Monthly Archives: January 2016

Review your retirement plan contributions for the new year

You may have already heard the news: Many tax numbers that are adjusted annually for inflation did not change for 2016. For example, the 401(k) contribution limit remains at $18,000 this year, plus another $6,000 if you’re celebrating your 50th birthday during 2016. SIMPLE plan contributions remain the same for 2016 also. You can save up to $12,500 in your SIMPLE account this year, plus another $3,000 if you’re age 50 or over.

Though the limits haven’t increased, taking full advantage of allowable contributions and any amounts your employer matches is still a good idea. Contributions you make to employer-sponsored retirement plans reduce your taxable income because your employer deducts the amount you specify from your paycheck before taxes. You might also be able to benefit from a savers credit of up to $2,000.

If you’re already contributing the maximum, you may want to consider opening an individual retirement account this year. You can have both types of retirement plans, and a Roth or traditional IRA will help you diversify your retirement holdings and save additional tax-deferred or tax-free money. Just remember that your traditional IRA contribution may not be tax-deductible if you’re eligible to participate in your employer’s plan.

The maximum amount you can contribute to an IRA during 2016 is $5,500 (plus $1,000 when you’re age 50 or older).

Give Carl Heinemann, your Chattanooga CPA, a call for information about these and other tax-sheltered accounts that can offer significant breaks for 2016.

Are you ready for Form 1095?

As you begin preparing year-end 2015 payroll tax returns, take time to consider whether a new Affordable Care Act reporting requirement will affect you. If you’re an applicable large employer, “Form 1095-C, Employer-Provided Health Insurance Offer and Coverage,” is required for each of your full-time employees.

What’s the definition of an applicable large employer (ALE)? You’re considered an ALE when you have 50 or more full-time employees in the prior year. A full-time employee is anyone working on average 30 hours or more per week, or 130 hours per month. You’ll also need to count “full-time equivalent” employees. These are employees whose actual working hours are less than 30 per week, but whose total combined hours meet the equivalent of full-time.

The 2015 Form 1095-C is due to your employees by March 31, 2016, and to the IRS by May 31. (The IRS deadline is June 30 if you file electronically, which you must do when you issue 250 or more forms.) The penalty for not filing Form 1095-C if you’re required to is $250 per form, up to $3 million per year.

Another health insurance payroll reporting requirement to remember: You still need to report the value of health insurance coverage on an employee’s W-2 if you have 250 or more employees.

Give Carl Heinemann, your Chattanooga CPA, a call if you have questions about these or any other payroll reports. We’re here to help.

Congress renews expired tax breaks

You’re probably familiar with tax provisions that expire on an annual basis, also known as “extenders.” In mid-December 2015, Congress renewed the extenders that expired last year.

But this time, the extender renewal went further than making the breaks retroactive to the beginning of 2015. Some of the rules are now effective through December 31, 2016, some are effective through 2019, and some are effective permanently. Other provisions made changes to existing tax rules that were not part of the extenders.

What does that mean for you? For one thing, it means you can benefit from tax breaks such as bonus depreciation, expanded Section 179 expensing, and residential and business energy improvement incentives on your 2015 federal income tax return.

Here are three rules that are back in place for 2015 — and that were permanently extended, meaning they’ll also be available in future years.

  • State and local sales tax deduction. If you itemize, you can choose to deduct sales taxes you paid during 2015 instead of state and local income taxes. You can claim your actual expenses or use optional IRS tables.
  • Educator expenses. If you’re a teacher who spends your own money for classroom supplies, you can claim up to $250 of your expenses as an above-the-line deduction. You may be able to deduct additional out-of-pocket expenses if you itemize.
  • Charitable donations from your IRA. Are you age 70½ or older? You can make a tax-free distribution of up to $100,000 from your IRA when the money is paid directly to a qualified charity.

Please contact Carl Heinemann, your Chattanooga CPA, to discuss how this new law could affect you.

Keep good records for a cash-intensive business

Do your business transactions involve a lot of cash? Because cash transactions are, or can be, anonymous, the IRS takes a special interest in “cash intensive” businesses. One indication of this interest is the “Cash Intensive Businesses Audit Techniques Guide” developed by the IRS. The goal of the guide is to assist IRS examiners in identifying specific issues, business practices, and examination techniques for businesses that primarily deal in cash.

What does that mean for your business? A cash business is generally not required under tax law to use a specific type of bookkeeping method. Still, the added scrutiny means you’ll want to be particularly careful about maintaining books and records that accurately reflect your income and expenses. Here are three suggestions to get you started.

