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The “Setting Every Community Up for Retirement Enhancement” Act of 2019 (SECURE Act) (12/2019)

The “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act), part of the Further Consolidated Appropriations Act, 2020 (H.R. 1865, P.L. 116-94), was enacted on December 20, 2019. The SECURE Act expands opportunities for individuals to increase their savings, and makes administrative simplifications to the retirement system.

Setting Every Community Up for Retirement Enhancement Act (SECURE Act)

 

Key provisions affecting individuals:

Repeal of the maximum age for traditional IRA contributions.

Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution age raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Partial elimination of stretch IRAs.

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant s or IRA owner s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).

Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.

A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary’s qualified higher education expenses.

Before 2019, qualified higher education expenses didn’t include the expenses of registered apprenticeships or student loan repayments.

But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.

Kiddie tax changes for gold star children and others.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children. Before enactment of the TCJA, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child.

Under the TCJA, for tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.

There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (“gold star children”), first responders, and emergency medical workers.

The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59-1/2 is subject to a 10% early withdrawal penalty on the amount includible in income.

Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.

Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.

Many home healthcare workers do not have taxable income because their only compensation comes from “difficulty-of-care” payments that are exempt from taxation. Because those workers do not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA.

For IRA contributions made after Dec. 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.

Key provisions affecting employer-provided retirement plans:

Unrelated employers are more easily allowed to band together to create a single retirement plan.

A multiple employer plan (MEP) is a single plan maintained by two or more unrelated employers. Starting in 2021, the new rules reduce the barriers to creating and maintaining MEPs, which will help increase opportunities for small employers to band together to obtain more favorable investment results, while allowing for more efficient and less expensive management services.

New small employer automatic plan enrollment credit.

Automatic enrollment is shown to increase employee participation and higher retirement savings. Starting in 2020, the new rules create a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to an existing plan start-up credit, and is available for three years. The new credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.

Increase credit for small employer pension plan start-up costs.

The new rules increase the credit for plan start-up costs to make it more affordable for small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500, or (2) the lesser of: (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan, or (b) $5,000. The credit applies for up to three years.

Expand retirement savings by increasing the auto enrollment safe harbor cap.

An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs and meets certain other requirements. One of the safe harbor plans is an automatic enrollment safe harbor plan.

Starting in 2020, the new rules increase the cap on the default rate under an automatic enrollment safe harbor plan from 10% to 15%, but only for years after the participant’s first deemed election year. For the participant’s first deemed election year, the cap on the default rate is 10%.

Allow long-term part-time employees to participate in 401(k) plans.

Currently, employers are generally allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans—like a 401(k) plan—to their employees. As women are more likely than men to work part-time, these rules can be especially harmful for women in preparing for retirement.

However, starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year. For employees who are eligible solely by reason of the new 500-hour rule, the employer will be allowed to exclude those employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Loosen notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans.

The actual deferral percentage nondiscrimination test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or nonelective contributions under either of two plan designs (referred to as a “401(k) safe harbor plan”), as well as certain required rights and features, and satisfies a notice requirement. Under one type of 401(k) safe harbor plan, the plan either (1) satisfies a matching contribution requirement, or (2) provides for a nonelective contribution to a defined contribution plan of at least 3% of an employee’s compensation on behalf of each nonhighly compensated employee who is eligible to participate in the plan.

Starting in 2020, the new rules change the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption. The new rules eliminate the safe harbor notice requirement, but maintain the requirement to allow employees to make or change an election at least once per year. The rules also permit amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time are allowed if the amendment provides (1) a nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year (i.e., by the close of following plan year).

Expansion of portability of lifetime income options.

Starting in 2020, the new rules permit certain retirement plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan, or IRA, of a lifetime income investment or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.

Qualified employer plans barred from making loans through credit cards and similar arrangements.

After Dec. 20, 2019, plan loans may no longer be distributed through credit cards or similar arrangements. This change is intended to ensure that plan loans are not used for routine or small purchases, thereby helping to preserve retirement savings.

Nondiscrimination rules modified to protect older, longer service participants in closed plans.

Starting in 2020, the nondiscrimination rules as they pertain to closed pension plans (i.e., plans closed to new entrants) are being changed to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer-service employees as they near retirement.

Plans adopted by filing due date for year may be treated as in effect as of close of year.

Starting in 2020, employers can elect to treat qualified retirement plans adopted after the close of a tax year, but before the due date (including extensions) of the tax return, as having been adopted as of the last day of the year. The additional time to establish a plan provides flexibility for employers who are considering adopting a plan, and the opportunity for employees to receive contributions for that earlier year.

New annual disclosures required for estimated lifetime income streams.

The new rules (starting at a to-be-determined future date) will require that plan participants’ benefit statements include a lifetime income disclosure at least once during any 12-month period. The disclosure will have to illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant s surviving spouse and a single life annuity.

Fiduciary safe harbor added for selection of annuity providers.

When a plan sponsor selects an annuity provider for the plan, the sponsor is considered a plan “fiduciary,” which generally means that the sponsor must discharge his or her duties with respect to the plan solely in the interests of plan participants and beneficiaries (this is known as the “prudence requirement”).

Starting on Dec. 20, 2019 (the date the SECURE Act was signed into law), fiduciaries have an optional safe harbor to satisfy the prudence requirement in their selection of an insurer for a guaranteed retirement income contract, and are protected from liability for any losses that may result to participants or beneficiaries due to an insurer’s future inability to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a plan.

Increased penalties for failure-to-file retirement plan returns.

Starting in 2020, the new rules modify the failure-to-file penalties for retirement plan returns.

The penalty for failing to file a Form 5500 (for annual plan reporting) is changed to $250 per day, not to exceed $150,000.

A taxpayer’s failure to file a registration statement incurs a penalty of $10 per participant per day, not to exceed $50,000.

The failure to file a required notification of change results in a penalty of $10 per day, not to exceed $10,000.

The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.

 

Note From The Partners

 

Dear WZ Clients and Friends,

As the end of the year is fast approaching, we should consider any last minute strategies that might help reduce your individual or business 2019 tax bill. Last year was the first year to be impacted by the Tax Cuts and Jobs Act of 2017 (TCJA). While there was no significant new legislation in 2019 affecting individual taxes, situations do change from year to year, thus requiring a fresh look at how to approach year-end tax planning. There are some strategies we can implement to benefit you and we should discuss before December 31.

For individuals:

  1. Bunching deductions into 2019
  2. Deduct Medical Expenses and Health Savings Accounts
  3. Mortgage interest deductions
  4. Home office expenses
  5. Revised kiddie tax rules
  6. Education-related deductions and credits
  7. Charitable contribution deductions
  8. Rental real estate
  9. Retirement planning
  10. Reevaluating your stock portfolio
  11. Substantial increases in deductions or non-taxable income could result in AMT exposure
  12. Planning for 3.8% net investment income tax
  13. Additional Medicare tax
  14. Timing income and deductions
  15. Foreign bank account reporting

For Businesses:

  1. Section 179 Expensing and Bonus Depreciation Deductions
  2. Qualified Improvement Property Glitch Remains Unfixed
  3. Qualified Business Income Deduction
  4. Rental Real Estate
  5. Vehicle-Related Deductions and Substantiation Requirements
  6. Fringe Benefit/Retirement Programs
  7. Increasing Basis in Pass-thru Entities
  8. Electing the De Minimis Safe Harbor
  9. S Corporation Shareholder Salaries

Please contact us with any questions or concerns so we can discuss ways to reduce your taxable income and tax liability for 2019.

From all three partners at Wagner & Zwerman, thank you for your patronage. Your continued support and suggestions throughout the years are a vital part of our growth. And for that, we are most grateful.

We look forward to serving you for many years to come.

Best,

Andrew Zwerman, Vincent Preto, John Antinore and the Wagner & Zwerman Team

3 Big Tax Issues to Look Out for in Your Estate Plan

Tax and Financial News August, 2019

3 Big Tax Issues to Look Out for in Your Estate Plan

3 Tax Issues Estate Plan

There are three big tax issues that can derail an otherwise well-executed estate plan. These include Family Limited Partnerships, Revocable Trust Swap Powers and Trust Situs. Below we explore the pitfalls with each issue.

Fixing FLPs

Family Limited Partnerships (FLP) are often created to hold investments or business assets in order to leverage a valuation discount, exert control and provide asset protection.

First, to understand the valuation discount, take the example in which an FLP owned a family business valued at $10 million. A straight 25 percent interest in this business would therefore be worth $2.5 million. However, due to valuation discounts for a non-controlling interest that would not be readily available for sale or able to control liquidation, the 25 percent might actually be valued at $1.7 million for estate tax purposes.

Second, FLPs also could be set up to allow the founder or parents to control operations even after a majority of their interest is given away.

Lastly, FLPs can protect assets. If an interest owner is sued, the claimant might not be able to exercise their claim, especially if they sued a minority interest holder. Instead, they could be limited to receiving a charging order. A charging order limits the claimant to only the distributions that interest holder would be entitled to and protects the other owners.

FLPs that ignore legal upkeep and technical legal formalities can jeopardize these the protection benefits by causing the FLP entity to be disregarded. Common errors include co-mingling personal and entity assets and ignoring the legal requirements to have current signed governing instruments.

On the valuation front, many FLPs were set up to provide valuation discounts at a time of significantly lower estate tax exemptions. Not only is this unnecessary, but the valuation discount can actually hinder the heirs by passing along a lower asset value when the basis is stepped up at death.

Swap Powers

Traditionally, irrevocable trusts are by definition trusts that cannot be altered (hence the name irrevocable). Uses include carving out assets from an estate to better protect the assets and provide tax savings.

