property (furniture) exceeds $5,000, you would need to obtain an appraisal of the furniture to satisfy the substantiation requirements—even if you donated the furniture to different organizations and at different times during the year. The IRS has strict rules as to who is considered a qualified appraiser.
To help you document some of these noncash contributions, you can download a fillable Noncash Charitable Contribution statement (http://images.client-sites.com/NonCash_Contribution2010.pdf). The statement includes an area for the charity’s agent to verify the contribution and a check box denoting whether the qualified organization provided any goods or services as a result of the contribution. Although not specifically blessed by the IRS, this statement includes everything needed for noncash contributions of up to $500—provided, of course, that you and the charitable organization’s representative accurately complete the form.
Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they specifically are not allowed.
Please call this office with any questions about documenting or valuing your noncash contributions.
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March Due Dates

2/29/2016

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​March 10 - Report Tips to Employer 

If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10.

Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

March 15 - Time to Call for Your Tax Appointment 

It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.

Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us. 

Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you. 

We look forward to hearing from you. 
March 2016 Business Due Dates
 
March 15 -  S-Corporation Election
File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2016. If Form 2553 is filed late, S treatment will begin with calendar year 2017.
March 15 -  Electing Large Partnerships 

Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.

March 15 - Social Security, Medicare and Withheld Income Tax 

If the monthly deposit rule applies, deposit the tax for payments in February. 

March 15 - Non-Payroll Withholding 

If the monthly deposit rule applies, deposit the tax for payments in February. 

March 15 - Corporations 

File a 2015 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.
 
March 31 - Electronic Filing of Forms 1098, 1099 and W-2G 

If you file forms 1098, 1099, or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, February 29 was the due date. The due date for giving the recipient these forms was February 1.

March 31 - Electronic Filing of Forms W-2 
If you file forms W-2 for 2015 electronically with the IRS, this is the final due date. This due date applies only if you electronically file. Otherwise, the due date was February 29. The due date for giving the recipient these forms was February 1.

March 31 - Large Food and Beverage Establishment Employers 

If you file forms 8027 for 2014 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, February 29 was the due date.
 
 
 
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IRS Announces 2016 Stand Mileage Rates

2/4/2016

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Homeowner Tax Energy Credits Get New Life

1/1/2016

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​Are Legal Expenses Tax Deductible?

12/8/2015

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​Article Highlights:


  • Legal Fees Associated With Personal, Living, or Family Issues
  • Legal Fees Associated With Business and the Production of Taxable Income
  • Examples of Legal Fees and Their Deductibility
  • The Tax Benefit of Legal Fee Deductions
A frequent question that arises is whether legal expenses are deductible.  The answer to that question can be both yes and no and can be complicated depending upon the nature of the legal expense.  The Internal Revenue Code (IRC), which is the body of tax laws written by the United States (U.S.) Congress and approved by the president in office at the time the law is created, tells us that except as otherwise expressly provided, such as itemized deductions, no deduction shall be allowed for personal, living, or family expenses.  
The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year:
  • For the production or collection of taxable income;
  • For the management, conservation, or maintenance of property held for the production of income; or
  • In connection with the determination, collection, or refund of any tax.
Applying those IRC provisions will allow you to determine whether a legal expense you’ve incurred is deductible or not, but the application can sometimes be complicated and also must take into account the Internal Revenue Service’s (IRS’s) interpretation of the law through rulings and regulations as well as the courts’ opinions on all of the above.  The following are some frequently encountered situations and how legal expenses paid in those situations should be handled:
  • Divorce - Legal costs, such as attorney fees and court costs, connected with divorce, separation, or support are non-deductible personal expenses.  Non-deductibility extends to legal fees incurred in disputes over money claims. However, legal and accounting fees paid for tax advice in connection with the divorce are deductible, provided the amounts for those services are delineated on the legal firm’s billings.
  • Taxable Alimony - The part of legal fees attributable to producing taxable alimony is deductible by the recipient of the alimony.  The attorney’s statement or invoice should stipulate what part of the fee relates to alimony to ensure a deduction for the alimony recipient.  Legal fees paid by the payer of the alimony are not deductible. Because child support payments are not taxable, fees paid to obtain those payments are not deductible.
  • Conduct of a Business - Legal fees incurred by a taxpayer in the course of a trade or business are generally deductible if they are ordinary and necessary expenses of the business. 
  • Relating to Insurance Proceeds - Legal fees to collect on a claim related to a taxpayer’s business are currently deductible, but legal fees related to a personal loss are not deductible. However, where a loss is associated with a capital asset, such as a taxpayer’s personal home, the related expenses can be added to the home’s tax basis and be used to offset any taxable gain in the future. 
  • Producing or Collecting Taxable Income: Attorney fees, court costs, and similar expenses are deductible if incurred during the production or collection of taxable income. A reasonably close connection must exist between the legal expense and the production or collection of the taxable income. 
  • Bankruptcy – Legal fees connected with a business bankruptcy are deductible. If personal bankruptcy is primarily caused by the failure of a business activity, the legal fees related to the bankruptcy proceedings are partially deductible as a business expense. The courts have used a proration of the fees based on the ratio of business creditor claims to total creditor claims.
  • Managing, Conserving, or Maintaining Income-Producing Property – Legal fees related to managing, conserving, or maintaining income-producing property are generally deductible. However, just because a taxpayer may have to sell income-producing property to satisfy a possible adverse judgment doesn’t mean he/she can deduct the cost of defending the suit under this provision.   
  • Related to Title of Property – Although legal expenses to acquire, perfect, defend, or clear title to property currently can’t be deducted as business or investment expenses, they are capital expenditures whose cost may be recovered through depreciation, depletion, or cost recovery. Incurred legal expenses related to title of personal property, such as a principal residence, aren’t deductible but can be added to the basis of the property.
  • Damage Suits – Legal fees for defending and filing damage suits in a taxpayer’s business or in employment are deductible.  Examples include expenses paid for defending a suit for wrongfully taking property; settling a damage suit against a business, which could help to avoid adverse publicity and controversy; getting a judgment for damages to rental real estate; and a teacher’s action of sex discrimination against a university.
  • Damages for Personal Injury or Sickness – In some cases, damages for personal injury or sickness can be excluded from income. Thus, the legal fees paid to secure such income are not deductible if the damage award is not taxable.  However, to the extent that the damage award is taxable or accrued interest is paid on the settlement funds, the legal fees are deductible. Where the funds are partially taxable and partially excludable, the legal expenses have to be prorated in the same ratio as the income is.
  • Will and Trust Document Preparation – The cost of legal fees for preparing a will is considered a personal expense that is not deductible. In most cases, the legal cost of creating a living trust is similarly treated as a personal, nondeductible expense. However, if the attorney who prepares the trust indicates on the billing statement the amount of the fee that is for tax planning or tax advice, the tax-related portion of the fee is deductible.
  • Criminal Cases - Legal fees incurred to defend against criminal charges related to a taxpayer’s trade or business are deductible. This is true even if the taxpayer is convicted of the crime.  However, legal defense expenses incurred by an individual charged with a crime are personal and generally not deductible.
  • Tax Issues – Legal fees associated with obtaining tax advice, having tax returns prepared, and defending a taxpayer being audited are all specifically included as deductible legal expenses. 
Just because legal fees are deductible doesn’t necessarily mean you will receive any tax benefit from the deduction.  While some legal fees can be deducted on business schedules and provide the maximum benefit, others have to be deducted as a miscellaneous itemized deductions, the total of which is subject to a 2% of AGI deduction floor.  In addition, miscellaneous itemized deductions are not deductible for alternative minimum tax (AMT) purposes.
As you can see, determining which legal expenses are deductible is complicated, and even if allowed, a deduction may not provide any tax benefit.  As every circumstance is unique, you are encouraged to call this office to determine if you will derive any tax benefit from your legal expenses. 
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December 2015 Individual Due Dates

12/1/2015

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​December 2015 Individual Due Dates



December 1 - Time for Year-End Tax Planning 

December is the month to take final actions that can affect your tax result for 2015. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2015 should call for a tax planning consultation appointment. 

December 10 - Report Tips to Employer 

If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

December 31 - Last Day to Make Mandatory IRA Withdrawals 

Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2015. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.

December 31 - Last Day to Pay Deductible Expenses for 2015 

Last day to pay deductible expenses for the 2015 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2015). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call the office for more information).

December 31 - Caution! Last Day of the Year 

If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.
 
December 2015 Business Due Dates




December 1 - Employers

During December, ask employees whose withholding allowances will be different in 2016 to fill out a new Form W4 or Form W4 (SP).  

December 15 - Social Security, Medicare and Withheld Income Tax 

If the monthly deposit rule applies, deposit the tax for payments in November.

December 15 - Nonpayroll Withholding 

If the monthly deposit rule applies, deposit the tax for payments in November.

December 15 - Corporations 

The fourth installment of estimated tax for 2015 calendar year corporations is due. 

