It’s Not Too Late to Check Paycheck Withholding

Did you know that the average tax refund was $2,729 for tax year 2018? While some taxpayers may find it advantageous to get a large tax refund, others may wish to have more of their money show up in their paychecks throughout the year. No matter which preference taxpayers choose, they should remember that they can make adjustments throughout the year that will influence the size of their refund when they file their tax return next spring.

TAX REFORM CHANGES

The Tax Cuts and Jobs Act of 2017 made significant changes that affected almost every taxpayer. Most of these changes took effect in 2018 and you may have noticed it when you filed your on tax return earlier this year.

Many taxpayers ended up receiving refunds on their 2018 tax return that were smaller or larger than expected. Others found they owed additional tax when they filed. To avoid tax surprises like this, taxpayers may need to increase or reduce the amount of tax they have taken out of their pay and should check their paycheck withholding as soon as possible — even if they did one last year.

TYPICAL TAXPAYER FILING SCENARIOS

Simple returns. For taxpayers whose tax situation is less complex, the easiest way to check whether their withholding is correct is to use the IRS Withholding Calculator on IRS.gov, which is designed to help employees make changes based on their individual financial situation.

Complex returns. Taxpayers with more complex tax situations such as married couples who both work, higher-income earners, and those who take certain tax credits or itemize might need to revise their Form W-4, Employee’s Withholding Allowance Certificate, completely to ensure they have the right amount of withholding taken out of their pay. If you’ve been putting this off, it’s not too late to adjust your tax withholding. Please call the office and speak with a tax and accounting professional who will evaluate your particular tax situation and help you determine how much tax you should withhold from your paycheck.

Small business owners or sole proprietors. Taxpayers who owe self-employment tax, individual taxpayers who need to pay the alternative minimum tax, those who owe tax on unearned income from dependents, and anyone with capital gains and dividends should contact the office and speak to a tax and accounting professional as well.

Life changes. Taxpayers should also check their withholding when there are life changes such as marriage or divorce, birth or adoption of a child, retirement, new job or loss of a job, purchase of home, or have filed for Chapter 11 bankruptcy.

Certain life changes might affect a taxpayer’s itemized deductions or tax credits. As such, taxpayers should check their withholding if they experience changes to the following:

  • Medical expenses
  • Taxes
  • Interest expense
  • Gifts to charity
  • Dependent care expenses
  • Education credit
  • Child tax credit
  • Earned income tax credit

Income not subject to withholding. Some taxable income is not subject to withholding. Taxpayers with taxable income not subject to withholding and who also have income from a job may want to adjust the amount of tax their employer withholds from their paycheck. Income that is generally not subject to withholding includes interest and dividends, capital gains, self-employment and gig economy income, and IRA distributions, including certain Roth IRAs.

HELP IS JUST A PHONE CALL AWAY

If you have any questions about tax withholding, don’t hesitate to call and speak to an accounting professional who can help.

Read more articles from our September 2019 newsletter here.

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October 1: Deadline to Set Up SIMPLE IRA Plans

Of all the retirement plans available to small business owners, the SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is the easiest to set up and the least expensive to manage. The catch is that you’ll need to set it up by October 1st. Here’s what you need to know.

WHAT IS A SIMPLE IRA PLAN?

SIMPLE IRA Plans are intended to encourage small business employers to offer retirement coverage to their employees. Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings. In addition, if living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE IRA plan retirement investments.

HOW DOES A SIMPLE IRA PLAN WORK?

A SIMPLE IRA plan is easier to set up and operate than most other plans in that contributions go into an IRA you set up. Requirements for reporting to the IRS and other agencies are minimal as well. Your plan’s custodian, typically an investment institution, has the reporting duties and the process for figuring the deductible contribution is a bit easier than with other plans.

SIMPLE IRA plans calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $13,000 in 2019, after which it can rise further with the cost of living. Owner-employees age 50 or older can make an additional $3,000 deductible “catch-up” contribution (for a total of $16,000) as an employee in 2019.