Irrevocable trusts are often structured as “grantor” trusts for income tax benefit purposes. Grantor trusts allow the grantor to report the trust income on their individual 1040, effectively having the grantor pay the tax burden and bypass the trust. This strategy can reduce the grantor’s estate.

There are numerous ways to create grantor trust status. Including swap powers is the most common. Swap powers allow the swapping of personal assets for trust assets of equivalent value. The problem with swap powers is that little attention is paid to them and they aren’t exercised in the right circumstances, leading to adverse income tax consequences.

It’s best to review the value of trust assets annually or even more often if the grantor is in poor health so you know when to exercise the swap powers. It’s also a good idea to involve your estate planning attorney and CPA if you are going to exercise the swap powers. This will ensure the swap is handled according to the rules of the trust document and properly reported on your tax returns.

Trust Situs Selection

Trust situs is the state where your trust is based. It determines which state law administers and rules the trust. Frequently, the trust situs is simply set up in the same state where the trust creator is a resident.

While simple, using a home state as the trust situs is not always best. A person’s home state may not provide the best protections or state taxation. The way around this is to “rent” a different trust jurisdiction. Doing so can allow you to lower or altogether avoid state income taxes. You’ll have to factor in the costs to do so as there will be more legal fees and trustee fees since an institution will need to hold the trust to create the state nexus. Overall, you can often come out ahead.

Conclusion

The best thing you can do is to review your current or potential trust with your estate planning attorney and CPA. This way you can stay on top of both the formalities and mechanisms in place to maximize the protections and benefits of the trust.

 

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General Business News August, 2019

Understanding and Applying Accounting Reports and Ratios

Understanding Accounting Ratios

When it comes to tracking incoming sales and outgoing expenses, there are many ways businesses can keep up with their invoices and implement strategies to reduce the time they spend on unpaid sales.

Accounts Receivable Turnover Ratio

Simply defined, the accounts receivable turnover ratio is a way of showing what percent of a company’s receivables or invoices are paid by clients. 

The U.S. Small Business Administration explains this ratio is determined by “dividing average accounts receivable by sales.” Determining average accounts receivable is done by adding the beginning and ending figures — be it a month, quarter or year, then dividing by 2. Determining the sales figure is calculated by taking the total sales still on credit and deducting any allowances or returns from the gross sales figure.    

If the beginning and ending accounts receivables for a 12-month period were $20,000 and $30,000, the average accounts receivable would be $50,000/2 or $25,000. If the gross sales were $200,000 for the 12-month period and there were $20,000 in returns, it would leave $180,000/$25,000 or an accounts receivable turnover ratio of 7.2

Accounts Payable Turnover Ratio

The payable turnover ratio is determined by taking all purchases from suppliers and dividing the supplier purchase figure by the mean accounts payable figure. The average accounts payable figure is calculated by adding the starting accounts payable figure and the ending accounts payable figure, normally at the beginning and ending of a period, such as 12 months. From there, the summed up accounts payable figure is divided by 2 to get an average.  

A business made yearly purchases on credit for about $250,000 from suppliers and had returns to those suppliers for about $20,000. If at the beginning of the 12-month period accounts payable were $11,000, then at the end of the period the accounts payable balance was $26,000, the total figures would equal $37,000.

From that point, there would be $230,000 in net yearly purchases on credit for the business and an average of $18,500 for the period’s accounts payable. Dividing the $230,000 by $18,500 equals 12.43. Therefore, the business’ accounts payable turned over about 12.5 times during the period. As the SBA explains, the higher the ratio, the more dependent companies are on accounts payable to acquire inventory.   

Accounts Payable Aging Report

When it comes to defining an accounts payable aging report, businesses can use this tool to determine and organize outstanding accounts payable to vendors or suppliers and how much each is owed. While it can be broken into discreet time frames, such as net-14 or net-60 or net-90, depending on how the supplier and business decided on payment terms, commonly accepted time frames established are: up to 30 days; 31 to 60 days; and so on.

This report is used to organize which supplier invoices are due and when. One important consideration to note is if the report assumes that all invoices are due within 30 days. If there’s special arrangements or terms from important suppliers, it could need adjusting as determined by individual supplier payment terms.  

By using an accounts payable aging report, businesses will see when they need to pay their bills on time and what percentage are being paid on time (or not). It will help businesses see if they’re paying late fees by organizing invoices. Businesses can also identify if there’s a need to negotiate with suppliers for reduced payments for early payments or for extended time to pay invoices if cash flow is an issue. 

Accounts Receivable Aging Report

Similar to an accounts payable aging report, an accounts receivable aging report helps businesses track outstanding invoices owed by clients. It also contains the client name, the time when payment is due and how late, if at all, client invoices are for issued invoices.

These reports help businesses determine the likelihood of debt becoming bad, and if unpaid invoices need to be sent to collections or written off. It can also measure in short and long terms how clients have made timely payments on their invoices. This can help businesses determine if they should reduce existing credit terms to their clients or to make an offer to discount what’s owed in order to get an otherwise uncollectible invoice paid.

Whether a company owes money or expects to be paid for a product or service, with the proper accounting tools, there’s a way to keep track of all inflows and outflows.

 

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Tip of the Month August, 2019

Pass It On: Accounting Tips to Share With Kids

Accounting Tips to Share With Kids, Accounting children

It’s never too early to helps kids understand accounting – the concepts of earning and spending. Here are a few ways to teach your little ones about how money works and even have a little fun.

Play Money Games

One way to explain the principles is by playing games like Monopoly and The Game of Life. However, if you want to be more homegrown and less commercial, bake some cookies, bag and price them, and turn your kitchen into a store. You might even get a toy cash register and calculators to make the whole experience more authentic. Then record the earnings, expenses and profits. This will really give children a “taste” of accounting!

Create a Family Budget

When sharing this activity with your kids, you don’t have to include every single expense – just those that they can easily understand, such as mortgage or rent, electricity, gas, phone, groceries and so on. Then, ask them to write up a budget of their own and include their income and expenditures for an allotted amount of time, perhaps a week. This way, you can demonstrate the importance of tracking money and explain that this is a common way that businesses and families deal with their finances.

Teach Them About Checking Accounts

Even though checks are being used less and less these days, a check register is still a good way to show kids how to reconcile expenses. First, you can let them watch you write a check, then explain how to record the check in the register. Then, get some generic deposit slips from your bank and demonstrate how deposits and withdrawals work. Finally, tell them that these transactions will be sent to them each month in a statement – you might even show them one you have to help them visualize the concept.

Explain Debits and Credits

Grab a blank sheet of paper and write a large T on it. Above the left side of the bar, write “Income: Money In” and above the right side of the bar, write “Expenses: Money Out.” Point out the difference between the two sides. If your child has an allowance, a way of earning money by doing chores or if they have a summer job, then ask them to pretend that they’re going to spend some of their money on things they’d like, such as games or candy. Have them record the amounts of earned income in the left column. Then ask them to imagine spending the money on the things they want and have them record those expenses in the right column. Then subtract the expenses from the income. This is quite effective because it helps kids see the money going in and out of an account. When they get a feel for how this works, they might be a little less interested in spending every cent they earn.

There are many other tools you can use to teach your children how money works, but these are a few good ones to get you started. As many parents can attest, helping kids comprehend how to manage money is one of the best lessons you can teach them.

Why Some People Are Afraid of the Hobby Loss Rules

Tax and Financial News July

Why Some People Are Afraid of the Hobby Loss Rules

Hobby Loss Rules IRS

Many tax advisors are very cautious when it comes to claiming hobby losses – and some would argue overly so. This conservative view stems from the impression that the taxpayer usually loses when challenged by the IRS. While technically true that the odds aren’t in your favor of winning a challenge, the overall risk often works out in the taxpayer’s favor over the long run. Below we’ll look at why tax advisors should start from the assumption of taking the losses.

Always a Loser

Taxpayers usually lose hobby loss cases. Typically, the odds are around 3-to-1 in favor of the IRS. So, on the surface it seems like the smart bet is to assume you’ll lose, but there are reasons not to plan based on this fact. First, this statistic only represents cases that are decided by the court. Taxpayers are usually pretty stubborn and most cases are settled in much more favorable circumstances to the taxpayer.

Second, the “losers” are often winners in the long run.

Why Losers are Really Winners

When a taxpayer loses a hobby loss case, they usually face a deficiency and an accuracy penalty of 20 percent.  The key issue here is how long before the loss is challenged?

Let’s take a pretend case as an example. Assume we have a taxpayer with tax losses of $60,000 per year, a 35 percent tax rate and they are audited for three years and lose. This results in a $63,000 deficiency ($60,000 x 35 percent x 3 years), plus an accuracy penalty of $12,600 (20 percent of the $63k). Had they not claimed the deduction, they would have paid the $63,000 in taxes anyway, so this isn’t really a loss; only the accuracy penalty is.

This doesn’t sound so great, does it? Why would someone take 3-to-1 odds in a scenario like this? Let’s think for a minute; what if the taxpayer had been taking the losses for 10 years?  Those first seven years that were never audited allowed the taxpayer to take the deduction. In this case we have $21,000 x 7 years = $147,000 in deductions that the taxpayer would have missed if they played it conservatively. Next, our hypothetical taxpayer would still be up more than $134,000 over the long term ($147k, less the accuracy penalty).

This all of course assumes the taxpayer is sincere in his or her efforts to make money and is not playing the “audit lottery,” which is of course unethical.

Honest Motives

Tax courts look to see if a taxpayer is genuinely and honestly engaged in the activity for profit. Objective honesty is the standard, and it doesn’t matter how slight the odds of turning a profit are. The IRS isn’t looking to judge the taxpayer’s business acumen, but their objective instead. You’ll need to truly be trying to make money with the activity or you’re doomed to lose.