  • Maintain original source documents. Sales invoices and cash register tapes are records that support the amount of income received. Tie these totals to your bank deposits. Remember to track income from electronic transactions, including digital currency, as well as non-cash activity such as bartering.
  • Support non-income cash inflows. Document loans you make to the business with written promissory notes. Keep records of amounts you receive in the form of refunds, rebates, and insurance policy payouts.
  • Practice good internal control. Internal controls are the processes you put in place to maintain the integrity of your accounting information. For example, having more than one person involved in receiving and recording income can help minimize the risk of errors or inadvertent misreporting.

Please call Carl Heinemann, your Chattanooga CPA, for more recommendations and guidance on establishing and maintaining a bookkeeping system that can help you support the income and deductions you report on your tax return.

Clean your financial house for the new year

“Auld Lang Syne” has been sung, the twinkling lights have been returned to the attic, and the inflatable Santa Claus is safely ensconced in a plastic bin in the garage. Now you’re ready to tackle a new year. To get started, take stock of your household finances and set goals for 2016. Here’s a suggested to-do list.

  • Credit reports. By law, you’re entitled to a free credit report every year from each of the three major credit reporting agencies: TransUnion, Experian, and Equifax. January is a good time to review at least one of these reports. Check for unexpected charges and inaccuracies and follow up as needed.
  • Home inventory. With camera in hand, go through the house and shoot a video or snap photos of your possessions. Combine the photographic record with a list of estimated value for each item. Secure a copy of the pictures and the list in a safety deposit box or off-site cloud storage. If disaster strikes, you’ll be able to itemize your assets to support insurance claims.
  • Important documents. If you haven’t prepared a will, the start of a new year is a good time to do so. Without a will, your assets may not be distributed according to your wishes. In addition, you’ll want to compile a list of other vital records such as wedding licenses, insurance policies, and real estate title deeds, noting their location and contents.
  • Financial goals. How much will you save in an emergency fund this year? How quickly will you pay off outstanding debts? Are your retirement plans on track? Revisit your goals and lay out steps to achieve them.
  • Net worth. Calculate the value of your assets. Then subtract your liabilities to arrive at your net worth. Ideally, the number will follow an upward trend from year to year as the value of your assets (house, investments, retirement plans) increase and your liabilities (bank loans, mortgages, credit accounts) decline. If your net worth isn’t moving in the right direction, make changes. Here’s an easy way to get started: If your employer offers a cost-of-living adjustment in January, consider using the increase to bolster your 401(k) contributions.
  • Old records. How long to keep records is a combination of judgment and state and federal statutes of limitations. For example, since federal tax returns can generally be audited for up to three years after filing and up to six years if the IRS suspects underreported income, a general recommendation is to keep tax records at least seven years after a return is filed. Requirements for records kept electronically are the same as for paper records.

If you’d like additional suggestions for organizing your finances and setting financial goals, give Carl Heinemann, your Chattanooga CPA, a call.

Balance sheet analysis provides planning opportunities

Learn to dissect your company’s balance sheet to discover opportunities for growth, imminent shortfalls, financial disasters in the making, and trends both favorable and unfavorable. To jumpstart your analysis, focus on the following key indicators.

Current ratio. The current ratio is calculated by dividing current assets by current liabilities. Current assets generally include cash, investments, short-term accounts receivable, inventory, and supplies. Current liabilities include payroll and other short-term payables, as well as current payments on long-term debts such as mortgages or bank loans. These accounts are classified as “current” because you generally expect to convert them to cash or pay them off within a year or during the current business cycle. For example, you might buy inventory on credit and plan to pay suppliers using proceeds from current sales. The rule of thumb: If your company’s current ratio is greater than one, you have enough short-term assets to cover short-term obligations. If the number dips below one, your business may be headed for trouble.

On the other hand, if the current ratio is three or above, you could be neglecting profitable investment opportunities. For instance, you might have too much money sitting in a low-interest bank account when the funds could be used to develop a new product line, liquidate long-term debt, or invest in a more lucrative venture.

Working capital. Subtract current liabilities from current assets to arrive at this number. Like the current ratio, working capital indicates whether your company has enough cash (and short-term assets that can be converted to cash) to meet current obligations. Banks analyze this number because they’re reluctant to loan money to a business that’s barely covering existing commitments. The greater the amount of working capital, the more likely your company will make payments when due.

Debt-to-equity ratio. You can calculate the debt-to-equity ratio by dividing total liabilities by total equity (assets minus liabilities). The debt-to-equity ratio indicates whether your company is relying excessively on debt to finance current operations. Like the spendthrift who finances an extravagant lifestyle with credit cards, a business that’s heavily leveraged may find itself careening toward bankruptcy. Analyzing this ratio can help you make needed corrections before it’s too late. Generally speaking, the lower the percentage, the stronger your company’s financial health.

For help analyzing your company’s financial statements, give Carl Heinemann, your Chattanooga CPA, a call.