2. Employer “matching” contribution
The employer match equals a maximum of three percent of employee’s earnings.

An owner-employee age 50 or over in 2019 with self-employment earnings of $40,000 could contribute and deduct $13,000 as employee plus an additional $3,000 employee catch up contribution, plus a $1,200 (three percent of $40,000) employer match, for a total of $17,200.

ARE THERE ANY DOWNSIDES TO SIMPLE IRA PLANS?

Because investments are through an IRA you must work through a financial institution acting, which acts as the trustee or custodian. As such, you are not in direct control and will generally have fewer investment options than if you were your own trustee, as is the case with a 401(k).

You also cannot set up the SIMPLE IRA plan after the calendar year ends and still be able to take advantage of the tax benefits on that year’s tax return, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE IRA plan effective for a year, it must be set up by October 1 of that year. A later date is allowed only when the business is started after October 1 and the SIMPLE IRA plan must be set up as soon as it is administratively feasible.

Furthermore, once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE IRA retirement plan.

If you are under 50 with $50,000 of self-employment earnings in 2019, you could contribute $13,000 as employee to your SIMPLE IRA plan plus an additional three percent of $50,000 as an employer contribution, for a total of $14,500. In contrast, a Solo 401(k) plan would allow a $31,500 contribution.With $100,000 of earnings, the total for a SIMPLE IRA Plan would be $16,000 and $44,000 for a 401(k).

If the SIMPLE IRA plan is set up for a sideline business and you’re already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE IRA plan and the 401(k) combined (in 2019) can’t be more than $19,000 or $25,000 if catch-up contributions are made to the 401(k) by someone age 50 or over. So, someone under age 50 who puts $9,500 in her 401(k) can’t put more than $9,500 in her SIMPLE IRA plan for 2019. The same limit applies if you have a SIMPLE IRA plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

HOW TO GET STARTED SETTING UP A SIMPLE IRA PLAN

You can set up a SIMPLE IRA plan account on your own; however, most people turn to financial institutions. SIMPLE IRA Plans are offered by the same financial institutions that offer any other IRAs and 401(k) plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement, you will choose an “effective date,” which is the start date for payments out of salary or business earnings. Again, that date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE IRA plan. You need such an agreement even if you pay yourself business profits rather than salary. Printed guidance on operating the SIMPLE IRA plan may also be provided. You will also be establishing a SIMPLE IRA plan account for yourself as participant.

READY TO EXPLORE RETIREMENT PLAN OPTIONS FOR YOUR SMALL BUSINESS?

SIMPLE IRA Plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business and work well for small business owners who don’t want to spend a lot of time and pay high administration fees associated with more complex retirement plans.

If you are a business owner interested in discussing retirement plan options for your small business, don’t hesitate to contact the office today.

Read more articles from our September 2019 newsletter here.

Who Can Represent You Before the IRS?

Many people use a tax professional to prepare their taxes. Anyone who prepares, or assists in preparing, all or substantially all of a federal tax return for compensation is required to have a valid Preparer Tax Identification Number (PTIN). All enrolled agents must also have a valid PTIN.

If you choose to have someone prepare your federal tax return, then you should know who can represent you before the IRS if there is a problem with your return. Here’s what you should know:

Representation rights, also known as practice rights, fall into two categories:

  • Unlimited Representation
  • Limited Representation

Unlimited representation rights allow a credentialed tax practitioner to represent you before the IRS on any tax matter. This is true no matter who prepared your return. Credentialed tax professionals who have unlimited representation rights include:

  • Enrolled agents
  • Certified Public Accountants
  • Attorneys

Limited representation rights authorize the tax professional to represent you if, and only if, they prepared and signed the return. They can do this only before IRS revenue agents, customer service representatives and similar IRS employees. They cannot represent clients whose returns they did not prepare. They cannot represent clients regarding appeals or collection issues even if they did prepare the return in question.