Conclusion

In the end, if a taxpayer has an honest objective to make a profit through a hobby, claiming the losses is typically in their interest. While they are likely to lose if challenged, they are guaranteed to lose if they don’t take the losses themselves. Finally, even if they lose certain years under audit, they are likely to come out ahead in the long run. So, if you’re truly trying to make money in a venture that could be seen as a hobby, it might not pay to be conservative.

 

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General Business News July

How to Define and Calculate a Break-Even Analysis

Break-Even Analysis

According to data from a U.S. Small Business Administration Office of Advocacy report from August 2018, businesses have varied longevity.

Nearly 80 percent (79.8 percent) of business startups in 2016 lasted until 2017. Between 2005 and 2017, the SBA mentions that 78.6 of new businesses lasted 12 months. Similarly, nearly 50 percent lasted at least five years.  

While there are many reasons why a company goes out of business – one is profitability. Knowing when the business is breaking even and will start making a profit can be accomplished with a break-even analysis.

Defining a Break-Even Analysis

As the SBA explains, a Break-Even Analysis is a useful way to measure the level of sales necessary to determine how many products or the amount of services that must be sold in order to pay for fixed and variable costs, otherwise known as “breaking even.” It refers to the time at which cost and revenue reach an equilibrium.

In order to get the Break-Even Quantity (BEQ), as the SBA uses, businesses must take their fixed costs per month and divide this figure by what’s left over after subtracting the variable cost per unit from the price per unit – or the product’s selling price.

Fixed Costs

These types of costs can include things such as rent or lease payments, property taxes, insurance, interest payments or monthly machine rental costs.

Variable Costs

In contrast to fixed costs, such as taxes or interest payments for the next month or year, business owners also must deal with variable costs. Utilities and raw material expenses are two examples of variable costs.

Looking at electricity costs, the amount and price of kilowatts used per month will vary based on the amount and length of usage of lights, climate control equipment, production runs and the rate of kilowatts from the supplier.

Looking at raw materials, such as oil or precious metals, these costs can decrease or increase frequently due to tariff or commodity fluctuations.

Sales Price Per Unit and Further Considerations

When it comes to how much an item is ultimately sold for, there are different considerations for different product sales. If a company is selling a product for $100 on the retail level, and the business’ fixed costs are $4,000 and there’s $50 in variable costs, the Break-Even Quantity can be calculated like this:

$4,000 / ($100 – $50) = $4,000 / ($50) = 80 products (to break even)

If those products are surfboards priced at $100 each, then sales of the 81st surfboard and onward would represent profits for the company. It’s also important to see how changing either fixed costs or variable costs can make a difference in the break-even point.

Reducing Fixed Costs

If a business owner refinances a loan to a lower, fixed interest rate, or reduces a salary for the next 12 months, the overall fixed costs will go down. Here’s an example with a lower fixed cost for the same scenario:

$3,500 / $50 = 70 products (to break even)

Reducing Variable Costs

If a business owner searches for another supplier, such as one that’s not subject to import tariff costs that get passed on to consumers, variable costs can be reduced for the same scenario. In this example, the variable cost is reduced to $45.

($100 – $45) = 55

$4,000 / $55 = 73 products (to break even)

While each business has its unique costs and industry conditions, a break-even analysis can help business owners determine future moves.

 

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Financial Planning News July

Financial Tips for Recent College Graduates

Financial Tips for Recent College Graduates

Members of the college graduating class of 2017 owed an average of close to $30,000 each in student loan debt. Imagine starting out adult life with that kind of debt load?

The prevalence of this type of mounting debt for a 21- or 22-year-old is unprecedented in U.S. history – and all the more reason why young adults need sound financial advice. Financial advisors might not necessarily market to this demographic; instead, waiting until they’re older and have assets worth their while. However, if today’s young adults don’t get off on the right financial footing with regard to managing debt, saving, budgeting and investing for the future, there won’t be that many in need of financial advice once they hit middle-age.

The following are a few tidbits of advice to help recent college grads develop successful money management habits.

Be Patient

Interestingly, many college graduates know they are in over their heads and welcome financial advice; in fact, they’re hungry for it. A recent survey found that the No. 1 goal for 94 percent of Millennials is to become debt free. Unfortunately, tackling thousands of dollars in debt while earning an entry-level salary is a difficult task. The first rule of thumb is to be patient.

It takes time to pay off that much debt. The best advice is not to develop expensive habits, such as buying an expensive car, one with poor gas mileage or a make that is known for expensive repairs. Don’t get into the gourmet coffee habit. Bring your lunch to work. These are common habits among young adults with little discretionary income, but the hard part might be refraining from this type of spending once they start earning a higher salary.

Any wage increases or monetary windfalls should be directed to paying off debt and establishing an emergency savings fund to cover three to six months of living expenses – just in case they get laid off or encounter a large, unexpected expense.

Be Disciplined

Just as it takes time and patience to pay off a large debt, it also takes time and patience for invested money to compound. Once debts are paid off, extra income should be devoted to a regular, automated savings plan, such as a tax-deferred retirement plan with a company match.

Here’s an example of the reward:

  • Madison starts investing $10,000 a year at age 25 for 15 years, for a grand total of $150,000. At age 40, she stops and never returns to that investment habit.
  • Aidan starts investing $10,000 a year at age 35 and continues that habit for 30 years – twice as long as Madison. His total contribution also is twice that of Madison’s, at $300,000.

By age 65, Aidan’s investment grows to $790,582. While Madison invested only half as much as Aidan, by age 65 her investment grows to $998,975 – $208,392 more than him (assuming a 6 percent average annual return). That’s what the power of compound interest can do for a new college graduate who starts saving young.

Be Diligent

Compound interest works both ways, so it’s important that young adults don’t miss or make late payments on student loans or other debt. Such bad habits lead to negative information being reported on their credit report, resulting in a low credit score that can cause them to be turned down for loans or charged higher interest rates. It can even mean losing out on a job opportunity, as some employers check out candidate credit scores.

Above all else, young college graduates need to make debt payments on time, build a credit history and protect their credit score.

Ideally, no matter how large debt payments are or how little a new college grad earns, a young adult should get in the habit of saving the same amount of money each month. Even if it’s just $20 a paycheck; it’s not the amount that matters – it’s the habit.

The best way to accomplish this is to live below your means. When you get a salary increase, increase your monthly savings amount. The easiest way to entrench a savings habit is to “keep living like you’re still a college student.”

When Saving for Retirement in Taxable Account Is a Good Idea

Tax and Financial News June 2019

When Saving for Retirement in Taxable Account Is a Good Idea

When Saving for Retirement in Taxable Account Is a Good Idea, 401k, 403b

Most people associate saving for retirement with tax deferred or non-taxable accounts: 401(k)s, 403(b)s, Traditional IRAs, Roth IRAs, etc. The tax benefits of these types of retirement accounts give individuals advantages over simply investing in a regular taxable brokerage account.  

Savings for retirement in a standard taxable account can also have its place – and the option shouldn’t be ignored. In this article, we’ll look at a handful of reasons why doing so might just be the best option.

Your employer doesn’t offer 401(k), 403(b) or similar type plan

Some employers, especially very small ones, don’t offer retirement plan options to their employees due to the cost or administrative burden. Others have restrictions on participation, such as waiting periods (sometimes up to one year) or cut out part-time employees.

In this situation, your options may be limited to opening an IRA, but contributions are limited ($6,000 or $7,000 per year, depending if under or over 50) so an IRA alone may not allow you to save enough to meet your goals. Savings in a taxable account can help bridge the gap between what the IRA allows and your target needs.

You have maxed out and still want to save more

Even if you have access to a tax advantaged savings plan, contributions are limited. For example, 401(k) plans limit contributions to $19,000 ($25,000 if age 50 or older) in 2019. Depending on your income or projected needs, this might not be enough.

Consider for example that many experts say a target savings rate of approximately 15 percent is needed to give a retiree sufficient income. Someone earning $200,000 a year should be putting away $30,000 per year using the 15 percent rule, considerably more than what a 401(k) permits.

Accessibility to your investments

Retirement accounts come with strings attached to those tax benefits. Taking money out of a 401(k), 403(b) or IRA early can trigger steep costs in terms of penalties and taxes.

If you’re someone who values options and access to long-term investment savings, a taxable account provides flexibility. You can add and remove money without limits, penalties or restrictions. You’ll also have more control in retirement as there will be no required minimum distributions later in life.

Benefits for your heirs

Passing on the balance of a 401(k), 403(b) or Traditional IRA to an heir puts him or her in a taxable situation. Typically, someone who inherits an IRA will have to pay taxes on the distributions as if they were ordinary income, just like the retiree during their lifetime. Generally speaking, someone who inherits a taxable account receives a step-up in basis (at the date of death or other depending on elections).

Let’s look at a simple example to understand this better. Assume you bought 1,000 shares of Apple for $20 ($20,000) and when you passed away it was worth $200 per share ($200,000). If you purchased this in your 401(k), then your heir would have to pay tax on the entire $200,000 as ordinary income as it’s distributed. If this investment was held in a taxable account, however, they could receive a step-up in basis. This means that while your basis was the $20,000 you originally paid, your heir’s basis would step up to the $200,000 value. This means he could sell the $200,000 worth of stock and pay zero in taxes.

Conclusion

As you can see, tax deferred and advantaged accounts offer many perks that make them excellent vehicles for saving; however, taxable accounts are often needed as well. The need to save beyond contribution limits or desire to pass on an inheritance in a tax-advantaged manner can behoove looking beyond 401(k)s and IRAs.

