Year End Tax Tips for Tiny Business Owners

 

Taxes for small business owners

Planning ahead on your taxes could save you money!

 

Updated for 2016!

 

Tiny business owners, you know who you are: you’re a single member LLC or sole proprietor, or maybe you’re in business with your spouse. You might even have an employee or two, but that’s about it. When Congress passes laws to help “small business” they don’t mean us. This post is for you. If you have a Sub-chapter S corporation, I’ve got some different tips here:  Tax Tips for Sub-chapter S Corporations

 

Number 1: If you’re going to be in the red for this year, you don’t really need to worry about reducing your business tax, right? Your negative business income will help offset your other income (if you’re lucky enough to have some). You can devote your energy to being profitable next year.

 

Number 2: If your business is in the black, congratulations! You’re going to want to look at cash flow and make sure you’re got enough cash to pay your upcoming expenses (like payroll and payroll tax if you’ve got it), but let’s look at some ways to reduce your excess income before the year is out.

 

Hire your kids: If you’ve got kids under the age of 18, you can hire then without having to pay FICA.  It used to be if you had an LLC, you paid FICA for your kids but that changed in 2011 so even if you have an LLC, you don’t pay FICA on your children’s wages.     There are rules that have to be followed, but if you could use a little help at work this time of year you’d at least be keeping the money in the family. For more information check this: Hire Your Kids

 

Pre-pay business expenses: Most tiny business owners use something called “cash basis accounting”, basically, you’re taxed on what comes in versus what goes out. If you are cash heavy, you can pre-pay some of your business expenses for up to twelve months. For example: I lease my office space, I’ve got a one year contract so I know that I’m going to have that monthly expense for the rest of the year. If I were cash heavy (in my dreams) I could prepay my rent for the next year and write it off on this year’s taxes. But you see how you can play with that? While I won’t be paying a full year of rent in advance, I did pay a few January bills early.

 

Delay invoices: Remember, this only works if you’re cash flush. Let’s say you did a job and a client owes you $1000 and you normally would send out the bill with a due date of December 30th. Change to due date to January 15th—you’re pushing that income ahead to next year. Besides, your client might just appreciate the break at Christmastime. I set up a billing schedule for a client that didn’t start until January and I used “I thought you could use a little Christmas break.” She was thrilled and I delayed the income—talk about a perfect win/win situation.

 

Credit card purchases:     According to IRS rules, if you buy something with a credit card, you’ve bought it now. So, let’s say you’re a little cash poor right now but you’ll have the revenues next month to cover your expenses. Pay expenses with your credit card and it will count as having been paid when charged.  I always like to be cautious about credit card spending–hate those bills, but it’s a good solution for some businesses.

 

This one I don’t like to say, but buy equipment: If you need it. I almost hate to list this as advice because it’s the standard that everybody says every year. One of my clients fired his old accountant for saying it. Like he said, “I know what I do need and don’t need to run my business and I don’t need any more equipment. What other ideas you got?”  Here’s my advice, “Don’t buy crap you don’t need.” If you do need equipment, and you’re profit heavy, it’s better to buy in December than in January. But buy what makes sense for the business.

 

Get your retirement plan in place: If you’re just investing in an IRA, you don’t need to worry about that yet, you’ve got until April to do that. If you’ve been wanting to set up a SEP or a 401(k), you need to get that done by December 31st. Contact your financial advisor about setting up your business retirement plan.

 

Last, because this isn’t really business: charitable contributions. If you’re a sole proprietor, your charitable contributions do not count as business expenses. So if you give money to the Salvation Army, that’s a personal deduction, not a business deduction. Every year, I see a lot of people trying to claim their charitable contributions as business expenses and it won’t fly with the IRS. Even if you pay a charity from your business bank account, it’s not allowed as a business expense. Charitable contributions won’t help reduce your self-employment taxes. Please give to charities and give generously, but know that it’s a personal deduction, not a business one.

Five Tax Issues for these Crazy Financial Times

Wall Street

Photo by Sjoerd van Oosten on Flickr.com

Wow! The market’s up, the market’s down. It’s crazy! Now I don’t give advice about stocks—it’s actually against the law for me to give advice about stocks—but I do give advice about taxes. Here are some things you need to know about your taxes during all this market craziness.

1. On your tax return, you only acknowledge a gain or a loss if you actually sell the stock. Let’s say you own 100 shares of Billy Beer stock that you bought at $100 per share, that’s $10,000 worth of stock. If the price of the Billy Beer drops to $90 a share, then you have $9000 worth of stock right? So technically you’ve lost $1,000. But, the loss only counts if you actually sell the stock for the $90 a share. If you keep the stock, nothing about Billy Beer goes on your tax return.