For returns filed after December 31, 2015, the only tax return preparers with limited representation rights are Annual Filing Season Program Participants. The Annual Filing Season Program is a voluntary program. Non-credentialed tax return preparers who aim for a higher level of professionalism are encouraged to participate.

Other tax return preparers have limited representation rights, but only for returns filed before January 1, 2016. Keep these changes in mind and choose wisely when you select a tax return preparer.

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Three Tips for Getting an Accurate Business Valuation

If you’re conscientious about financial reporting, you may already have a sense of your company’s worth, but in some instances, you might need a formal business valuation, such as:

  • Certain transactions: Are you selling your business? Planning an IPO? Need financing?
  • Tax purposes: This includes estate planning, stock option distribution, and S Corporation conversions.
  • Litigation: Often needed in cases like bankruptcy, divorce, and damage determinations.

There isn’t a single formula for valuing a business, but there are generally accepted measures that will give you a valid assessment of your company’s worth. Here are three tips that you can use to give your business a more accurate valuation.

1. Take a close look at how your business operates. Does it incorporate the most tax-efficient structure? Have sales been lagging or are you selling most of your merchandise to only a few customers? If so, then consider jump-starting your sales effort by bringing in an experienced consultant who can help.

Do you have several products that are not selling well? Maybe it’s time to remove them from your inventory. Redesign your catalog to give it a fresh new look and make a point of discussing any new and exciting product lines with your existing customer base.

It might also be time to give your physical properties a spring cleaning. Even minor upgrades such as a new coat of paint will increase your business valuation.

2. Tangible and intangible assets. Keep in mind that business valuation is not just an exercise in numbers where you subtract your liabilities from your assets, it’s also based on the value of your intangible assets.

It’s easy to figure out the numbers for the value of your real estate and fixtures, but what is your intellectual property worth? Do you hold any patents or trademarks? And what about your business relationships or the reputation you’ve established with existing clients and in the community? Don’t forget about key long-term employees whose in-depth knowledge about your business also adds value to its net worth.

3. Choose your appraisal team carefully. Don’t try to do it yourself by turning to the Internet or reading a few books. You may eventually need to bring in experts like a business broker and an attorney, but your first step should be to contact us. We have the expertise you need to arrive at a fair valuation of your business.

If you need a business valuation for whatever reason, please don’t hesitate to call and speak to a tax and accounting professional who can help.

Sign up for our newsletter to receive tax tips and timely articles delivered right to your inbox. Read more articles from our August 2019 newsletter here.

10 Facts About the Adoption Tax Credit

If you adopt a child in 2019, you may qualify for a tax credit, and if your employer helped pay for the costs of an adoption, you may be able to exclude some of your income from tax. Here are ten facts you should know about the Adoption Tax Credit.

1. Credit or Exclusion. The credit is nonrefundable. This means that the credit may reduce your tax to zero. If the credit is more than your tax, you can’t get any additional amount as a refund. If your employer helped pay for the adoption through a written qualified adoption assistance program, you may qualify to exclude that amount from tax.

2. Maximum Benefit. The maximum adoption tax credit and exclusion for 2019 is $14,080 per child.

3. Credit Carryover. If your credit is more than your tax, you can carry any unused credit forward. This means that if you have an unused credit in 2019, you can use it to reduce your taxes for 2020. You can do this for up to five years, or until you fully use the credit, whichever comes first.

4. Eligible Child. An eligible child is under age 18. This rule does not apply to persons who are physically or mentally unable to care for themselves.

5. Qualified Expenses. Adoption expenses must be directly related to the adoption of the child and be reasonable and necessary. Types of expenses that can qualify include adoption fees, court costs, attorney fees, and travel.

6. Domestic Adoptions. For domestic adoptions (adoption of a U.S. child), qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment even if the adoption is never finalized.

7. Foreign Adoptions. For foreign adoptions (adoption of an eligible child who is not yet a citizen or resident of the U.S.), qualified adoption expenses paid before and during the year are allowable as a credit for the year when it becomes final.

8. Special Needs Child. If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you didn’t pay any qualified adoption expenses.