 

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Financial Planning June 2019

Social Security: News, Tips and Trends

Social Security: News, Tips and Trends

There are a number of threats that both retirees and pre-retirees are facing right now when it comes to drawing Social Security benefits. For example, there’s a new scam this year. Seniors are being solicited by callers who claim to be with the Social Security Administration (SSA). The caller says he regrets to inform that the elderly person’s Social Security payments have been suspended. The caller says it’s either because the beneficiary has been involved in a crime or there has been suspicious activity related to their benefit. Here’s the interesting part: the caller then requests that the senior repay a certain amount of his benefit to Social Security by gift card. The scammer is then able to use this money quickly with no paper trail.

If that sounds absurd, consider that over the span of just two months Social Security beneficiaries collectively lost upward of $6.7 million by falling prey to this a new, highly effective scam. Even if an elderly person is suspicious or knows the call is fraudulent, he may acquiesce anyway for peace of mind. Seniors who rely on Social Security as their primary source of income are of no mind to mess around when that income is threatened. If you or anyone you know is in this situation, be aware that the SSA does not make direct phone calls, does not threaten to stop paying benefits, and certainly does not ask to be refunded payments by gift card.

From a longer-term perspective, Social Security payments could be threatened by – ironically enough – the current administration’s strict immigration policy. The former chairman of the Federal Reserve, Alan Greenspan, recently noted that in 2010 alone, unauthorized foreign workers paid about $12 billion in tax revenues that went directly into Social Security’s coffers. Because many immigrants pay FICA taxes whether they are documented or not, this revenue source has been a mainstay to our Social Security, Medicare and Medicaid programs for as long as they’ve been in effect. Based on 2016 government data, even before the recent immigration policies were implemented, Pew Research reports that the number of unauthorized immigrants had dropped to its lowest level (10.7 million) since its peak (12.2 million) in 2007.

The unfortunate consequence of fewer immigrants is that payroll taxes may have to increase and/or Social Security benefits reduced in coming years. One economist projected that if we continue down this current path of highly restrictive immigration policies, Social Security benefits would need to be cut by nearly 25 percent.

To make the most of their benefits, many retirement planners recommend that retirees wait as long as possible to begin drawing Social Security income. The longer you wait, the higher the benefit. However, those in poor health or diagnosed with a terminal illness (only two to four years to live) may be better advised to begin taking benefits. However, there is a caveat to this strategy that should be considered. Delaying benefits not only ensures a higher payout for the primary beneficiary, but also for the surviving spouse. When the primary breadwinner takes Social Security before full retirement age, his monthly benefits are permanently reduced – that is, the amount his widow will be stuck with for the rest of her life. If you don’t actually need the income, it might be worth delaying benefits to increase the amount a dependent spouse receives upon your death.

Another little known fact about Social Security is that you can have a do-over. If you retire, start drawing benefits and then decide to go back to work, you can actually stop taking the payout and let it continue to accrue until you’re ready again. Of course, there are restrictions in place. First, you must be under age 70. Second, you have to alert SSA of this plan by submitting the appropriate form within 12 months of applying for benefits. And third, you must pay back all the money you’ve received to date. The good news is that you can reapply later and enjoy a higher benefit as if you were drawing it for the first time.

 

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Tip of the Month June 2019

Best Road Trips on a Budget

Best Road Trips on a Budget

Summer is here and it’s time for getting out of town. However, you don’t want to set off on the open road without a plan. While there are an endless number of places to visit across the United States, here are a few road trips that are filled with natural parks, mountains and beaches, all of which are notably affordable, if not free.

From New York City to Charleston, South Carolina

First stop, Cape May, NJ, where you can hit Cape May Beach for some sun, then walk/bird watch for free at The Meadows. Next stop, Ocean City, MD, where there’s a 3-mile-long boardwalk with lots of arcades and fast-food joints (read: kid-friendly and affordable).

After that, head toward the fabled Outer Banks of North Carolina. Lots of adorable towns and free public beaches pepper this area, but you can’t miss Cape Hatteras. Should you want a break from the sand, you can take in all the critters at the Pea Island National Wildlife Refuge, then climb to the top of the Cape Hatteras Lighthouse – both free. Last stop, iconic Charleston, where the eye-popping architecture is complimentary, as is visiting The Battery, biking the Palmetto Trail and swooning over the miraculous Angel Oak Tree.

From Chicago, IL, to Santa Monica, CA, via Route 66

Starting in Grant Park, the official beginning of Route 66, you can walk and hike across lots of gorgeous tree-filled greens, bike along Lake Michigan, snap pics by Buckingham Fountain and check out sculptures and installations, all gratis.

Head next to Carthage, MO, to the 66 Drive-In, where you can watch one movie and get the second one for free. After this, make your way to bucket list-worthy national parks, including Yosemite, Grand Canyon and Petrified Forest National Parks. While they do charge entrance fees, they’re minimal and the jaw-dropping nature is priceless. Last stop, beachy Santa Monica, where the waves, the pier, the mountains – everything is waiting to greet you.

From Houston, TX, to Portland, OR

First stop is Dallas, where you can see the JFK Memorial and the Calatrava Bridge, both without charge. Next stop, Amarillo, where a must-see is the Cadillac Ranch, rows of old Caddies nose-down in the ground. Free and a great photo op.

Head to Denver, where Rocky Mountain National Park is just a heartbeat away. Stop by Red Rocks Park in the city for awesome natural formations (no charge), followed by the Denver Museum, which is free every first Saturday of the month.

After this, head to Boise, ID, where you can hike/walk in the Boise River Green Belt, hoof it around the Idaho State Capital Building, then get yourself back into nature at the Camel’s Back Park. Last stop, Portland, where a few free things of note include visiting Mill Ends Park, the world’s smallest park. The Vacuum Museum, (yes, you read that right), where you’ll see vintage vacuums. And then, of course, what you came here for, the nature stuff: Forest Park, where you can check out the Witch’s Castle. The Urban Waterfall at Ira Keller Forecourt Fountain Park and of course, Columbia River Gorge, for crazy gorgeous waterfalls and all kinds of outdoor fun.

These three road trips are just a sliver of the many routes that offer freebies along the way. But remember: head for the great outdoors. More often than not, you’ll see some memorable sites that won’t cost an arm and a leg.

HSA Accounts and Their Incredible Long-term Benefits

Tax and Financial News May 2019

HSA Accounts and Their Incredible Long-term Benefits

Pretty much everyone has heard about 401(k) plans, but beyond these – Health Savings Accounts (HSAs) also can be great retirement vehicles. HSAs are tax-advantaged savings accounts for those with high-deductible health plans (HDHPs). The idea is that since those with HDHPs generally have lower premiums but higher out-of-pocket expenses, they need a way to save for such expenses.

Few eligible taxpayers take full advantage of HSAs. The Employee Benefit Research Institute estimated a few years ago that out of the approximately 17 million people eligible, only about 13.8 million opened HSA accounts, leaving almost 20 percent without one. The survey also revealed that very few people maximize their contributions – and nearly everyone takes current distributions, leaving balances far lower than they could be otherwise.

Why Does This Matter?

The HSA’s tax advantages make it a great way to save for retirement and in some ways it is even better than using a retirement account. For example, you can make tax-deductible contributions either via payroll deductions or on your own; the account grows tax-free on interest, dividends and capital gains; and withdrawals for qualified medical expenses are tax-free. In contrast to a 401(k) or IRA, HSAs do not require withdrawals at a certain age, allowing the account to remain untouched and growing tax-free for the rest of your life. Now let’s look at some considerations to fully take advantage of HSAs.

Max Your Contributions Before It’s Too Late

HSA contributions are only tax-deductible before a certain age; once you qualify for Medicare this tax advantage ends. Once you are eligible for Medicare you technically no longer must have an HDHP and therefore aren’t allowed to make deductible contributions anymore. Once you reach 55 years old, catch-up contributions of an additional $1,000 per year are allowed for each the taxpayer and spouse, if married.

Look at Your HSA as an Investment Tool

While HSAs weren’t intended to be investment accounts, treating it like one is the best way to benefit from the tax advantages. Get in the mindset of treating your HSA contributions as “untouchable,” and pay your medical expenses with money from outside the account.

Aside from maximizing what you put in and taking out as little as possible, you need to invest HSA funds wisely. Consider an investment strategy similar to what you use for other retirement assets, within the context of your entire portfolio.

Also remember that while your employer might make it easy to open your HSA account with a certain administrator or even set you up with a default provider, you ultimately have say over where to keep your HSA money. An HSA is more like an IRA than a 401(k)s in this respect, so look around for a plan that offers high-quality, low-cost investment options.

Maximize Your HSA Assets in Retirement

By waiting until retirement to use your HSA funds, you enable those assets to grow tax free with the potential to use the funds tax free as well. You’ll still will be able to use the funds tax free only for qualified medical expenses, but what qualifies as a medical expense is expansive.

For example, in addition to the typical items, tax-free HSA withdrawals can be used to pay for  portions of the premiums for certain long-term care insurance policies, in-home nursing care, retirement community fees that include certain types of care, and nursing home fees.

Another thing to note is that since there are no required minimum distributions, you’ll never need to worry about being forced to withdraw the money.

Conclusion

HSAs are largely overlooked as investment tools even though their unique tax advantages make them excellent choices. Obviously, you don’t want to hoard HSA funds at the expense of ignoring your health care, but if you have the means to fund your HSA and pay your medical expenses before retirement with other money, you can reap the benefits in years to come. Lastly, keep in mind that these strategies are all based on current federal tax law. While most states follow federal tax law regarding HSAs, not all do.

 

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General Business News May 2019

How to Budget for Estimated Tax Payments

According to a March 22 Internal Revenue Service News Release, 2018 federal tax filers might be able to have any penalties for an underpayment of estimated tax removed. This could be possible if they’ve paid at least 80 percent of their 2018 tax obligations through either quarterly estimated payments, income tax withholdings or a combination of both during the 2018 calendar year.