2. Stocks that are held within a 401(k) plan or an IRA can be sold at a gain or a loss and it never gets reported on your tax return. The whole point of your retirement plans is that you can have tax free gains. Most of the time, your money is growing inside these vehicles and you’re not getting taxed on it. When you do have a loss inside your 401(k), you don’t get to claim a deduction for it.

3. The maximum loss from a sale of stock that you can use to offset your ordinary income (like wages) is $3,000. Let’s say you sold off some stock and had a loss of $10,000. Sales of stock are considered to be passive income or passive losses. (To be blunt—it’s called passive income because it’s possible to sit on your butt and make money.) The maximum amount of passive income loss you can have on your tax return for any given year is $3,000. Any extra loss you have can carry forward to the next year. You can use the passive loss from the sale of your stock to offset other types of passive income also, such as income from a partnership or rental real estate. The important thing to know though is that if you have a loss of $100,000 in the stock market, you’re not going to get to write it all off at once.

4. Just because the market has taken a nosedive, it doesn’t mean that you really have a loss on your stock. Remember, your gain or loss is based upon what you bought the stock for and what you sold it for. This is especially important for senior citizens to remember. Back in 2008, we had some serious stock market drops. When tax time came around, I had several clients tell me how much money they lost in the market, but when I did the paperwork they really had large gains because they had held the stocks for so long. They were very surprised to be paying so much money in capital gains tax.

5. You must report the sale of stock on a Schedule D form. One of the most common IRS letters is to people who sold stock and forgot to report in on a Schedule D form on their tax return. Stock sales are reported to the IRS. Using the Billy Beer example, let’s say you bought it for $100,000 back in 2007 and sold it for $90,000 this year but you forgot to report it on your tax return. You’ll get a letter from the IRS saying that you owe them $22,500 (if you’re in the 25% tax bracket) in income tax plus penalties and interest. (And the penalties will be huge because you “forgot” $90,000 in income!) The reality is that you should show a loss on your Schedule D and you’re probably due a refund ($750 if you’re in the 25% tax bracket.) Always remember to report your stock sales on your tax return.

Why You Don’t Want to File Your Taxes on April 15th (Or the 14th for that matter)

taxation with representation

Photograph by Dayna Bateman

Does this sound like you?  You’re pretty sure that you owe taxes this year so you’ve had no motivation to get them done.  You know you have until April 15th so all through February and March you’re not even thinking about it.  April 1st rolls around and now it’s like, “Oh yeah, I’ve got to get that done.”  But life gets in the way and the next thing you know, it’s April 14th and you’re starting to panic.  You go online to do your return and realize that you’ve got some funky tax issue that you can’t handle by yourself so you need professional help.  You head down to the big box tax store and wait in line with 20 other folks who are in the same boat as you.

Don’t do that!

Don’t do your taxes on April 14th.  (Okay, for 2011 the tax deadline is April 18th, but everybody knows the 15th is tax day even if the IRS likes to mess with us about that.)  But that’s just another good reason not to file your taxes on the 14th because you have until the 18th this year.

But it’s more than that.  More mistakes get made on tax returns on April 14th than any other day of the year.  This isn’t a statistical fact, it’s just my observation.  I do audit work helping people who have tax trouble.  I notice that tax returns done on April 14th have more mistakes.  Not necessarily big mistakes, but missed deductions and credits.     

If you’re going into the big box tax store on April 14, those preparers are busting their behinds trying to make sure that everybody gets taken care of.  They’re probably exhausted from the long hours already.  If you go in at night, most of those folks have already put in eight hours at their day job already.  If there’s a line of people in the chairs, the office manager is probably cracking the whip, “Let’s keep it moving people!”  This is not the day that they’re going to ask you all of the questions they need to ask to give you the best service possible.  They have the built in questions in their software that they’re required to ask you, but don’t expect anything above and beyond the minimum if you go in during rush time.

If you go into a big box store on April 14th (or 15th or one of those late days) and there’s a big line and it looks crazy, the best thing for you to do is just file an extension.  If you think you owe, make a best guess as to how much you owe and pay it (keeps you from paying late payment penalties.)  An extension is an extension of time to file, it does not give you an extension of time to pay.  The penalty for filing late is much higher than the penalty for paying late though so even if you don’t pay, you’re still better off filing the extension than filing your return late.