December 31 - Last Day to Set Up a Keogh Account for 2015 

If you are self-employed, December 31 is the last day to set up a Keogh Retirement Account if you plan to make a 2015 Contribution. If the institution where you plan to set up the account will not be open for business on the 31st, you will need to establish the plan before the 31st. Note: there are other options such as SEP plans that can be set up after the close of the year. Please call the office to discuss your options.

December 31 - Caution! Last Day of the Year 

If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.
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Important Reminder For Purchasing Your Health Insurance Through The Government Marketplace

11/2/2015

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Article Highlights:
  • Determining Household Income
  • The Advanced Premium Tax Credit
  • Marketplace Estimate of Income
  • Modified Adjusted Gross Income
  • Who Is Family For Health Insurance Purposes?
When applying for insurance through a state or the federal health insurance marketplace, you will be asked to provide an estimate of your household income for 2016. Your household income is a key factor in determining if you are qualified for an insurance subsidy called the premium tax credit (PTC). Any premium tax credit that you are entitled to will be computed on your 2016 tax return when it is filed in 2017. However, the insurance marketplace will allow you to reduce your insurance premiums during the year by applying this credit in advance based upon the estimate of your household income you provided when applying for the insurance. This advance is referred to as the advanced premium tax credit (APTC).
It is very important to remember that the PTC is based on the actual family income when your tax return is filed in 2017—not on the estimate you provided when you enrolled—and if the APTC you received during 2016 was more than the PTC you are entitled to based upon your household income, you may be required to repay all or part of the APTC you received during 2016. Thus, it is important to correctly estimate your family’s household income when applying for the insurance and to report any significant income changes during the year on the insurance marketplace.
Household income includes the modified adjusted gross income (MAGI) of everyone in your family who is required to file a tax return. Your family includes you, your spouse, and everyone you are entitled to claim as a dependent on your tax return. MAGI is your family’s adjusted gross income (AGI) plus nontaxable social security, nontaxable interest and excluded foreign earned income.
As an example, say that you are married with one child. You have a W-2 income of $35,000 and nontaxable interest income of $150. Your spouse does not work, but your 16-year-old child works at a fast food restaurant and has a W-2 income of $4,000 for the year. Your AGI would be $35,000, which includes only your W-2 income. However, your MAGI would be $35,150 because it includes the nontaxable interest income. Since your child’s W-2 income is less than $6,300 (the standard deduction for 2016), your child is not required to file a tax return, and your child’s income (MAGI) is not included in the household income. Thus, your household income would be $35,150.
However, if your child’s W-2 income had been $7,000 (exceeding the standard deduction for the year), the child would have to file a tax return, and the child’s income would have to be included when determining your household income, which in this case would be $42,150 ($35,150 + $7,000). The addition of the child’s income to the household will significantly reduce the amount of PTC you are entitled to, and not including it when estimating your income will most likely result in you having to repay a significant amount of APTC on your 2016 tax return.
The computation of household income can become complicated when dependent children are working and when one or more forms of nontaxable income are received by a family member. It may be appropriate to consult with this office for assistance when determining household income.
 
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It's Time for Year-End Tax Planning

10/1/2015

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Article Highlights: 
  • Capital Gains and Losses 
  • Roth IRA Conversions 
  • Recharacterizing a Roth Conversion 
  • Minimum Required Distribution 
  • Annual Gift Tax Exemption
  • Expensing Allowance (Sec 179 Deduction) 
  • Self-employed Retirement Plans 
  • Increase Basis 
For the past few years, year-end tax planning has been challenging due to the lateness of action by Congress. This year is no different because of uncertainty over whether Congress will extend any of the many expired or expiring tax provisions. However, regardless of what Congress does later this year, solid tax savings can still be realized by taking advantage of tax breaks that are still on the books for 2015. For individuals and small businesses, these include: 
  • Capital Gains and Losses – You can employ several strategies to suit your particular tax circumstances. If your income is low this year and your tax bracket is 15% or lower, you can take advantage of the zero percent capital gains bracket benefit, resulting in no tax for part or all of your long-term gains. Others, affected by the market downturn earlier this year, should review their portfolio with an eye to offsetting gains with losses and take advantage of the $3,000 ($1,500 for married taxpayers filing separately) allowable annual capital loss allowance. Any losses in excess of those amounts are carried forward to future years. 
  • Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire. 