This new level was established after the 90 percent payment requirement was reduced to 85 percent of estimated tax obligations on Jan. 16. With paying estimated taxes a legal requirement for many taxpayers, let’s examine how this works for individuals and business entities.

Individuals and Organizations Responsible to Pay Estimated Taxes

For the most part, corporations are required to pay estimated taxes if they project owing taxes of at least $500 as part of their tax return filing.

When it comes to other entities, including sole proprietors, partners, shareholders of S-corps and individuals, estimated tax payments are required if there is an expected tax obligation of at least $1,000 with their yearly filing.

Obligations for Estimated Payments

As income is earned, so must taxes be paid through either estimated or withholding tax remittances to the IRS.

Estimated tax payments might be necessary for workers who have not had enough withholdings taken from a variety of earnings. It can come from salaries or pension payments, or from interest or dividend payments, alimony, capital gains or sweepstakes winnings. Self-employed individuals are required to pay estimated taxes to help cover any applicable alternative minimum tax obligations, along with self-employment taxes and income taxes.

If there’s not enough tax paid via withholding and/or estimated taxes, or if they are paid late, there could be a penalty assessed. This is regardless of if a refund is due the taxpayer when a tax return is filed.

When Estimated Tax Payments May Not Be Required

For those who receive compensation in the form of wages or a salary, employers can work with their employees to withhold the appropriate amount to lessen the chances of estimated tax obligations. Other scenarios that can provide an exemption of paying estimated taxes are when no taxes were due the previous year (or not legally required to file a return), and the applicant was a resident or American citizen for the entire year and the past tax year consisted of 12 months.

Making Estimated Tax Payments

Required four times every calendar year, estimated taxes can be paid weekly, bi-weekly or monthly. It doesn’t matter the frequency of payments, as long as the estimated taxes are remitted by the due date.

While there are different requirements for workers in certain industries, such as fishermen and farmers, for those filers who fail to pay what’s required of their taxes, be it estimated or withholding, the IRS can assess a penalty. However, if the taxpayer meets one of the following criteria – based on the lowest figure – they can expect to avoid a penalty:

  • Has a tax obligation of less than $1,000 (after factoring in credits and withholdings)
  • Has already satisfied 90 percent of tax obligations for the existing tax year
  • Has already paid the same amount in taxes owed the previous tax year

However, with the recent IRS news release, for 2018 at least, the 80 percent threshold has been established. Other ways filers might be able to get amnesty from this penalty include if the person becomes deceased; retires once they turn 62 years old; or develops a disability within the tax year when the estimated tax payments are due. The under-payment of estimated taxes must be “due to reasonable cause” and not purposely trying to avoid payment. 

Determining and paying estimated taxes is not a one-size-fits-all requirement by the IRS, but it’s a legal requirement for millions of Americans and those living and working in the United States.

 

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What’s New in Technology May 2019

What To Expect From 10G Data Speed

When it comes to smartphones, speed and connectivity is generally referenced by generation. For example, the industry is currently focused on creating 5G networks.

However, in the cable industry the G refers to gigabits. Over the past two years, this industry has expanded the availability of 1 gigabit broadband Internet from 4 percent to 80 percent of U.S. households. Now that the foundation for gigabit expansion exists, the cable industry is looking to increase speeds by tenfold and make it accessible to more homes and businesses globally.

The new focus is on 10G technology, which also is expected to reduce transfer latency, provide greater security and enhance the ability to host a wide range of immersive skills and applications – even those that haven’t been conceived yet. Internet service providers (ISP) are currently preparing the infrastructure necessary to enable a seamless and secure 10G online experience for computers.

A Bit Versus a Byte

What might not be clear to consumers is the difference between a gigabit and gigabyte, also known as a bit and a byte. A bit refers to the rate of transferring data: 1 gigabit transmits 1 billion bits per second. Even 1 gigabit represents extremely fast bandwidth that, for user purposes, means no log time when streaming video, downloading music or playing video and virtual reality games,

For example, 1 gigabit can download an entire two-hour HD movie in less than 60 seconds. It also offers the bandwidth to enable multiple downloads simultaneously and allow multiple users to surf and interact on the internet at the same time on various devices.

In contrast, a byte is the measurement for storage available on a computing device. The data itself is measured in bytes, and bytes are delivered in single bits at a time. For reference, 1 gigabyte of memory holds about 312 MP3 songs or 535 e-books.

Therefore, to maximize both storage and speed, it’s important to have a high capacity to store data (bytes) and impressive speed (bits) so that vast amounts of data can transmit quickly.

Small Business Benefits

While larger companies have dozens to hundreds of employees with a wide range of job responsibilities, many small businesses tend to be focused on a just a few. And those few can be significantly impacted by a lagging network. For this reason, deploying faster computer speed can make a big difference in the time it takes to search data, retrieve records, run point-of-sale systems and transmit financial transactions. Even the most basic mom and pop shops will benefit from this enhancement of speed and storage capacity.

For professional services firms, where time is indeed measured by money, 10G has the potential to revolutionize their business model by reducing expenses, enhancing the customer service experience and maximizing staff productivity.

10G, which has been described as the next great leap for broadband, is not an insular achievement. It is part of a larger cable broadband technology platform designed to process exponentially more data from more devices at 10 times the speed of what we expect today. Combined with enhanced reliability and security features, 10G is projected to launch a myriad of new immersive technologies and digital experiences that will revolutionize the way businesses are run.

Trump Tax Law Makes Now the Perfect Time for the Roth Conversion Retirement Trick

Tax and Financial News April 2019

Trump Tax Law Makes Now the Perfect Time for the Roth Conversion Retirement Trick

Roth Conversion

Converting a traditional IRA to a Roth IRA takes some fortitude and faith in the future numbers because this change can accelerate your tax bill. The current market and tax rate cuts from President Trump’s plan, however, are creating an environment ripe for conversions and making the move much more palatable. Together, these two factors are essentially creating new groups of taxpayers for whom a conversion makes good sense.

IRA Basics Revisited

Contributing to a traditional IRA gets you a tax deduction now, at the time of your contribution and allows your money to grow tax free. You’ll also need to begin withdrawing your annual required minimum distributions (RMDs) once you hit age 70½, with whatever you take out taxed as ordinary income. Roth IRAs operate differently, as your contribution is made with after tax income but in return your investments grow tax-free and you pay no tax when you finally withdraw the money.

Roth Conversion Mechanics

Under a conversion you choose to pay tax at the time of the conversion on the money in the traditional IRA and transform the account into a Roth, making all future gains and withdrawals free from taxation. The ability to convert was limited for many people, however, because back when Congress created Roth IRAs, there were income limits above which the conversion was not allowed. In 2010, the government removed the income restrictions on conversions and now anyone can make a conversion.

Running the Numbers

Understanding if making a conversion is worthwhile requires calculations that depend on assumptions of tax rates in the future and investment performance. Generally, if you believe your investments will be worth more and the tax rates will be higher when you withdraw the money, then a conversion makes sense.

Benefiting from the arbitrage on tax rates between now and the future often requires spacing out the conversion over multiple years. The idea is to convert just enough out of the traditional IRA to raise your income until it’s just below the next higher tax bracket. The recent tax cuts to individual rates make the conversion option a lot clearer as they both cut rates and expanded tax brackets.

Finding the Sweet Spot

Under the previous tax law, the sweet spot for many people was after retirement but while they were still under 70 and not yet taking RMDs. The widening of the 24 percent bracket means that the sweet spot for converting will extend to a greater number of taxpayers, both younger and older.

No Second Chances

The new law cut out the ability to “recharacterize” conversions. Recharacterization allowed taxpayers to unwind a Roth conversion any time before Oct. 15 the year after you convert. The idea is that if you convert $250,000 at the beginning of the year and then the market drops dramatically (like in 2008 when the S&P 500 fell almost 40 percent) you could unwind the conversion and do it again later when the balance is lower (and therefore your tax bill from the conversion as well). There are no more do-overs under the current tax law.

One strategy to mitigate this risk is to convert specific investments first if you are looking at a multi-year conversion strategy, focusing on those that are performing the worst. The idea is that they are more likely to go up in the future, like when you rebalance a portfolio to harvest your best performers and buy more of those that are down. Another strategy is to take a cost-averaging strategy to conversion.

Conclusion

In the end, the real payoff comes not from market timing, but from making the conversion and allowing the money to grow tax-free for decades, taking advantage of the power of compounding and then reaping the rewards tax free. If you have assets in a traditional IRA, now may be a good time to talk with a financial planner to see if a Roth conversion is the right move for you.

 

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General Business News April 2019

How to Determine a Business’ Health by its Net Profit Margin

Net Profit Margin

When it comes to figuring out a company’s net profit margin, this calculation gives a business and its financial officers a much better picture of the company’s profitability.

Defining Net Profit Margin

Net profit margin determines the percentage of revenue that ends up as profit after expenses are accounted for. Represented as a percentage, it’s calculated by taking the company’s net profit and dividing it by the entire revenue.

Looking at the Formula Itself

When it comes to calculating the net profit, it goes beyond the gross margin calculation, which only factors in the “cost of goods sold” – or how much the input materials and direct labor cost the company to produce saleable goods. Determining net profit includes factoring in the cost of goods sold figure, but also includes other expenses, such as payroll, lease payments, taxes, and others.

Once all cash flow, expenses and costs are factored in, whatever amount remains would be considered the net profit. The total revenue is self-explanatory as it’s simply 100 percent of a business’ sales in a defined time-frame. From there, the net profit is divided by the company’s total revenue, and then multiplied by 100 to get the percentage or net profit margin.      

