Fringe benefits may be such an established part of your business compensation package that you’re fairly casual about them. Nevertheless, it’s wise to review your policies periodically to make sure you’re correctly classifying the fringe benefits you provide and getting the maximum tax deduction.
For example, say you’ve been including expenses such as break room coffee and snacks in your “meals and entertainment” general ledger account. The practice could be costing you at year-end. Why?
Generally, only 50% of the cost of meals and entertainment expenses are deductible on your federal income tax return. However, office snacks provided to workers on your business premises qualify for 100% deductibility. Separating the expenses makes it easy to determine the proper tax treatment.
Health insurance premiums may also require separate accounting. For example, when you own more than 2% of the stock of an S corporation, premiums you pay for your policy must be reported on your Form W-2 at year-end as part of your wages.
The health insurance premiums you pay for your employees are generally not included in wages, though they may be reported on Form W-2.
Fringe benefits can be a valuable tax break for your business. To be deductible, they must be an ordinary and necessary business expense and meet certain other requirements.
Give us a call. We’ll help you untangle the rules.
If you’ve been searching for ways to fund a business project, you’ve probably come across an online option known as “crowdfunding.” In simplest terms, crowdfunding means many people give you money to fund your project in exchange for a reward such as a free copy of your product.
As you explore the idea of crowdfunding, you may wonder about the tax treatment of the money you receive. Is it an investment in your business? A gift? Taxable income?
Here’s a broad overview.
- Investment. In general, under U.S. law, when you offer many “investors” stock or other equity in your business, you’re selling securities, and you have to comply with federal and state securities regulations.
While the 2012 JOBS Act created a crowdfunding exemption to these regulations, the Securities and Exchange Commission has not yet finalized the rules. At present, calling the money you receive from crowdfunding an “investment” is not an option.
- Gift. Broadly defined, gifts are cash or other consideration you receive from someone who provides the gift freely, with no expectation of getting something from you in return. When you provide crowdfunders with a reward or other perk in exchange for financial support, the transaction typically will not meet the tax law definition of a gift.
- Income. Money you receive for your work — from whatever source — is income, and usually includable on your federal income tax return. Related expenses can be deductible.
Give us a call to discuss how crowdfunding receipts will impact your taxes. We’re here to help.
It’s fun to imagine what your child’s future holds. If college is part of your dream, you may also be thinking about how to pay for tuition. One way is to establish a tax-advantaged plan that you — as well as family members and friends — can contribute to on birthdays, special occasions, or any time at all.
One such account is known as a 529 plan. These state-qualified tuition programs, named for a section of the federal income tax code, offer tax benefits in three ways.
- Income taxes. The contributions you make to 529 plans are not tax-deductible on your federal income tax return. However, account earnings are tax-deferred, and can be tax-free if the withdrawals are used to pay for qualified educational expenses.
- Gift taxes. While 529 plan contributions are subject to gift and generation-skipping tax rules, you can also take advantage of a special option: the opportunity to make five years’ worth of gifts at once, gift-tax free.
Since the annual gift tax exclusion is $14,000 for 2013, you could potentially fund a child’s or grandchild’s account with $70,000, or $140,000 if you choose to split the gifts with your spouse.
- Estate taxes. In general, 529 plan assets are not included in your estate, even if you are the owner of the account. Instead, the assets are considered the property of the account’s beneficiary.
Want to know more about 529 plans? Give us a call. We’ll help you compare available plans and choose the one that matches your goals.
Oops! You filed a joint return, and the federal income tax refund you were expecting shrank before it hit your bank account. The letter that arrived in the mail tells the story: Your spouse had outstanding debt from before you were married — debt you are not responsible for. Your joint refund was reduced, or offset, to repay the amount owed.
Is there anything you can do?
You may be able to recover your share of the refund if part of the income on the return is attributable to you and you made tax payments via withholding or estimated vouchers. Recovery is also a possibility if you claimed a refundable tax credit on the joint return.
Here’s how the process works.
When the repaid debt belongs solely to your spouse and part of the overpayment you were expecting belongs to you, the “injured spouse” rules come into play. Under these rules, you allocate amounts shown on your joint return between the two of you as if you had filed separate returns, and report the results on Form 8379, Injured Spouse Allocation.