  • Recharacterizing a Roth Conversion – If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the value of those assets may have declined due to this summer's market drop; and, as a result, you will end up paying more taxes than necessary on the higher conversion-date valuation. However, you may undo that conversion by recharacterizing it, which is accomplished by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA. This must be done via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA. 

  • Don't Forget Your Minimum Required Distribution – If you have reached age 70 1/2, you must make required minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. 

  • Take Advantage of the Annual Gift Tax Exemption – Although gifts do not currently provide a tax deduction, you can give up to $14,000 in 2015 to each of an unlimited number of individuals without incurring any gift tax. There's no carryover from this year to next year of unused exemptions. 

  • Expensing Allowance (Sec 179 Deduction) – Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2015, the expensing limit is $25,000. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Note: There is a good chance the Congress will increase that limit before year's end and after this newsletter has gone to press, so watch for further developments.

  • Self-employed Retirement Plans – If you are self-employed and haven't done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2015, even if the contributions aren't made until 2016. You may also qualify for the pension start-up credit. 

  • Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss in 2015, you may want to increase your investment in the entity so you can deduct the loss, which is limited to your basis in the entity. 
Also keep in mind when considering year-end tax strategies that many of the tax breaks allowed for calculating regular taxes are disallowed for alternative minimum tax (AMT) purposes. These include deduction for property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for mortgage interest, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, accelerating payment of these expenses that would normally be made in early 2016 to 2015 should – in some cases – not be done.
 
Action May Be Needed Before Year-End

Article Summary: 
  • New regulations 
  • Adopting a de minimis policy 
  • Deadline for adopting a policy for 2016 
  • Limitations without a de minimis policy 
Prior to the release of the new regulations dealing with capitalization and repairs, the Internal Revenue Code and regulations provided no specific de minimis amount that could be expensed for business purchases of items with a useful life of greater than one year, although the IRS generally didn’t quibble over the expensing of items costing $100 to $200 or less. This is without regard to the Section 179 expensing provision. 

The new regulations now define a de minimis amount, but it is not a specific amount nor is it automatic. To utilize the de minimis safe harbor, business taxpayers must have an accounting procedure in place before the beginning of the tax year that specifies the de minimis safe harbor amount adopted by the business. 

If your business has not previously adopted an accounting policy, it may be appropriate to do so before the beginning of your business’s next tax year, which would be January 1, 2016, for calendar year businesses. 

In general, a small business, one without an Applicable Financial Statement, can adopt a de minimis safe harbor up to $500. 

Without an accounting procedure adopting a de minimis safe harbor, a small business can only expense the cost of items with a life of one year or less and would be required to capitalize (depreciate) all other items regardless of cost (however, these items may be eligible for Section 179 expensing). 

If you have questions related to adopting a policy for 2016, please contact this office before year’s end.
 
Don't Be Scammed By Fake Charities

Article Highlights: 
  • Scammers and charitable contributions 
  • How to check on legitimate charities 
  • Disaster scammers 
As the end of the year approaches, you will probably be besieged by requests from charitable organizations for contributions. The holiday season is the favorite time of the year for charities to solicit donations. 

But you should be aware that it is also the time of year when scammers show up in force, pretending to be legitimate charities in hopes of deceiving you into giving them your hard-earned money. 

When making a donation, you should take a few extra minutes to ensure your gifts are going to legitimate charities.IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. 

Here are some tips to make sure your contributions are going to legitimate charities. 
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. 

  • Don't give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. Using a credit card to make legitimate donations is quite common, but please be very careful when you are speaking with someone who called you; don't give out your credit card number unless you are certain the caller represents a legal charity. 

  • Don't give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift. 
Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters. In the aftermath of major disasters, it's common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information and may set up phony websites that claim to solicit funds on behalf disaster victims. Unscrupulous individuals may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims to get tax refunds. 

Scammers may also attempt to get personal financial information or Social Security numbers that can be used to steal the victims' identities or financial resources. Disaster victims with specific questions about tax relief or disaster-related tax issues may call a special IRS toll-free disaster assistance telephone number (1-866-562-5227) for information. 

Don't be scammed; make sure you are donating to recognized charities. Deductions to charities that are not legitimate are not tax deductible. If you have questions, please give this office a call.
 
Have You Taken Your Required Minimum IRA Distribution?

Article Highlights: 
  • Required Minimum Distributions 
  • When the Distributions Must Begin 
  • RMD Distribution Tables
  • Figuring the Amount of the Distribution 
  • IRA-to-Charity Transfers 
As year-end approaches, this is a good time to make sure you have taken your required minimum distribution (RMD) for 2015. 