Potential Explanations for Varied Net Profit Margins

Ideally, the higher the net profit margin is, the better the financial health of a company. However, a low profit margin for a period of time or over the long term doesn’t necessarily mean a business is poorly managed. There are many reasons why a low net profit margin may exist and persist.

Different Margins Depending on Each Industry

As Forbes and Sageworks points out, the higher the net profit margin is, the better it is for the company. However, there are some considerations when it comes to what’s expected for different industries. For example, looking at the data ending June 30, 2017, for the previous 12 months, the Medical and Diagnostic Laboratories industry saw an average net profit margin of 12.1 percent. Conversely, “Accounting, Tax Preparation, Bookkeeping, and Payroll Services” saw a net profit margin of 18.4 percent.

While these industries are on the high end, Forbes and Sageworks point out that other industries, such as the grocery industry, are still profitable, but do so by making their profits on lower margins, with a much higher volume. 

Financing Considerations

Another factor that can lower a company’s profit margin is how its financing is structured. If a company chooses to incur debt financing to buy fixtures or pay employees to run operations, interest expenses,  – especially initially – , could negatively impact a company’s net profit margin.  

Infrequent or One-Time Exceptions to Operations

If a business has recently sold a profitable (or unprofitable division) and that sale has made a material change in revenue, especially for a single quarter, it can provide an anomaly in a company’s net profit margin calculation. Similarly, if business fixtures don’t get purchase often or equipment is reduced, for example, net profit margin can be impacted noticeably.

Regardless of the industry, understanding business’ net profit margin is, another helpful tool in determining how and why a business is making or losing money. 

 

 

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Tip of the Month April 2019

3 Tax Woes and How to Survive Them

3 Tax Woes and How to Survive Them

The tax deadline is roughly two weeks away. But if you’re going to be late in filing, can’t pay all of what you owe or have the fear that you might be audited, don’t panic. We’ve got you covered with some smart ways to handle these three, potentially scary scenarios.

Late Filing

Of course, if you owe, make every effort to file as soon as possible to avoid penalties and interest. But the good news is, if you’re owed a refund, there’s no penalty for filing late. More good news: For those who qualify, Free File is still available on IRS.gov through Oct. 15 to prepare and file returns electronically. There’s more: If you have a history of paying on time and are missing this year’s deadline, there’s always Penalty Relief.This provision, called First Time Penalty Abatement, allows you to qualify if, a) You haven’t previously filed a return, or if you have had penalties in the past, you have no penalties for the three years prior to filing this year; b) You filed all currently required returns or filed an extension; c) You have paid, or arranged to pay any tax due. See? There’s hope.

Can’t Pay All of What You Owe?

Due to the Tax Cuts and Jobs Act, you might find that you owe because you didn’t change your withholding, as well as the fact that the law eliminated exemptions, increased child credits and limited popular deductions, to name a few of the changes. Not to worry. If you’re stuck and need help, you’ll be relieved to know that you can apply online for a Payment Plan. While you’re settling your debt, you can view your balance online and pay with IRS Direct Pay or by a debit or credit card.

If you need further assistance, consult a professional. If this is any consolation, the Government Accountability Office estimated in a report last summer that about 30 million workers had too little withheld from their paychecks. While this increased their take home pay, it also increased their tax liability. Again, consult a tax professional if you have questions, but remember: there is light at the end of the tunnel. You will get out of this.

If You Get Audited

The truth is, unless your income is super high, you have less than a one percent chance of being audited. That said, if this does happen, you’ll want to be prepared. But first, a little education. There are three kinds of audits, a) Correspondence Audit: The simplest kind and it’s usually the result of you making a mistake on your return; b) Office Audit: This one is more complicated. You’ll need to go into an IRS office with required paperwork, but the bigger thing to keep in mind is that this kind of audit could be a result of some high tax deduction like, say, a large medical expense; and c) Field Audit: This one is similar to an Office Audit; however, this time, the IRS comes to you and asks to see your records.

No matter the type of audit, don’t freak out. Simply take a deep breath, and gather all your documents: W-2s, 1099s, bank statements, proof of income, investment statements, along with bills, receipts and other proof of expenses. Next, schedule your audit or postpone it. Then, keep a cool head and strive to be compliant with IRS representatives because, after all, they are just doing their job. However, the very best option is to call a tax professional. He or she will know exactly what to do and walk you through this sometimes hairy process.

So there you have it. There are ways to survive the situations that you might have around filing your taxes. The motto to keep in mind? This, too, shall pass.

Winners and Losers of the Tax Bill

Tax and Financial News March 2019

Winners and Losers of the Tax Bill

Winners and Losers of the Tax Bill 2018

In 2018 when President Trump and the Republican Congress rewrote the tax code, everyone knew there would be winners and losers. Exactly how this will play out is just starting to be seen – it closes loopholes while opening others and takes away some perks while creating new ones. Let’s see who the winners and losers really are by looking at the results of the tax law now and over time.

Winners and Losers Will Change Over Time

Almost all taxpayers get some type of tax cut; for example, the Tax Policy Center estimates that only about five percent of families will face an increased tax obligation in 2019. This sounds great! Initially, measured as a percentage of their total tax bill, things start out evenly. According to the nonpartisan Joint Committee on Taxation, households earning between $200,000 to $1 million will see a nine percent decrease in their tax burden compared to only an eight percent reduction for families earning $75,000 to $100,000.

Unfortunately, not everyone gets to keep their tax cuts over time because while the average rates dropped in 2018, they will return to 2017 levels by 2026 for individuals. The changes to corporate tax code are permanent. As a result, most taxpayers will see a modest tax hike by 2027, mostly impacting middle-income families.

Big Benefits Don’t Come Easy

Many Americans will benefit from the increase in the standard deduction, but they will no longer receive personal exemptions for themselves and family members, and many will lose the ability to itemize deductions. Some higher-earning small business owners, however, will benefit from a new 20 percent tax break for pass-through income. Above certain income limits, some professions such as health care, accounting and law, among others, are not entitled to this tax break. Those who are will need to use a complicated formula to calculate their benefit. Corporations face the most complexity, especially if they operate internationally, and will face increased compliance costs.

So, the winners are individuals who always had simple returns and pass-through business owners who qualify for the 20 percent break. The losers are taxpayers with several children, those who used to itemize extensively, and people who live in states with high taxes (the maximum deduction for the total of mortgage interest, state and local taxes is $10,000).

Corporate Competitiveness Increases

The reduction in the top corporate tax rate from 35 percent to 21 percent brings the United States closer to other countries. According to the Tax Foundation, which ranks countries based on the competitiveness of their tax environments, this change moved the United States up four spots from 28th place to 24th place. For now, it appears most companies aren’t making major changes, but this could take more time to play out. Large corporations are unlikely to act until there is more certainty around how long the tax break will last. The United States will also have to hope that other countries don’t respond to even the playing field.

Who’s Footing the Bill

The tax bill was sold by many on the premise that the tax cuts would pay for themselves through economic growth generating enough revenue to offset the tax cuts. The Congressional Budget Office has a different view, estimating the tax changes will increase the federal debt by almost $2 trillion by 2027. Initial tax receipts suggest the CBO’s view is right, but it’s too early to tell.

Recognize that any time there are changes in the tax law, there will be winners and losers. These winners and losers change over time and often there are unintended consequences. For now, it’s clear who are the winners and losers in some respects, but in others it will take time.

 

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General Business News March 2019

How to Create Cash Flow Projections and Profit & Loss Statements

How to Create Cash Flow Projections and Profit & Loss Statement

When it comes to making cash flow projections, we’re all aware that it’s not an exact science. One of the main difficulties about accurately projecting cash flow has to do with timing. Examples include factoring in overhead such as payroll; lease or tax payments on the building; using credit to make purchases or for future investment to grow the business; and when payment is collected from clients.

Understanding Cash Flow Projection

One important reason that many business owners create a cash flow projection is to include it in their business plan when they approach an investor or bank for a loan. Detailing a company’s cash flow projection consists of three parts: positive, negative or break-even results going forward.

The first section details all incoming cash flow. Examples include sales revenue from products or services expected to be collected during the month noted. These often include assumptions when the majority of receivables are collected within 30 days. However, the projection may be more or less dependent on whether invoices go unpaid or collections efforts are more costly or last longer than anticipated.

The second part documents all cash outlays that will be paid during a month for business expenses. Examples include payroll and associated taxes, installment payments on loans, buying new equipment, lease or rent payments, etc. The third part of the cash flow projection for each month takes the incoming cash flow and subtracts the cash outlays from it.

Cash flow projection is a good way to determine if there will be enough collections on invoices, if expenses will be in line, and if the existing business strategy needs to be adjusted for more sales of products or services. This also can help business owners better determine strategy if they need a larger initial investment before opening or an injection of new capital post-launch.

Profit & Loss Statement

The first part consists of how much revenue the business made (from either products and/or services sold), minus any returns that must be repaid.

The second part of a Profit & Loss Statement looks at the cost of goods sold. It calculates how much it costs the company for any input or raw material expenses, labor for employees to manufacture the product or deliver the service, and whatever it took to run the factory or office. However, the costs associated with products not sold or delivered during the time frame are not included.

Along with the ability to include business overhead expenses for consideration, an important distinction with the Profit & Loss Statement is that some non-cash considerations are included –  such as depreciation or how much the business can deduct for the purchase of a fixture or vehicle.   

The final section specifies if a business made or lost money from selling any assets or it received interest income during the time frame.

Much like cash flow analysis is important to business operations, companies can use the Profit & Loss Statement to modify their business’ path. For example, a business owner may wish to evaluate whether or not he can increase profitability by choosing different material suppliers. Or, hedge for projected increases in raw materials to improve profit margins.

