Business taxes involve a lot of paperwork, and those papers typically contain a lot of personal financial information. Are you taking steps to make sure your records are secure? Here are a few tips to help:
Secure sensitive employee materials. As an employer, you’re required to collect Social Security numbers and other identification, such as copies of drivers’ licenses. Keep this sensitive information secure by restricting physical access to printed or copied documents, using passwords on your accounting software, and creating a unique identifier for employee IDs.
Some states require that you safeguard the information obtained from job seekers, such as shredding applications after a certain period of time.
Protect important numbers. Truncate Social Security numbers on the paper copy of Forms 1099 that you send to your vendors. Instead of displaying the full nine digits, replace the first five numbers with asterisks or Xs.
Encryption is key. When sending data to your accountant for tax return or payroll preparation, be sure to use encrypted email or upload files to a secure digital storage service site.
Keeping accounting information from falling into the wrong hands is a growing concern for many businesses. Give Carl Heinemann, your Chattanooga CPA, a call if you have questions.
Health savings accounts (HSAs) have been around a long time, and little has changed since they were first introduced in 2003. They offer tax benefits, many of which you can benefit from if you know how. Here’s a refresher on how HSAs work:
An HSA has two parts. These parts include a high-deductible health insurance policy and a savings account. The idea is simple: You buy a health plan with a high deductible, and you deposit cash into a savings or investment account to pay the policy deductible and other qualified out-of-pocket medical expenses.
Contributions are tax-deductible. The tax benefit comes from the way the savings account part of the HSA works, which is similar to a traditional individual retirement account. For example, you can claim a federal income tax deduction for contributions to your HSA, and the deduction is above the line, meaning you can benefit without having to itemize.
Contribution amounts change. For 2018, the maximum tax-deductible contribution is $3,450 when the insurance plan covers only you, or $6,900 when you purchase an insurance plan for your family. When you’re age 55 or older, you can contribute (and deduct) an extra $1,000.
There are rules around withdrawals. Interest, dividends or other growth in the account is tax-free as long as you use withdrawals for qualified medical expenses. But what happens if you use the money for other purposes? The withdrawals are included in income, taxed at your regular rate, and subject to a 20-percent penalty. If you are 65 or older, you can withdraw money from your account for any reason without paying a penalty.
Keep in mind that other rules apply, including the opportunity to fund an HSA with a tax-free rollover from your individual retirement account.
Call Carl Heinemann, your Chattanooga CPA, if you have questions about how you can make the most tax-savvy choices with your HSA.
Are you up to your ears in tax debt or at odds with the IRS over your tax liability? You may have more payment options than you think.
Offer in compromise (OIC)
Essentially, an OIC is an agreement with the IRS to settle your tax liability for less than the full amount owed. Usually, the IRS won’t accept an OIC unless the amount you offer is equal to or greater than the “reasonable collection potential” (RCP) from assets you own – including real estate, autos, bank accounts and future earnings.
The IRS may accept an OIC for one of three reasons:
There is doubt as to the tax liability
There is doubt that the full amount owed can be collected
The compromise is based on effective tax administration (In other words, requiring full payment would create an economic hardship or otherwise be inequitable)
The application fee for an OIC is generally $186, although there are certain exceptions.
You may end up deciding to apply for an installment agreement instead if you can’t pay the full amount of tax you owe within the OIC payment parameters. An installment agreement allows you to make a series of monthly payments over time. The IRS offers various options for making these payments, including:
Direct debit from your bank account
Payroll deduction from your employer
Payment by the Electronic Federal Tax Payment System (EFTPS)
Payment by credit card
Payment via check or money order
Payment with cash at a retail partner
The user fee for installment agreements varies, depending on the type of payment, but the maximum fee is $225. Interest and possibly penalties will also be added to the amount owed.
Which option is better? It depends on your personal situation. Call Carl Heinemann, your Chattanooga CPA, to discuss what option is right for you.
One type of retirement plan that often fits the needs of small business owners is the Simplified Employee Pension (SEP). Typically, accounts are set up as SEP IRAs, much like traditional IRAs.
What to know about SEPs
As the name implies, it’s relatively simple to establish and operate a SEP plan. Unlike some other qualified plans – including 401(k)s – you don’t have to file annual reports with the IRS. Here are some other key aspects of SEPs:
The contribution limit is generous. For 2018, the maximum deductible contribution is generally equal to the lesser of 25 percent of compensation (20 percent of earned income of a self-employed individual) or $55,000. In comparison, the annual contribution limit for a traditional IRA is only $5,500 ($6,500 if you’re age 50 or older).
Employers make contributions. A potential downside for employers is that you generally have to make contributions on behalf of all full-time employees who are 21 and older and have worked for the business at least three of the last five years. Part-time employees are included if each earns more than $600 in 2018.