What is an RMD, you ask? The tax code does not allow IRA owners to keep funds in a traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. 

Generally, required distribution begins in the year the IRA owner attains the age of 70½. If 2015 is the year you reached 70½, you can avoid a penalty by taking that distribution no later than April 1, 2016. However, delaying the first distribution means you must take two distributions in 2016, one for 2015, when you reached age 70½, and one for 2016. If an IRA owner dies after reaching age 70½ but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date. If you became 70½ in an earlier year, you are required to take a distribution no later than December 31 of each year. 

The amount you are required to withdraw is based upon the value of the IRA account on December 31 of the prior year multiplied by your life expectancy from the Uniform Lifetime Table illustrated below. If you have more than one IRA, the RMD for each one is figured separately, but you may add up all the RMDs and take the total amount required for the year from any one or a combination of the IRAs. 





Not illustrated, because of the size, are the Joint and Last Survivor Table, which is used to determine RMDs when the sole beneficiary is a spouse who is more than 10 years younger than the IRA owner, and the Single Life Table, used for certain beneficiary RMD determinations. For table values not illustrated, please call this office. 


Example: The IRA account owner is age 75 in 2015, and the value of his IRA account on December 31, 2014, was $120,000. His 73-year-old wife is the sole beneficiary of the IRA. From the table, we determine the owner’s life expectancy to be 22.9. Thus his RMD for 2015 is $5,240 ($120,000/22.9) and must be withdrawn no later than December 31, 2015.

If in the preceding example the taxpayer had not withdrawn the $5,240, he would be subject to a 50% penalty (additional tax) of $2,620 ($5,240 x 50%). Under certain circumstances, the IRS will waive the penalty if the taxpayer can demonstrate reasonable cause and makes up the withdrawal soon after discovering there was a shortfall in the distribution. However, the hassle and extra paperwork involved in asking the IRS to waive the penalty makes it something you want to avoid by taking the correct amount of distribution timely. Some states also penalize under-distributions. 

There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years. 

Prior to 2015, there was a provision of the tax code that allowed a taxpayer to use up to $100,000 of IRA funds to contribute to a charity by directly transferring the IRA funds to the charity via a trustee-to-charity transfer. In doing so, (1) the transfer counted toward the RMD requirement, (2) the amount transferred did not have to be reported as income, and (3) no charity deduction was claimed. The advantages of that provision allowed a taxpayer to take the standard deduction and still benefit from the charitable donation. It also kept the IRA distribution from being included in the taxpayer’s AGI, potentially causing less of their Social Security income to be taxed and reducing the effect of higher AGI phaseouts. NOTE: There is a chance that the provision will be extended, so to achieve any tax benefit from it, you would need to act now as if it were in effect. 

Even though an IRA owner whose total income is less than the return filing threshold is not required to file a tax return, he or she is still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution. 

In many cases, advance planning can minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise in which a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need help with planning, please call this office for assistance. 
 
Will Your Favorite Tax Benefit Expire?

Article Summary: 
  • Expiring Tax Provisions 
  • Personal Provisions 
  • Business Provisions 
  • Will Congress Act? 
More than 50 tax provisions that Congress routinely extends on a yearly basis expired at the end of 2014. The big problem is, each year they are extending the provisions later and later in the year, creating uncertainty for taxpayers on whether they can depend on these tax incentives or not. This makes tax planning unclear and leaves taxpayers wondering about their projected tax liability. 

For 2014, Congress waited almost to the end of the year to apply many of the provisions to the 2014 tax year. This was not only a problem for taxpayers but also for the IRS, which needed to adjust its forms and tax filing software at the last minute and actually had to delay the start of the tax season. 

Although there were serious discussions among some members of Congress in the spring related to passing an extender bill, those discussions withered away with the summer heat and little has been discussed recently about either making some of the provisions permanent or extending some or all of them for another year. So whether we will have extender legislation and, if we do, what will be included in that legislation is up in the air. 

So you may wish to review the expiring provisions to see how you will be affected if they are not extended. Each of these tax benefits expired at the end of 2014 and will not apply in 2015 unless Congress acts. Although more than 50 provisions are expiring, the list below only includes those that most likely will impact individuals and small businesses: 


  • Teachers' Above-the-Line Expense Deduction – Elementary and secondary teachers have been allowed to deduct up to $250 for classroom supplies without itemizing their deductions. As an alternative, these teachers can deduct these expenses as a charitable itemized deduction if they work for a public school or charitable organization and obtain the required documentation verifying the expenses. 