If you’re at the big box store, they’re going to pressure you to file your return now instead of doing the extension.  Here’s why:  they get paid a commission for the tax returns they prepare during the tax season.  Most of them get laid off after the last filing date.  The few preparers who work during the summer get paid an hourly wage for the off season work and it’s not anywhere near the rate they get for their seasonal work.  Filing your extension doesn’t pay them much if anything so that’s why they don’t want to do it.

Now if you go someplace and it’s not a mad house and you find someone there that makes you feel confident, by all means go ahead and file.   Do it and be done with it.  Sometimes, while the 14th may be a madhouse, the 15th will be quite calm and a good time to file.  Use your good judgment.   Don’t file a tax return while feeling panic.  Fixing a bad return costs more than doing it right the first time.

Qualified Charitable Distribution: Last Minute Tax Tips for Seniors

 

Qualified Charitable Distributions help save on taxes

If you are over 70 and 1/2, you may be able to take advantage of a Qualified Charitable Distribution.

 

UPDATED FOR 2016

 

The Qualified Charitable Distribution (also known as a Charitable IRA Rollover) is now a permanent part of the tax code!

 

What is a Qualified Charitable Distribution (or QCD)?  If you’re 70 and 1/2 or   older, you’re required to make required minimum distributions (RMD) from your Individual Retirement Account (IRA.)  Even if you don’t need the money, you have to take it out of your retirement account and you have to pay tax on it.  If you don’t, the penalties are even worse than any tax you’d have to pay. Additionally, many seniors don’t get the benefit of claiming their charitable donations on their income tax returns because they don’t have enough other things to deduct like mortgage interest.

 

The Qualified Charitable Distribution helps with this problem by allowing you to take money out of your IRA and make a direct contribution to a charity.  The distribution counts towards your RMD and it’s tax free to you because it went to the charity.  That’s a win/win situation!

 

Another advantage to the QCD is that the income from the distribution never shows up as income on the face of your tax return.  This is really helpful for people who may be able to claim other deductions or benefits based on having a lover Adjusted Gross Income (or AGI.)  For example:  if you had enough medical expenses to be deductible, a lower AGI would allow you to claim a bigger deduction.

 

Can you make a contribution of more than your RMD?  Yes you can.  You can actually make a charitable distribution of up to $100,000 from your IRA with no federal income tax impact.  $100,000 – that wasn’t a typo.  If you’re in a financial position to make a donation like this, that would be $100,000 to a charity of your choice with no limitations as to its deductibility because it’s part of an IRA charitable rollover.

 

Can you make a QCD if you’re less than 70 and 1/2 years old?  No, I’m afraid not.  You must be at least 70 and 1/2 at the time you make the distribution.

 

If you’re interested in making a Qualified Charitable Distribution, talk it over with your financial advisor and your charity.  You’ll want to make sure that it’s done correctly and you’ll want to keep good records in case there’s ever any question about your RMDs.

 

Can I still take a charitable deduction on my tax return for my QCD?   No, the QCD will be exempt from tax so you can’t claim it as an additional deduction.

 

Another Missouri Tax Credit: The Center for Head Injury Services

Updated May 21, 2016

 

Missouri Tax Credit for Center for Head Injury Services

 

 

I realize that I plug the Missouri Tax credits quite a bit, but when you’re choosing a charity, they really give you the best bang for your buck. You don’t just get a federal income tax deduction, you also get a 50% tax credit to offset your Missouri state income tax liability. The other thing that I really like about the Missouri Tax Credits is that the money you donate to these charities is staying right here in Missouri, helping our friends and neighbors. It’s a win/win/win situation.

Today I’m going to talk about the Center for Head Injury Services. The Center serves over 800 people each year who have head injuries or other cognitive disabilities. Their programs include employment assessment, job placement and day services.

The Missouri tax credits available fall under the categories of Neighborhood Assistance Program (NAP) tax credits and Youth Opportunity Tax Credits (YOP).   It’s available to businesses or individuals who contribute $500 or more to the organization.

Charities that qualify for Missouri Tax Credits have already been pre-screened by the state and meet pretty strict requirements about how they spend your money.   The idea behind these grants is that a well run non-profit organization can provide these valuable services better than the state can.

So why is the Center for Head Injury Services so important?  Many reasons.  Did you realize that over 2 million people suffer from brain injuries every year?  And what most people don’t realize is that brain injuries can cause permanent limitations and chronic health conditions that require long term support.  Brain injuries aren’t like a disease that can be cured.  The Center for Head Injury Services is a comprehensive resource to all types of head injury victims and their families.