You can file Form 8379 separately from your income tax return, or, if you’re aware of debt that will be offset by an expected refund, include Form 8379 with your return. Keep in mind you’ll need to apply for relief each year that an offset might occur, and that special rules apply to community property states.
Let us know whenever you get correspondence from the IRS. We’re here to help.
For most middle-income taxpayers, the chances of getting audited by the Internal Revenue Service (IRS) are slim indeed. In fact, only about one percent of such taxpayers get audited, and most of those audits involve an exchange of correspondence with the IRS, usually to correct or clarify a few items on a federal tax return. If you operate a small business, the likelihood that you’ll be audited increases a few percentage points, but a full-blown audit is still unlikely.
That said, the IRS generally audits tax returns based on perceived risk. In other words, if your return contains certain “red flags” or risk indicators, your return is more likely to be audited. For example, the IRS may receive 1099 (miscellaneous income) forms showing that you were paid for freelance or temporary work. If that income isn’t reported on your individual tax return, the IRS’s numbers and yours won’t agree. Or maybe you’re self-employed and claim substantial expenses for business travel, meals, and entertainment. Based on long years of experience, the IRS knows that business owners often fudge these numbers.
So how should you respond if that dreaded letter from the IRS shows up in your mailbox?
- Don’t panic. For one thing, an IRS audit may actually result in corrections to your tax return that reduce your tax liability. Such a scenario is not uncommon. Remember, the auditor’s goal is to make sure your tax return is correct and supported by appropriate documentation. That’s all.
- Understand how audits work. If your business is being audited, you can expect the auditor to interview employees, examine records, and observe your operations and inventory. Be sure to encourage your staff to cooperate fully and answer questions truthfully. If they’re asked for a document that isn’t readily available, it’s acceptable to ask for more time.
- Get organized. In the audit world, nothing beats good documentation. So it’s important to keep accurate records throughout the year. If certain supporting documents can’t be located, check online. Your mortgage company, for example, will likely maintain records of interest paid, and your employer should have duplicate copies of your W-2 forms.
- Treat the auditor with respect. Most auditors, contrary to Hollywood’s depictions, aren’t vindictive or dishonest. Like your local policeman or business owner, auditors have a job to do. Treat them as professionals, and they’ll likely treat you in kind.
Decisions about location and the ins and outs of leasing commercial space can be significant factors in determining a firm’s long-term profitability. That’s because the cost of leasing space is often one of the biggest numbers on the profit-and-loss statement. The greater the expense, the greater the potential impact on the bottom line. Your goal: rent space for a cost that makes sense in light of your company’s projected income. Not an easy task.
Here are four pointers to help you avoid serious pitfalls when leasing commercial property.
- Start early. At least six months before you plan to move in, begin the selection process. Scout out locations and narrow your choices. Waiting until you’re desperate for space may leave you with fewer options. Leasing should not be an impulse purchase. Starting early may also provide opportunities to observe walk-by or drive-by traffic, the location’s visibility, and the habits of neighboring tenants. It may also provide more time for tracking current spending, which will help you develop a better understanding of the level of lease payments your business can afford to pay.
- Compare properties. In addition to identifying a property that’s located near your client base, comparison shopping can provide negotiating leverage. By obtaining lease proposals from several landlords, you may be able to play one against another and carve out a deal that’s especially advantageous to your firm.
- Sweat the details. Read the lease; then read it again. Pay special attention to the length (term) of the lease, renewal options, and scheduled rent increases. You’ll also want to scrutinize clauses describing your responsibility for utilities, maintenance, and upkeep of common areas and systems. The agreement should spell out your options for subleasing and delineate default provisions. For example, the lease may specify that you’ll be locked out immediately for failure to pay the current month’s rent, or may specify a grace period during which you can get caught up. Termination options, security deposits, allowances for leasehold improvements — all should be specified in the contract.
- Seek professional help. Especially if you’re establishing a main office in a new space, it makes sense to hire a real estate attorney or other professional to review the lease terms before signing. An experienced broker may also provide assistance when negotiating lease terms. Careful evaluation and bargaining at the front end may save dollars and avert headaches later on.