  • Principal Residence Acquisition Debt Forgiveness Exclusion - When a lender forgives debt, the amount of the debt forgiven is income to the borrower; and, although the law allows a taxpayer to exclude that debt relief income to the extent the taxpayer is insolvent, many taxpayers saddled with this problem were not insolvent. To alleviate that situation, Congress passed a law allowing debt relief income from the discharge of qualified principal residence acquisition debt to also be excluded from one's income. This exclusion does not apply to forgiven equity debt income. 

  • Excludable Commuter Transportation and Transit Passes – The tax law allows an employer to reimburse, tax-free, an employee for qualified parking, certain commuter transportation and transit passes. For several years now, the monthly maximum has been the same for all three ($250 in 2014). However, the nontaxable amount of commuter transportation and transit passes will drop to $130 in 2015 if the higher deduction is not extended. 

  • Mortgage Insurance Premiums – A temporary provision has been allowing lower-income taxpayers to deduct mortgage insurance premiums on contracts in connection with acquisition indebtedness on the taxpayer’s principal residence. 

  • General Sales Tax Deduction – This temporary provision allows taxpayers to take a deduction for state and local general sales and use taxes in lieu of a deduction for state and local income taxes. The big losers here will be residents of states that do not have a state income tax; these taxpayers will end up without either deduction if the provision is not extended. 

  • Qualified Conservation Contributions – This special rule for contributions of capital gain real property made for conservation purposes allowed qualified conservation contributions to be deducted up to 50% of a taxpayer’s AGI (100% for qualified farmers and ranchers). Without an extension, the allowable contribution will be limited to 30% of the taxpayer’s AGI. The portion of the contribution that exceeds the AGI limitation is carried over for up to five future years. 

  • Above-the-line Tuition Deduction – This deduction allows moderate and low-income taxpayers to take an above-the-line deduction (maximum $4,000) for qualified higher education tuition and related expenses. As an alternative, most taxpayers will qualify for the American Opportunity Tax Credit. 

  • IRA to Charity Contribution – A temporary provision allowed taxpayers age 70½ or older to directly transfer up to $100,000 from an IRA to a qualified charity without including the distribution in income, and it would also count towards their required minimum distribution. Although no charitable deduction is allowed, the benefit is the same as (or even better than) taking a taxable distribution and then getting a charitable deduction. It also keeps the donor’s AGI lower for purposes of all the AGI limitations built into the tax laws. It is especially helpful for those with Social Security income that becomes taxable because of an IRA distribution. As a hedge, in case this provision is extended, act as if it has been. 

  • Bonus Depreciation – For the past several years, as an incentive for businesses to invest in equipment and boost the economy, this provision allowed businesses to take bonus depreciation in the first year the property is placed in service. At one time it was 100%, but was 50% in 2014. The impact here, if the provision is not extended, is that equipment will have to be depreciated over the equipment’s useful life, generally 5 or 7 years. Where applicable, the Sec 179 expense deduction can be used, but it too is reduced drastically without extension (see below). 

  • Sec 179 Expense Deduction – As part of the economic recovery efforts of the last few years, Congress temporarily increased the Sec. 179 expensing limit from $25,000 per year to $500,000, which it has been since 2010. The property cost limit phaseout threshold was also increased to $2 million. Without extension the maximum deduction will return to $25,000 with a $200,000 cost limit phaseout. 

  • Qualified Real Property Sec 179 Deduction – For years 2010 through 2014, the definition of qualified property for purposes of the Sec 179 deduction was temporarily amended, with some limitations, to include: 
o Qualified leasehold improvement property, 
o Qualified restaurant property, and 
o Qualified retail improvement property 
Thus, without an extension, these properties will no longer qualify for the Sec 179 expense deduction. 
  • 15-year Life – A temporary provision allows 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. Without an extension, these items will have to be depreciated over a 31-year life. 
Where Congress left off this summer was with a Senate bill that would extend the provisions for 2015 and 2016 and House legislation that would only extend a few of the provisions for 2015 only. With the partisan battles going on in Congress, the distraction of the upcoming elections and the holiday recesses just around the corner, what will happen to the extender legislation is anyone’s guess at this point. If history is an indicator, passage will come very late in the year. 

If you have any questions, please call. 
 