Depending on the stage of the company, these are two ways a business owner can better understand how to account for the operation in order to enhance his chances for profitable and long-term sustainability.

 

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Tip of the Month March 2019

8 Good Things to do with Your Tax Refund

8 Good Things to do with Your Tax Refund

Getting a tax refund is always a great feeling. But what should you do with it? While the first thing you might be tempted to do is spend it on a splurge for yourself, here are a few other things you might want to consider.

Start an Emergency Fund. If you don’t have one, this kind of account is critical. If you already have one, add to it. Online savings accounts that are interest bearing or money market accounts are your best bets. You can’t control the future, which is why being prepared is your best defense.

Pay Off Debt. Whether it’s a credit card, student loan or car loan, paying on – or eliminating – the account with the highest interest is best. Becoming debt free not only provides emotional relief, it’s also the key to financial freedom.

Start Saving for Specific Dreams. Do you want to travel? Buy a new car? Make a home improvement? You can either put your entire refund toward one of your life goals, or break it up into different buckets. This way, you’re not only being disciplined and mindful, you’ll also avoid taking on future debt. Most importantly, you’re taking intentional steps toward making your dreams come true.

Refinance Your Mortgage. When you do this, you still have to pay closing costs and fees, but your refund can contribute to or cover this entirely. Plus, you can potentially save a lot of money each year on mortgage interest. You’ll thank your future self for this move.

Start a College Fund. With costs skyrocketing, this might be one of the best gifts you can give your kids or grandkids. Set up a 529 plan, a tax-advantaged investment vehicle designed to encourage savings for a designated beneficiary’s higher education expenses. The best thing about this is that you might be eligible to deduct it from your state income taxes. Thinking ahead pays off in the long run.

Kick Your Career Up a Notch. If it seems like your colleagues are getting promotions and raises because they know a certain skill, then use your refund to enroll in a class and catch up. One of the cool things about this is that you can take advantage of a Lifetime Learning credit and claim it on your taxes. Remember, you’re worth it.

Donate to a Charity. What are you passionate about? Giving to a cause you believe in not only helps others, you can also use it as a deduction on your taxes. Doing good for those in need always feels good.

Put it Toward Your Retirement. Though you might be years away from retirement, it will be here before you know it. Use your refund money to purchase or add to a Roth or traditional IRA. That irresistible thing you might be tempted to blow your money on today will be long forgotten by the time you retire.

Truth is, what you do with your tax refund is up to you. However, putting it toward something that has a long-term pay out or a significant goal can be a very smart thing to do.

When Is A Loan Not A Loan?

Tax and Financial News February 2019

When Is A Loan Not A Loan?

When Is A Loan Not A Loan

With the sweeping new tax legislation in 2018 capturing everyone’s attention, other changes have taken a back seat. There were several Tax Court cases in 2018 that rendered important decisions impacting how things work – one of which was Povolny Group, Inc. v. Commissioner, T.C. Memo 2018-37.

The Povolny Group decision centers on a common issue where an individual uses his corporation like a personal pocketbook, transferring money in and out without any formality.

Facts of the Case

James Povolny joined his spouses’ company (LLC) as a minority owner. Later in 2002, he went out and started his own real-estate brokerage firm, the Povolny Group (PG), as a 100 percent owner.

At one point, PG won the bid to build a hospital for the Algerian Ministry of Health. To perform the job, Povolny formed another company as the sole owner: Archetone International (AI). To secure the contract, the government mandated guaranties and collateral. To meet this obligation, Povolny had AI, PG and LLC borrow money from lenders.

Unfortunately, the Algerian government quit paying Povolny and terminated the project. In the end, Povolny had a lot of debt and AI couldn’t pay it so he used LLC to pay $241k of AI’s debt, with LLC claiming a deduction for bad debt for tax purposes.

Later, Povolny used PG to pay $70k of the debt for both LLC and AI, with PG deducting these amounts as cost of goods sold. Eventually, when he was audited, Povolny changed his position claiming the amounts were really loans from PG to the other two companies.

IRS Position 

The IRS denied LLC’s $241k deduction for bad debt, claiming that the amounts were capital contributions and not loans and therefore could not be deducted as bad debt. The IRS also denied PG’s $70k deduction again on the premise that it was not a loan, but a capital contribution.

Relevant Law for Business Owners

If an individual owns 100 percent of a company or group of companies, they often treat business transactions informally because they view it as all their own money – taking cash in and out of the business without any formal process. This is something that could never happen if the business had multiple owners.

Example and Why It Matters

This often results in midstream changes in how the owner treats the transactions for accounting purposes. One example is where a business owner takes cash out and later discovers that these distributions exceeded their stock basis. This should result in a capital gain, but due to the informality of the transactions the shareholder changes how they treat the cash withdrawal from a distribution to a loan.

Another example of what frequently happens is there is a shareholder who puts money in a corporation, either themselves or through another entity they own, without any formal designation and then later accounts for it as a loan instead of a capital contribution.

What Really Matters

The rules are that you can only claim a bad debt deduction if there’s been a loan. Problems stem from the informality of the treatment between the individual and the entities they control; the IRS wants these types of dealings to be treated like arms-length transactions to validate the treatment and classification as either debt or equity.

Generally, there are 11 factors the IRS considers – all of which focus on how the transaction is structured and documents to see if it acts more like a real loan from a third-party lender or more like a capital contribution from the owner.

Conclusion

In the end, the court sided with the IRS and disallowed all of the deductions. The lesson here is that if you or a company you own advance money to another company and you want it to be considered a loan, then you need to treat it as a loan. Make sure you use a formal note with a stated maturity date, post collateral, pay interest, and record it as a loan on the tax return. If you want to write off debt as bad debt, you need to prove that you’ve done everything possible to collect and that repayment isn’t possible.

At the end of the day, the IRS doesn’t care if you own it all. But they do expect you to treat each entity you own as a separate entity rather than extensions of each other, making sure that everything is documented and treated with the appropriate formalities.

 

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General Business News February 2019

How Businesses Can Effectively Manage Seasonal Sales

How Businesses Can Effectively Manage Seasonal Sales

When it comes to businesses dealing with seasonal sales, making payroll and other financial obligations can be stressful on budgets. However, one way to deal with fluctuating sales and cash flow problems is to see if invoice factoring is appropriate to meet year-round needs.

Invoice Factoring

One way for businesses dependent on seasonal sales is to have better financial predictability and available resources, as the Journal of Accountancy explains. Businesses can accomplish this by selling their accounts receivables through factoring.

Companies looking to increase cash flow during the slow sales season can benefit by selling their accounts receivable to a third-party business called a factor. When a company sells its invoices through the factoring process, it can collect much faster on that invoice from recent customer purchases compared to Net 30, Net 60 or Net 90 when an invoice is submitted. 

How the Process Works

During the course of this arrangement between a company and the factor, there are three main phases. The company receives an advance, or a portion of the invoice’s outstanding balance from the factor. The difference between the portion the factor pays the company initially and the remaining portion of the invoice is called the reserve. This remaining amount is held by the factor until the invoice is completely paid off by the company’s customer –more commonly referred to as the debtor.

Depending on the factor, there could be an initial invoice fee, along with an “interest charge fee,” which is determined by how much is advanced from the factor’s purchased invoices multiplied by the factor’s interest rate and how long it takes the debtor to pay the invoice.

Accounting for Recourse and Non-Recourse Factoring

Depending on how invoices are arranged to be sold to a factor, accounting must be noted accordingly. If receivables are sold to a factor with no recourse, it should be classified as a sale on the balance sheet.

The Journal of Accountancy discusses how Generally Accepted Accounting Principles (GAAP) applies to factoring contracts with recourse. A company looking to sell its accounts receivables sells them to the factor with no stipulations attached. If an invoice transferred to the factor can’t be paid for within 90 days by the customer, the borrowing company assumes all risk for the factored invoice.

Factoring for Companies and Accounting Considerations

According to the FASB Account Standards Certification (ASC) Section 860-10-40, if receivables are sold to a factor with recourse, there are guidelines that determine if it’s a sale or a secure borrowing. If the three following tests, referring to the example sale above and according to the above referenced ASC Section are satisfied, it can be accounted for as a sale.

First, if the invoices are put “beyond the reach of the transferor and its creditors” including in times of bankruptcy or if a company’s assets and/or its operations are put in a legally appointed receiver, it has met the “isolation condition.”

Second, the factor has the right to exchange the asset. Third, the company relinquishes control over the transferred invoices by not having an agreement the permits the company to rebuy or reclaim the accounts receivables prior to the date of maturity. The other prohibited method of control for the transferor is to have a one-sided ability to demand the transferee give back certain assets, except through a cleanup call – which is when the factoring company can make the initial company buy back the invoices before the factoring term has expired.

 

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Tip of the Month February 2019

5 Tips for First-Time Tax Filers

5 Tips for First-Time Tax Filers

Filing taxes for the first time can be overwhelming. But if you have the right tools and advice before you start, it won’t be. Here are a few critical things to know before you begin, which will make the seemingly daunting process much easier.

Start Prepping Early

Even though the deadline to file a tax return is April 15, you’ll want to start as soon as you can. You’ll need time to gather all of your important documents like a W-2 from each employer and, if you’re a contractor, your 1099 forms. If you have a full-time job and worked freelance on the side, you’ll need both. The good news is that the forms show how much you made in the past year and how much tax was withheld. According to Kathy Pickering, executive director of The Tax Institute at H&R Block, you should gather any additional forms that show big expenditures, such as paying for education or charitable giving. Finally, proofread your form. Karen M. Reed, director of communications for Citrus Heights, California-based TaxResources Inc., said that a mistake in just one digit can lead to disastrous results.