They provide adult day care and therapy for persons with severe injuries and vocational and employment services to persons with less severe injuries.  They also provide counseling to families having trouble adjusting to disability issues.  They serve people with all types of head injuries whether its from a car accident, a stroke or an aneurysm.   Bottom line:  they do good work.

Even if you’re unable to qualify for a Missouri Tax credit, a donation to the Center for Head Injury would be money well spent.

One final thing, the Center for Head Injury Services has an equipment loan program.  If you have equipment that you are no longer using, they could use crutches, walkers, canes, wheel chairs, bath & shower chairs and benches, commodes, and other types of rehabilitative equipment.  Donating these items doesn’t qualify for the Missouri Tax Credit, but it would certainly be a good use of these items. You also might be able to qualify for a deduction on your federal return for “non-cash” contributions.

To learn more about the Center for Head Injury Services, click here:  https://www.headinjuryctr-stl.org/

 

Last Minute Tax Tip: MO Tax Credit–Almost Home

Missouri Tax Credit for Almost Home

Photo from the Almost Home website

Here’s another charity that you might want to take a look at, it’s called Almost Home. Almost home serves teen mothers and their children with up to two years of housing, counseling, education and other support services. Since they opened back in 1993, Almost Home has served over 1,500 mothers and their children.

Almost Home currently has Missouri tax credits available to individuals and corporations for donations of between $100 and $100,000. Many of the tax credit programs don’t even start until you make a donation of $1,000 or more, so this is a good program for persons with a smaller charitable donation budget. As usual with Missouri tax credit programs, the credits are good for a 50% credit against your Missouri state income tax liability. This tax credit is in addition to the usual deductions that you get to claim for charitable contributions on your federal and state income tax return.

For a donation to Almost Home to count towards the Missouri Tax Credit, the donation must be in cash, stocks, bonds, securities or real property. If you can’t make that type of contribution but would still like to help Almost Home, they have a wonderful wish list on their web site. Donations of clothing, toys or supplies won’t qualify for the Missouri tax credits, but would be most graciously and gratefully accepted by the organization.

Almost home qualifies for Missouri Tax Credits under the Missouri Maternity Home Tax Credit program which is admistered by the Department of Social Services.

For more information about Almost Home and the tax credit program, please click on the link to their website: http://www.almosthomestl.org/donate/tax-credits

For information on the Missouri Maternity Tax Credit program, click on the Missouri website: http://www.dss.mo.gov/dfas/taxcredit/maternity.htm

Almost Home was established by the Franciscan Sisters of Mary. Their primary areas of concern are establishing and achieving personal goals related to health care, emotional stability and education; teaching appropriate parenting skills; and empowering members for independent living.

Last Minute Tax Tip: Hire Your Kids

Hire your kids

Reduce your taxes, hire your kids to work for you!

Do you own your own small business as a sole proprietorship? Do you have kids? If so, did you know that you can pay your kids to work in your business and they won’t be subject to social security and Medicare taxes? Now if you pay them more than their standard deduction, they could be subject to income tax withholding but even so, not having to pay the employment tax is a big savings. You also don’t have to pay Federal Unemployment taxes either.

Why is this good to know? Well if you pay your kids wages from your business, it’s a business deduction and that’s money you’re keeping in the family and not paying self employment taxes on. It’s important to keep the wages commensurate with work that the kids actually perform. The IRS isn’t going to buy the idea that your 4 year old is earning $50,000 a year doing statistical analysis for your company. But what can your kids actually do?

My first job was handling all of the scut work that the secretaries in the office wouldn’t do. I cleaned the white board in the meeting room, made the coffee, made photocopies and ran errands. I was happy because I was getting paid, the secretaries were happy because they didn’t have to do those jobs any more, and the boss was happy because his staff was happy. I was 15 at the time, but frankly a much younger kid could have handled that job.

My son’s in college now, but he used to be my IT guy. For the cost of a Chucky Cheese pizza and some tokens, he’d take care of any computer problems I had. After he left for school, I had to hire a professional to help me. The freelance IT person I hire costs me $99 per hour. I had no idea how valuable my son was as an employee until he went away. I had never paid him a wage. (Granted, I’m paying through the nose for tuition but that’s another story.) What I should have done was pay him a wage and let him buy his own pizza. That would have reduced my self-employment taxes.

So what about your kids, do they help you with your business? Can they? Would they? If the answer is yes, then you might want to consider putting them on the payroll.