When to Claim a Disaster Loss

Article Highlights: 
  • Disaster Losses 
  • Elections 
  • Net Operating Loss 
  • AGI Limitations 
  • Possible Gain 
With the wild fires and draught in the West and flooding on the East Coast, we have had a number of presidentially declared disaster areas this year. If you were an unlucky victim and suffered a loss as a result of a casualty, you may be able to recoup a portion of that loss through a tax deduction. If the casualty occurred within a federally declared disaster area, you can elect to claim the loss in one of two years: the tax year in which the loss occurred or the immediately preceding year. 

By taking the deduction for a 2015 disaster area loss on the prior year (2014) return, you may be able to get a refund from the IRS before you even file your tax return for 2015, the loss year. You have until the unextended due date of the 2015 return to file an amended 2014 return to claim the disaster loss. Before making the decision to claim the loss in 2014, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund. 

If you elect to claim the loss on either your 2014 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs. 

If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, whether the loss is claimed on the 2014 or 2015 return, and results in negative income, you may have what is referred to as a net operating loss (NOL). When there is an NOL, the unused loss can be carried back two years and then carried forward until it is all used up (but not more 20 years), or you can elect to only carry the unused loss forward. 

Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL. 

Ordinarily, casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss. 

For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster. 

As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain. 

If you need further information on casualty and disaster losses, your particular options for claiming the loss, or if you wish to amend your 2014 return to claim your 2015 loss, please give this office a call.
 
6 Steps to Get Your Business Startup on Track For Long Term Success
It’s easy to think about startup businesses and consider the success or horror stories, but what about the average startups? The hard and bleak reality is that the majority of small business startups fail. So, to avoid being like the average startup, you need to create a plan for success. 

Choose the Right Entity 

One of the first steps to forge a solid start includes selecting the right entity for your business. This legal structure will affect the amount of paperwork you need to do and the legal ramifications you will face. 

The right entity will help you reduce your liability exposure and minimize your taxes. You need to ensure your business can be financed and run efficiently with a method that helps ensure the business operations will continue after the death of the owner. Along with making the startup process more organized in an official capacity for the company, the formalization process will also solidify the ownership of participants who are participating in the venture. 

To choose your entity, you will first need to consider what personal level of risk you face from liabilities that could arise from your business. You will then need to consider what the best angle is for taxation, finding ways to avoid layers of taxation that can increase unnecessary expenses. Then, you will have to consider what kind of ability you have to attract investors and what ownership opportunities will need to be offered to key stakeholders. Finally, you will have to consider the overall costs of operating and maintaining whatever business entity you choose. 

There isn’t necessarily only one entity that can fit your business. The key in this process is looking at how each entity will alter your business’s future to select the one that is right for you. You might choose a sole proprietor, corporation or limited liability company if you are a single owner. If your business is going to be owned by two or more individuals, then you might choose a corporation, limited liability, limited partnership, general partnership or a limited liability partnership.

Sole Proprietorship: The most common entity type where a single owner is personally liable for financial obligations. This is the easiest type of business entity to form and offers complete control to you as the managerial owner. 

Partnership: When two or more people want to share the profits and losses of a business, they can benefit in a shared entity that does not pass along the tax burdens of their profits or benefits of the losses. In this entity form, however, both partners are personally liable for the financial obligations of the business. 

Corporation: A corporation is an entity that is separated from the founders and handles the responsibilities of the organization for which it bears responsibility. The corporation can be taxed and held legally liable for its actions, just like a person. The corporate status allows you to avoid personal liability, but you will have to provide the funds to form a corporation and keep extensive records to keep the corporation status. Double taxation can also be seen as a downside to the corporate status, but a Subchapter corporation can avoid this situation by using individual tax returns to show profits and losses. 

Limited Liability Company (LLC): This is a hybrid form of a partnership entity that allows owner to benefit from aspects of the corporation and partnership forms of the business. Both profits and losses can be passed to the owners without taxing the business and while shielding owners from the personal liability factor. 

Plan for Growth 

Even though the number one reason startups fail is due to the production of a product no one wants, you can’t just stop with a great product. As an entrepreneur, you have to know about every aspect of your business. Even if you are not an expert in the process of business and aspects of your company, failure in those areas can still cost you your success. You have to know enough to catch key problems in your company’s startup process. 

Too segmented, and your company will struggle with gaps and overlap. If the CEO believes it is his or her job to lead, but not to market, then he or she may miss an important connection between target audience and company direction. If the marketer believes it is his or her job to market, but not to develop the website, then he or she might find the website design does not appeal to the right audience. Each individual needs to be both responsible and organic in their approach to helping the company move in the right direction. 