Learn Key Terms

If you have a basic understanding of key terms, the entire process will be much more manageable, according to CPA Tim Wolfe. Wolfe recommends that you understand the meaning of things like effective tax rates, the average rate at which someone is taxed, and tax-deferred, which refers to investments on which applicable taxes – typically income taxes and capital gains taxes – are paid at a future date instead of during the period in which they are incurred. Other important terms to know are the difference between tax deduction and tax credit – a deduction lowers taxable income, while a credit reduces the amount of taxes you owe.

Consider Educational Expenses

If you’re a student and paying for your education, you just might be in luck. Deductions for your education are key. Arthur Agulnek, an accounting professor at the University of Texas at Dallas, said that new taxpayers should make sure they don’t leave money on the table by looking into the education tax credit and earned income tax credit. In fact, Agulnek said that education deductions can save a student as much as $4,000.

Get Familiar with New Tax Laws

You don’t have to be an expert the first time around, but there have been a few changes you’ll want to be aware of. First, there are new tax brackets. Second, the standard deduction has increased to $12,000 for single filers, up from $6,500 for the 2017 tax year. Third, the personal exemption of $4,050 has been eliminated this year. With all the changes to tax laws, you’ll want to keep up-to-date about the latest information.

Ask the Tax Professionals

If you have a question on your return, don’t guess. Ask a tax professional. If you’re a student, consult your advisor or parents. Remember, there is no such thing as a dumb question. It’s only dumb if you don’t ask it!

Taxes are an inevitable part of living in the United States and something you will learn to harness. The good news is that the process and terminology will get easier each year you file your return. Having informative resources at your fingertips are all you need to be a success.

Divorce Can Be Taxing

Tax and Financial News January 2019

Divorce Can Be Taxing

Divorce is expensive, Divorce taxes

Divorce is expensive. Aside from the emotional toll divorce takes on a family, both the process and aftermath of a divorce can be costly. Below we look at some of the steps people can take to help remove the tax sting out of an already challenging time and arrive at the best financial position.

Changes to Alimony

We ring in the new year with changes to alimony tax law. Prior to Jan. 1, 2019, alimony payments were deductible by the spouse who paid them and taxable to the spouse receiving them. Typically, this provided an overall benefit to the family unit as the alimony recipient, generally being the lower earner, paid a lower tax rate. Often referred to as the “divorce subsidy,” this situation was costly to the government. From 2019 and forward, alimony is no longer deductible by the payer or taxable to the recipient.

This might appear to be a win for the receiving spouse; but consider that the change will most likely mean less alimony for the receiving spouse. It could also cause non-working divorced spouses to lose their eligibility to make IRA/Roth IRA contributions since they won’t have a source of taxable income.

One note on timing: if you finalized your divorce in 2018, the alimony will still be treated under the old rules for tax purposes – and even if you modify your divorce agreement in the future, the alimony will retain this tax treatment.

Pre- and Post-Nuptial Agreements Could be in Trouble

If you have a pre-nuptial or post-nuptial agreement, it is advisable to have the agreement reviewed. Aside from the impact of the new tax provision on alimony, relevant changes since it was written and more recent court rulings could impact how well an agreement holds up in court. Additionally, knowing where you stand if your divorce gets confrontational will give you the knowledge to negotiate your best financial case via a settlement or in court.

Decide What Really Matters to You

It’s unlikely you’ve stopped and taken the time to parse out what you really want in the next chapter of your life after divorce. Going through your divorce with great clarity on this topic will help you focus your financial negotiations to arrive at the best outcome for you in less time and, as a result, lower professional fees.

Calculate Whether You Should or Not

Settling seems enticing instead of fighting it out, but it’s best to work with both your divorce attorney and CPA or other financial professional to understand the long-term implications of any settlement. On the other hand, if there is little at stake, a long drawn out divorce process might prove to be more expensive than it’s worth. Working with the right professionals will help provide an objective view of the financial situation and assist you in understanding if you’ll need to change your spending habits, work longer or take other actions.

 

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Financial Planning January 2019

What Leading Economic Indicators Tell Us

What Leading Economic Indicators Tell Us

One of the reasons investing is tricky is because it involves so many factors that we cannot control. One factor is the specific investment itself. In the case of a stock, the share price relies on company management and leadership; manufacturing, marketing and distribution; and balancing expenses with revenues. Another factor is investor and market sentiment, which can change on a dime based on economic uncertainty, the day’s news or a presidential tweet.

Then there’s a third component, which encompasses broader economic events and how they impact investment market fundamentals and the business life cycle. One way we monitor the economy and try to predict market cycles is through economic indicators. These are trackable data points that economists use to get an idea of the direction of specific aspects of the economy.

The following is an overview of regular economic indicators considered reflective of the current economy and indicative of future activity.

Gross Domestic Product (GDP)

GDP measures the total monetary value of all finished goods and services produced in the United States over a specified time period. Economists believe it is the most accurate measure of a country’s overall health.

Price Indexes

There are several types of price indexes, which are basically a way of tracking prices – and thus cost increases and decreases – in order to measure inflation. The most popular measure is the Consumer Price Index (CPI). It is published monthly and tracks the prices of a “basket” of many of the most common goods and services that urban consumers buy, including food, transportation, clothing and medical care.

The Producer Price Index is used to help monitor data from a commercial (wholesale) perspective. It tracks product price changes from a cross-section of sectors in the U.S. economy and is published on a monthly basis.

Jobless Claims Report

The jobless report tracks the number of workers who file for unemployment benefits, which tend to increase when the economy slows. The report does not track self-employment, contract or part-time employees (none of who qualify for unemployment benefits). It is published weekly but typically evaluated as a four-week moving average to account for short-term variances.

Housing Starts

The New Residential Housing Construction Report tracks the number of new building permits issued, which indicates increases or decreases in new construction activity. For reference, new construction usually picks up during the early expansion phase of the business cycle. This housing report generally refers to supply, while the Existing Home Sales Report, compiled by the National Association of Realtors, reflects the current demand for home sales. When viewed together, they offer a balanced assessment of the housing sector.

Consumer Confidence

Because consumer perspective can influence market fundamentals, economists track what is called a Consumer Confidence Index (CCI) that measures the general outlook of the American population. The CCI monitors a sample of 5,000 U.S. households with regard to consumer spending, which represents 70 percent of the economy. A rise in consumer confidence is typically viewed as a positive indicator for strong economic growth.

Purchasing Managers

The Purchasing Managers’ Index (PMI) gauges the confidence level of businesses, based on their spending patterns with regard to new orders, inventory levels, production, supplier deliveries and employment. The PMI is comprised of a sample of 300 purchasing executives in the manufacturing sector. For reference, an increase in new orders typically indicates a rise in prices, while a decrease points to a drop in prices. This indicator is generally used to anticipate GDP growth.

There are dozens of key economic indicators that signal changes in the direction of the economy. These regular reports help investors, market analysts and wealth managers make day-to-day buy and sell investment decisions.

 

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General Business News January 2019

Tips for Choosing the Appropriate Liability Insurance for Your Business

Which Liability Insurance for Your Business

When it comes to liability insurance, the saying “you can never be too prepared” is quite meaningful. While business owners cannot predict what happens day to day or year to year, they can look into having business liability as way to give themselves peace of mind. The first step is to understand why it’s so important.

The Rocky Mountain Insurance Information Association reports that more than one in two home-based business owners lack necessary insurance. Furthermore, the Independent Insurance Agents of America (IIAA) found that 4 of 10 respondents do not have enough coverage because they believe their homeowners policy covers commercial liability. As you can see, education on this matter is essential. Here are descriptions of several different types of liability insurance from the U.S. Small Business Administration.

General Liability

One of the most common types of liability insurance for businesses is general liability. If the business is a grocery store or restaurant, general liability usually covers customers looking to have their doctor and hospital bills, damaged property or lost wages paid for because they claim they were somehow affected in the course of business operations. General liability also can protect businesses against claims if a third party believes their reputation has been tarnished by written or spoken materials from the company.  

Product Liability Insurance

Whether a business makes a product, is a wholesaler, a distributor or sells the product directly to customers, product liability insurance protects a business against monetary losses if said product is defective and harms the user. Examples of a defective product is if there’s a chain cracked on a swing or there’s an over-the-counter medication with a harmful ingredient and the defective product is determined to have caused the harm.

Professional Liability Insurance

This type of insurance, also known as errors and omissions, protects business owners who provide professional advice or services if they make a mistake or unintended omission in the course of delivery of said services. Examples of this can include a radiologist or one of their subordinates failing to deliver and communicate results of initial and final reports, especially if a medical condition diagnosis has been changed to indicate a more serious problem, and that failure to fully communicate all information leads to preventable medical problems for the patient.

Other examples can include engineers miscalculating combinations of traffic loads on a bridge. If engineers miscalculate the maximum load levels and use incorrect materials and anchors, it could lead to construction delays and/or additional costs to use different materials if a stronger bridge is necessary.

Commercial Property Insurance

When it comes to protecting one’s company against damages to their business’ assets, this type of insurance can reduce the potential financial impact. Policies can and do cover the business owners’ structure from events such as fires, hail and wind events, along with property damage due to criminal activity. This type of insurance may cover business assets as well, such as computers, furniture and inventory.

Home-Based Business Insurance

For business owners who run operations from their home, this type of policy can become part of a homeowner’s existing policy. This type of coverage can protect home-based business owners by covering limited amounts of equipment, such as computers, phones and cameras. It also may provide liability coverage for the homeowner if, for example, a client visits and is injured by slipping on steps or tripping over a box.

No matter what insurance policy a business needs, the best way to protect against loss is to reduce risk in the first place. Along with training employees to follow workplace safety procedures and reducing hazards for customers and workers to reducing the likelihood of accidents, finding the right mix of liability insurance lets business owners focus on growing their business.