9. No Double Benefit. Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you can’t claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.

10. Income Limits. The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount you can claim depending on the amount of your income.

QUESTIONS?

If you have any questions or would like additional information about this tax credit, please contact the office.

Sign up for our newsletter to receive tax tips and timely articles delivered right to your inbox. Read more articles from our July 2019 newsletter here.

Deducting Business-Related Car Expenses

If you’re self-employed and use your car for business, you can deduct certain business-related car expenses.

There are two options for claiming deductions:

Actual Expenses. To use the actual expense method, you need to figure out the actual costs of operating the car for business use. You are allowed to deduct the business-related portion of costs related to gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments).

Standard Mileage Rate. To use the standard mileage deduction, multiply 58 cents (in 2019) by the number of business miles traveled during the year.

Car expenses such as parking fees and tolls attributable to business use are deducted separately no matter which method you choose.

WHICH METHOD IS BETTER?

For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses. You may use either of these methods whether you own or lease your car.

To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. In subsequent years, you can choose to use the standard mileage rate or actual expenses. If you choose the standard mileage rate and lease a car for business use, you must use the standard mileage rate method for the entire lease period – including renewals.

Opting for the standard mileage rate method allows you to bypass certain limits and restrictions and is simpler; however, it’s often less advantageous in dollar terms. Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

The standard mileage rate may understate your costs, especially if you use the car 100 percent (or close to it) for business.

DOCUMENTATION

Tax law requires that you keep travel expense records and that you show business versus personal use on your tax return. Furthermore, if you don’t keep track of the number of miles driven and the total amount you spent on the car, your tax advisor won’t be able to determine which of the two options is more advantageous for you at tax time. It is essential to keep careful records of your travel expenses (if you use the actual expenses method you must keep receipts) and record your mileage.

You can use a mileage logbook or if you’re tech-savvy, an app on your phone or tablet. A number of phone applications (apps) are available to help you track your business expenses, including mileage and billable time. These apps also allow you to create formatted reports that are easy to share with your CPA, EA, or tax preparer.

To simplify your record keeping, consider using a separate credit card for business.

QUESTIONS?

Don’t hesitate to call and find out which deduction method is best for your particular tax situation.

Sign up for our newsletter to receive tax tips and timely articles delivered right to your inbox. Read more articles from our July 2019 newsletter here.

How the Sharing Economy Affects Your Taxes

If you’ve ever used–or provided services for– Uber, Lyft, Airbnb, Etsy, Rover, or TaskRabbit. then you’re a member of the sharing economy and it could affect your taxes. The good news is that if you’ve only used these services (and not provided them), then there’s no need to worry about the tax implications.

However, if you’ve rented out a spare room in your house through a company like Airbnb then you need to be aware of the tax consequences. You may not realize that the extra income you’re making could impact your taxable income–especially if you have a full-time job with an employer. That extra income is taxable even when the activity is cash only or is a part-time “side gig” and it could turn into a tax liability if you’re not careful.

To avoid surprises at tax time, it’s more important than ever to be proactive in understanding the tax implications of your new sharing economy gig and seek the advice of a competent tax professional.

If you have a job with an employer make sure your withholding reflects any extra income derived from your side gig (e.g. boarding pets at your home through Rover or driving for a ride-share company like Uber on weekends). Use Form W-4, Employee’s Withholding Allowance Certificate, to make any adjustments and submit it to your employer who will use it to figure the amount of federal income tax to be withheld from pay.

NEW BUSINESS OWNER

While you may not necessarily think of yourself as a newly self-employed business owner, the IRS does. So, even though you work through a company like Airbnb or Rover, you are considered a business owner and are responsible for your own taxes (including paying estimated taxes if you need to). It’s up to you to keep track of income and expenses–and of course, to keep good records that substantiate your income and expenses (more on this below).

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement.