While you want growth, you need to be prepared to sustain it. In order to get your venture capital secured, you need accelerated growth; grow too slow and you won’t be eligible for the funds you need to keep growing. Yet, your company will have to be equipped for that growth. The shifting size will alter your ability to work as an agile startup, will force you to reconsider a variety of your tools and may even make you update your physical headquarters. This is just one more reason your current company leaders and employees need to be flexible in the nature of their coverage and thorough in the application of their talents. 

The second major reason that companies fail is due to a shortage of funds. These companies run out of cash because their growth stalls. Stalling growth can kill a startup by making them lose to the competition, lose customers, lose employees and lose passion. 

Growth Hack 

Once you’ve gotten your business prepared for substantial growth at a very rapid pace, you will need to focus your attention on increasing that growth. A relatively new term, growth-hackers are professionals that are specifically focused on the rapid growth of startups. Since the second largest reason startups fail is directly related to money shortages (and indirectly related to growth), you will want to focus a lot of your initial attention on increasing growth in creative ways. 

The growth hacker job is usually done by a professional who stands in the place of a marketer. The growth hacker has to understand your startup’s audience and how to appeal to them for faster growth. The growth hacker will also break your large end goal (increased growth at a rapid rate) into smaller, actionable and achievable tasks, like doubling your content creation, to reach that end goal. 

Watch the Money 

In order to help manage the funds that you do have, you will want to establish financial controls to provide your startup with a solid foundation. The internal controls will include accounting, auditing, damage control planning and cash flow. You will need to have disciplined controls to ensure solid growth and help you never run out of cash. 

You will want to adjust and re-adjust your projections for cash flow, never allowing the cash to run dry. This also means you need to set maximum limits of purchasing authority to keep partners or employees from overspending. You will need to require all payments to be recorded on invoices to support audits and keep spending on track. Additionally, you will want to use an inventory control system and use an edit log to track changes made to your website. Don’t overlook your suppliers as sources of financing or assume that all shipments are accurate or in good condition. Ask for term discounts, pay on time and always create purchasing contracts to ensure your goods are delivered. 

Measure Your Achievements 

Key Performance Indicators (KPIs) are ways to measure the company’s success in achieving key business goals. You will want to establish KPIs on multiple levels in order to monitor your efforts on meeting your objectives. 

You will want to use SMART KPIs that are Specific, Measurable, Attainable, Relevant and Timely. Goals that are too general, don’t have an end date and aren’t within your control are goals doomed to fail. To help your startup succeed, you need to discover the core objectives that will really improve your company status. 

Work With Us 

Finally, you need to spend more time growing your business than accounting for it. Remember, a misplacement of funds and lack of cash is the second biggest reason why startups fail.

Once you have a product that is worth taking to market and a plan in place to cultivate funding, you will be in a good place with your startup. Don’t let any of these points cause you to lose control of your business with a blind side hit that you could have prepared for.
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Family, Income and Residence Changes Can Affect Your Premium Tax Credit

9/1/2015

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​Family, Income, and Residence Changes Can Affect Your Premium Tax Credit
Article Highlights:
  • Advance premium tax credit (APTC)
  • Repayment avoidance
  • Things you should report
  • Special enrollment period
If you get health insurance coverage through a government Health Insurance Marketplace, it is very important that you keep the Marketplace aware of any changes in household income, marital status, and family size.    
If you are receiving advance payments of the premium tax credit, it is particularly important that you report changes in circumstances, including moving, to the Marketplace. There’s a simple reason: reporting these income and life changes lets the Marketplace update the information used to determine your eligibility for a Marketplace plan, which may affect the appropriate amount of advance payments of the premium tax credit that the government sends to your health insurer on your behalf.
Reporting the changes will help you avoid having too much or not enough premium assistance paid to reduce your monthly health insurance premiums. Getting too much premium assistance means you may owe additional money or get a smaller refund when you file your taxes. On the other hand, getting too little premium assistance could mean missing out on monthly premium assistance that you deserve.
Changes in circumstances that you should report to the Marketplace include, but are not limited to:
  • An increase or decrease in your estimated household income
  • Marriage or divorce
  • The birth or adoption of a child
  • Moving
  • Starting a job that offers health insurance
  • Gaining or losing your eligibility for other health care coverage
Many of these changes in circumstances—including moving out of the area served by your current Marketplace plan—qualify you for a special enrollment period to change or get insurance through the Marketplace. In most cases, if you qualify for the special enrollment period, you will have sixty days to enroll following the change in circumstances.
If you have questions about the premium tax credit or the advance payment of the credit, please give this office a call.
 
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