Contributions are discretionary. For instance, you can boost them in good years, cut them or even skip them in bad years, as long as you contribute the same percentage of compensation for all participants. This gives small business owners flexibility.
RMDs are necessary. As with other qualified plans, you must begin taking required minimum distributions (RMDs) after you reach 70 1/2. And, if you make withdrawals prior to 59 1/2, you could be hit with a 10 percent penalty tax on top of the regular income tax (unless a special exception applies).
Of course, you have other options. The qualified SIMPLE plan is similar to the SEP, but offers a lower contribution limit. For 2018, the limit is $12,500 ($15,500 if you’re 50 or older). Finally, you have until your tax return due date, plus extensions, to set up and fund a SEP for the tax year.
Call Carl Heinemann, your Chattanooga CPA, for assistance in setting up a SEP.
An important step in estate planning is creating an inventory of your assets. Your executor, or the person you designate in your will to carry out your last wishes, uses the inventory to make sure all of your property passes to your heirs.
It’s likely that some of your assets exist in digital form. Documenting your digital assets along with your physical belongings can help ensure your final wishes are honored and your estate is administered correctly.
Here are a few items to keep in mind as you compile a list of your digital assets:
Create a list of passwords. In order to review financial accounts with banks, brokerages or other businesses, your executor will need your current passwords. If you protect passwords with additional encrypted apps, include the master access info.
Most importantly, keep your list updated when you change passwords.
Be comprehensive. Add URLs, usernames and passwords for non-financial accounts (such as your email and online storage sites) to your inventory. Why? These accounts can be essential for retrieving invoices, statements and other paperwork for which you’ve chosen electronic-only delivery.
Don’t forget device access. The physical assets you use to access your digital data include your phone, tablet and computer. That means your executor will need passwords and file names to access those devices. Also, list the location and encryption information for offsite or standalone storage devices, like external drives.
When it comes to planning, keeping track of your online assets can be vital. Call Carl Heinemann, your Chattanooga CPA, if you have questions how your assets may be affected by state and federal estate tax laws.
Let’s say that you learn a local business owner is ready to retire. The prospect of acquiring his or her company seems intriguing and feasible. But is it a good investment? And how much should you offer? Here are three steps that will help you determine a company’s value:
Don’t only rely on a third-party valuation. Associations and trade groups in the industry may provide guidelines, often expressed as a percentage of sales or asset values. Valuations based on these estimates are free and, as the saying goes, “you get what you pay for.” A general guideline may work as a starting point, but the one-size-fits-all approach is rarely sufficient to provide an accurate picture of a company’s worth.
Consider using business valuation software. This approach may provide a better estimate because it’s based on more factors. You input asset and income information from the company’s financial statements and/or tax returns into the application, and the software cranks out a fair market value or, more likely, a range of values.
Perform a financial statement analysis. You calculate the company’s book value, the difference between its assets and its liabilities as presented on the balance sheet. Unfortunately, this approach can be misleading, especially if the assets are presented at historical cost. Some assets may have declined in value. For example, inventory may be obsolete or accounts may be uncollectible.On the other hand, the business may own real estate that’s appreciated since being purchased. You may also want to project future cash flows and discount them to the present using an assumed rate of return.
Historical profits, industry trends, competitors, intangibles, customer demand – these factors and many others impact a company’s value. As a result, depending on your resources and interest, you may want to consider hiring a professional business valuator, such as Carl Heinemann, your Chattanooga CPA.
Be aware, however, that the final selling price will likely differ from any theoretically-derived value.
Now that your teens are heading back to school this fall, it’s a good time to start planning for their higher education. That means you may be interested in a Section 529 plan account that provides tax-favored savings.
And if you have younger children you’ll be happy to know that a recent tax law change has opened up Section 529 plans to kids attending elementary and secondary schools.
Here’s what you need to know about 529 plans
Section 529 plans are sponsored by individual states, state agencies or educational institutions. There are two basic types:
Prepaid tuition plans: You acquire units or credits used toward future education at current prices. So you end up locking in tomorrow’s education costs today.
Education savings plans: The plan invests in a portfolio for each participant’s account. Investment earnings vary and are then used to pay education costs.
With either type of plan, if you fund an account for a beneficiary (like your child or a grandchild), there’s no current tax due on the earnings within the account. And when the beneficiary finally enters school, payments for qualified expenses are exempt from tax. The list of qualified expenses includes:
Tuition and fees
Supplies and equipment
Reasonable costs of room and board
Your younger children may now benefit
Beginning in 2018, the tax breaks for 529 plans are extended to tuition payments for grades K-12 at public, private or religious schools. For example, if you send your child to a prestigious college prep school, you can tap into the Section 529 account to pay for the tuition – with no tax consequences.
However, there is a limit for these younger kids. Plan contributions can only be used for up to $10,000 in school expenses annually.