And now, for the good news. As a business owner, you are entitled to certain deductions (subject to special rules and limits) that you cannot take as an employee. Deductions reduce the amount of rental income that is subject to tax. You might also be able to deduct expenses directly related to enhancements made exclusively for the comfort of your guests. For instance, if you rent out a room in your apartment through Airbnb, amounts you spend on window treatments, linens, or even a bed, could be deductible. If you drive for Uber and use your personal vehicle you may be able to take the standard business mileage rate, which in 2019, is 58 cents per mile.

PITFALLS: IT’S MORE COMPLICATED THAN IT SEEMS

At first glance renting out a spare room through Airbnb or pet sitting through Rover seems like an easy thing to do, but as with most things, it’s more complicated than it seems and you’ll need to keep an eye out for the following pitfalls:

    • Insurance requirements
    • Business license registration (state or municipal)
    • Room and lodging, or tourist taxes

Many municipalities charge room, occupancy, or tourist taxes on the amount of rental paid for short term stays (less than 30 days). Noncompliance may result in penalties, fees, and payment of back taxes owed.

    • Estimated Tax Payments

Failure to set aside money for taxes and/or estimated tax payments is common, especially under tax reform. The U.S. tax system is pay as you go, which means taxes must be paid as income is earned during the year, referred to as estimated tax payments. Estimated tax payments apply toward both income tax and self-employment tax (Social Security and Medicare).

If you don’t pay enough tax, through either withholding or estimated tax (or a combination of both) you may have to pay a penalty. Estimated tax payments are due quarterly. The payment of estimated tax for the income for the first quarter of the calendar year (that is, January through March) is due on April 15. Payments for subsequent quarters are generally due on June 15, September 15 and January 15. Please visit the Tax Due Dates for applicable dates this year. If you don’t pay enough by these dates you may be charged a penalty even if you’re due a refund when you file your tax return.

If you also work as an employee, you can often avoid needing to make estimated tax payments by having more tax withheld from your paycheck.

    • Tax Withholding

Taxpayers involved in the sharing economy who are employees at another job can often avoid making estimated tax payments by having more tax withheld from their paychecks. Don’t hesitate to call the office if you need assistance figuring out your withholding and filing a new W-4 with your employer to request the additional withholding.

    • Forms 1099-MISC or 1099-K

As a sole proprietor, you may receive a Form 1099-MISC (employees receive a Form W-2) or a 1099-K. Form 1099-K, Payment Card and Third Party Network Transactions, is an information return that reports the gross amount of reportable payment card and third party network transactions for the calendar year to you and the IRS. If you receive a Form 1099-K, you should retain it and use the information reported on the Form 1099-K in conjunction with your other tax records to determine your correct tax. Even if you didn’t receive one from the company you provide services for (Lyft, Uber, Airbnb, etc.), the IRS might have, so make sure you report that income on your return.

Special Tax Rules for Renting out your Home

If you rent your home out for 15 days or more during a calendar year and you receive rental income for the use of a house or an apartment, including a vacation home, that rental income must be reported on your return in most cases. You may deduct certain expenses such as mortgage interest, real estate taxes, maintenance, utilities, and insurance and depreciation, which reduce the amount of rental income that is subject to tax.

If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won’t be able to deduct your rental expense in excess of the gross rental income limitation.

Generally, if you rent out your home for less than 15 days, then you do not need to report any of the rental income and you don’t deduct any expenses as rental expenses.

RECORDKEEPING

It’s important to keep good records and to choose a recordkeeping system suited to your business that clearly shows your income and expenses. The type of records you need to keep for federal tax purposes depends on what kind of business you operate; however, at a minimum, your recordkeeping system should include a summary of your business transactions (i.e. income and expenses) using a cash basis of accounting. Your records must also show your gross income, as well as your deductions and credits.

TAX RULES ARE COMPLICATED: DON’T GET CAUGHT SHORT

If you have any questions or would like more information about the sharing economy and your taxes, please contact the office.

Sign up for our newsletter to receive tax tips and timely articles delivered right to your inbox.    Read more articles from our June 2019 newsletter here.