Who’s allowed to do this? There are only two categories of businesses where you can put your children on the payroll without paying employment taxes. One is sole proprietors; that’s businesses that file a schedule C with their 1040 tax return. The other is partnerships where both of the partners are the parents of the children working. If there is even one partner who is not a parent of the child, then you must pay the payroll taxes. Also, if you own a corporation of any kind, you must pay employment taxes on your child’s wages.

With the year end fast approaching, and winter break heading this way, now might be a perfect time to test the waters for hiring your kids. The money you pay them now will reduce your taxable income for 2010.

Last Minute Tax Tip: Donating Stock to Charity

December is always the big  push time for charitable donations.  If you’ve ever thought about donating your stock holdings instead of plain cash, here are some things you should know.

First, if you have stock that has appreciated in value, you want to give the charity the stock and let them sell it for cash, instead of you selling it and giving them cash.  The reason is because you get to claim the charitable deduction for the fair market value of the stock you gave away, but you don’t have to pay any capital gains tax on the increase.  You have a win/win/win situation.  (No capital gains, plus charitable deduction, plus the charity gets stock they can sell for cash=win/win/win.)

Second, if you have stock that has gone down in value, you want to sell it first and then give the cash to the charity.  This is exactly the revese of the above.  By selling stock that’s gone down in value, you get to claim a capital loss which can offset you capital gains or up to $3,000 of your ordinary income.  Once again you have a win/win/win situation.  (Claim loss against income, get charitable deduction, plus charity gets cash.)

Although December 30 and 31 are the highest giving days for charity donations, you need to do this a little earlier in the month so that your brokerage has time to do all the transactions.  Make sure you have some wiggle room for your stock transactions to actually close and get it all done before Christmas.  Earlier if possible.

Bottom line:  stock goes up — give it directly to charity, stock goes down — sell first then give money to charity.  It’s that easy.

Last Minute Tax Tip: Caring for the Elderly?

...to very old people (99 years)

Photo by Maufdi

Are you caring for a spouse or a parent who is over 60 years of age and physically and/or mentally incapable of living alone?  If you live in Missouri, there may be a tax credit for you.  It’s called the Missouri Shared Care Tax Credit and it could be worth up to $500 off of your Missouri state income taxes.

In order to qualify for this tax credit, you must live in the same residence as the person you’re caring for for more than 6 months during the tax year and you must not get paid for providing care.

The person you’re caring for must not receive funding or services through Medicaid or social services block grant funding.  (Medicare is fine, it’s just Medicaid that’s not allowed.)   

To qualify for a tax credit, you will need to have your physician, or the Division of Senior and Disability Services, Missouri Department of Health, sign a certification form that says the person you care for is incapable of living alone and must acquire necessary home care to avoid placement in a care facility.  That’s why I’m putting this in the “to do in December” list–getting the certification part may take some time.

When you think about the stress and the cost of caring for someone at home, this doesn’t really seem like much of a tax credit.  On the other hand, there are already so many people already caring for an elderly spouse or parent at home and not getting anything for it, I wanted to make sure that I got this message out.  By the way, if you’ve been caring for someone for a few years, you can go back and amend old state returns to claim this credit.  You can go back up to three years.

To learn more that the Shared Care Tax Credit, click on this link to the Missouri Department of Revenue website:  http://dor.mo.gov/taxcredit/sct.php

Last Minute Tax Tip: Deductions for High Income Earners

The idea of tax deductions for high income earners must sound preposterous, especially if you’re a high income earner.  You know how it goes, you try donating money to charity or taking advantage of any of the other tax deductions only to find that your deduction is “limited due to your income.”  So what’s the point?

Well this year, there is a point.  Itemized deductions and exemptions aren’t phased out for high income taxpayers for 2010.  Last year, if you earned over $166,800 you started to lose out on your deductions.  The higher your income, the less valuable your deductions were.   Only for 2010 are you allowed all of your itemized deductions.  You also get 100% of your exemptions also.

But what about the Alternative Minimum Tax or AMT?  Won’t that get us anyway?  Well, yeah.  AMT is a problem for high income earners.  But, and this is important, charitable deductions aren’t eliminated in the AMT calculation.  AMT dings you for your state tax payments, miscellaneous deductions (like employee business expenses), and some types of mortgage payments.  Your charitable contributions still count as a deduction in the AMT calculation.  Even if you’re stuck paying AMT, you’re still better off having that charity deduction on your tax return.

Bottom line:  If you are a high income earner, there has never been a better time for you to make a charitable contribution.