It’s helpful to note that you can roll over unused 529 plan funds for a beneficiary to an account for another beneficiary. This might benefit families who have one child completing college and another in high school.
Call Carl Heinemann, your Chattanooga CPA, if you have questions about 529 plans and how you can save with other education savings accounts and tax credits.
It may be easier to qualify for a medical deduction in 2018 than before, assuming you’ll itemize deductions. Specifically, the threshold for deducting unreimbursed medical and dental expenses has been lowered to 7.5 percent of adjusted gross income (AGI). That means only the excess amount above the threshold is deductible.
At the same time, other tax law changes increasing the standard deduction and reducing the tax benefits of itemized deductions might complicate your tax situation. As a result, a sizable medical deduction could tilt the scales in favor of itemizing.
Look beyond typical medical deductions
Certainly, you should bunch medical expenses in 2018 when it suits your needs. But you don’t have to only count on typical costs for doctor visits and prescription drugs.
Deductions for a wide variety of less common expenses have been approved by the IRS or the courts in the past, including amounts paid for the following:
Birth control pills
Breast pumps and supplies
Guide dogs and other service animals
Lead-based paint removal
Medical care for transplant donors
Oxygen and oxygen equipment
Special diet foods prescribed by physician
Telephone equipment for the disabled
Wigs for mental health purposes (e.g., to compensate for loss of hair due to an illness or medical treatment)
Note that the costs may be large or small. For instance, deductions have been allowed for installing a swimming pool to alleviate the taxpayer’s asthma as well as clarinet lessons to correct a child’s overbite.
Remember that the medical deduction threshold reverts to 10 percent-of-AGI in 2019. If you expect to clear the 7.5-percent mark in 2018 and will still be itemizing, move nonemergency expenses like medical exams and dental cleanings into this year. Otherwise, defer elective expenses to 2019, when you might have a shot at a deduction.
Give Carl Heinemann, your Chattanooga CPA, a call if you’d like help determining your tax savings with your medical deductions.
Are you thinking of renovating a building you own in an historic part of town? Before you start knocking down walls, find out if the building qualifies as an historic structure. It could result in a tax credit reducing your bill by thousands of dollars.
However, be aware that beginning in 2018 recent tax law changes affect the credits for building renovations.
Claiming the credit
While the 10 percent credit for rehabilitating buildings placed in service before 1936 is no longer available for expenses incurred after 2017, you may continue to claim a separate credit that’s equal to 20 percent of qualified expenses for renovating historic structures.
For instance, if you spend $100,000 to update a brownstone with historic character, you may be able to cut $20,000 off the cost. Under the latest tax laws, this credit must be taken ratably over five years. That means a $4,000 credit is claimed each year for five years. So it’ll take a little longer to recoup your costs.
Unlike the rehab credit, it may be easier to qualify for the historic structure credit than you think. For example, there are no age restrictions or wall retention rules. And it doesn’t have to be a place where George Washington slept or an antebellum mansion. But there are two key requirements:
The building must be listed on the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior. Currently, more than 90,000 buildings are listed.
The rehabilitation must be certified as retaining the original historic character (but not necessarily the original use) of the building.
Finally, certain complex transitional rules may apply to projects that were underway before 2018. Call us if you have questions about your renovation projects and whether or not you’re qualified to claim this credit.
You’ve likely heard about the volcanic eruptions in Hawaii and how they’ve caused extensive damage to the property of several U.S. taxpayers. And as we head into hurricane and tornado seasons, other disasters are likely. Luckily, there’s a silver tax lining in the dark clouds: You may qualify for a casualty loss deduction, despite recent tax law changes.
Deduction changes starting in 2018
The casualty loss deduction has generally been suspended for 2018 through 2025, but you can still claim a loss for damage in an area formally declared as a federal disaster area. These include Hawaii during the volcano eruptions or the hurricane damage areas in the U.S. Southeast last year.
The deduction is limited to the excess unreimbursed loss above 10 percent of your adjusted gross income (AGI), after subtracting $100 for each casualty event.
Example: Your AGI is $100,000 and a severe storm resulted in $50,000 of damage to your home. If you received $30,000 in insurance proceeds, the amount eligible for the casualty loss deduction is $19,900 ($50,000 – $30,000 – $100). That means you can deduct $9,900 ($19,900 – 10 percent of AGI, or $10,000).
Note that the tax law changes don’t affect deductions for unreimbursed losses to business property — they don’t need to be in a federally declared disaster area to be deductible. Those business losses remain deductible without regard to any AGI limit or $100-per-event floor.
Special rules may apply
Individuals may take advantage of a special rule for disaster-area losses: If it suits your needs, you can choose to deduct a disaster-area loss in the tax year preceding the year of the event instead of the year the event actually occurs. As a result, you may get your tax money even sooner.