Monthly Archives: November 2016

Kick-start deductions for a new business

Are you launching a new business venture? If so, you’ve probably spent money getting ready to open your doors. Normally, you’re required to amortize these “startup” costs over a period of 180 months, starting with the month your business begins. That time period means you’ll typically write off your initial expenditures in 15 years. However, under a special provision of the tax code, you can expense up to $5,000 of the costs in the year you begin business, with no waiting.

To benefit from the break this year, your business must be in operation before January 1, 2017. Depending on the type of business, if you open the doors to customers or allow online sales around the holidays, you’ll most likely qualify.

What expenses are eligible for the immediate deduction? The general rule is that qualifying costs are investigatory or the kind you’d be able to deduct if the business was already operating. Examples of investigatory costs include an analysis or survey of potential markets, products, and labor supply. Qualifying costs that you incur before beginning operations include ads for your business opening, salaries and wages for employees who are being trained, and consultant fees.

Be aware that the $5,000 current deduction is reduced on a dollar-for-dollar basis when startup costs exceed $50,000. For example, suppose you sink $53,000 into a new venture that begins doing business before the end of the year. As a result, the current deduction is reduced to $2,000 ($5,000 – $3,000). The remaining startup expenses must be amortized under the usual rules.

  • Tip. Track your startup costs so you can take maximum advantage of the current write-off.

Got questions? Contact Carl Heinemann, your Chattanooga CPA, for more information.

Harvest gains or losses at year-end

From a tax planning perspective, the end of the year is the “season of the harvest” for capital gains. Harvesting means you analyze your portfolio, determine your tax situation, and select investment sales to generate capital gains or losses, as your circumstances require.

Why consider the harvesting strategy? Think about how capital gains are taxed on your federal income tax return. Short-term gain, typically defined as gain from the sale of assets you’ve owned for a year or less, is taxed at ordinary income rates. Those rates can be as high as 39.6%. Long-term gain on assets you’ve owned longer than one year is taxed at rates that vary from 0% to 20%, depending on your income tax bracket.

Under long-standing rules, capital gains and losses from securities transactions, as well as dispositions of other capital assets, are “netted” for tax purposes. Netting means gains and losses initially offset each other. After netting, remaining losses can offset up to $3,000 of ordinary income for the year. Any excess is carried over to future years.

If you realize capital gains at year-end, those gains may be absorbed by previous losses, while any excess long-term capital gain is taxed at the favorable rates. This is especially advantageous if you realize short-term gain up to the amount of your losses. On the other hand, if you have prior capital gains, you might realize losses up to the amount of those gains.

Other tax factors may also come into play. For instance, capital gains are treated as “net investment income” for purposes of the 3.8% net investment income surtax. Realizing gains at year-end may trigger or increase your exposure to this tax.

Of course, taxes are only one consideration when making investment decisions. For help assessing whether a harvesting strategy will work for you, and for more year-end tax saving ideas, give Carl Heinemann, your Chattanooga CPA, a call.

Get help when responding to an IRS notice

Have you received an IRS notice? If you want help responding, you may need to grant authorization so the IRS can discuss the matter with a representative of your choice. That’s because your tax return is your private business, and the IRS is prohibited from releasing information you report, except in limited circumstances.

Here are two ways to grant authority for access to certain tax information.

  • Form 8821, “Tax Information Authorization.” This form is a disclosure authorization that allows the person you choose to automatically receive notices and other information about your federal taxes for periods you specify. You can revoke the authorization by submitting a signed copy of the original with the word “Revoke” written across the authorization you no longer want to grant. Don’t have a copy of the original form? Send a letter to the IRS instead, with your information and revocation request.
  • Form 2848, “Power of Attorney and Declaration of Representative.” The power of attorney lets someone who is eligible to practice before the IRS represent you and, in some cases, sign agreements and other documents on your behalf. You can revoke a power of attorney by filing a new one for the same tax period, or by sending a signed copy of the original with the word “Revoke” written across the top.

Other forms may be required, depending on the type of tax information and how much authority you want to grant. Contact Carl Heinemann, your Chattanooga CPA, for assistance. We’ll help you choose the appropriate level of authorization and complete the necessary form.

Reduce taxes and penalties by planning for required minimum distributions

Are you over age 70½? Do you own a traditional IRA? You may need to take a required minimum distribution from your account before year-end. If you don’t need the income yet, you may be wishing you had other options. One reason: Depending on the size of your required minimum distributions, you can potentially pay more tax during your retirement than you were paying before you retired. The distribution is also included in your provisional income, which can trigger a tax on your social security. Yet if you don’t take the distribution, you might have to pay a penalty of 50% of the amount you did not withdraw. What can you do?

An option that might help this year is to make a qualified charitable contribution. When you’re age 70½ or older, you can distribute up to $100,000 to a qualified charity directly from your IRA. The annual distribution is excluded from income and is counted as a required distribution.

For future years, consider converting all or part of your traditional IRA to a Roth. A conversion helps minimize future required distributions from your traditional IRA. In addition, you typically don’t have to take withdrawals from Roth accounts, and money you do withdraw is tax-free. You even have the option of “undoing” the conversion next year if you think you made a mistake.

What about the tax you’ll have to pay on the conversion? By “filling” your current tax bracket you can pay the tax at your current income tax rate. Filling a bracket means you convert an amount that keeps your income below the top of the income range for that bracket. For example, the upper limit of the 15% tax bracket is $75,300 in 2016 when you’re married filing jointly. Say your estimated income for 2016 is $65,000. You can convert approximately $10,000 from a traditional IRA to a Roth before you move into the next tax bracket.

Caution: Be aware you can’t convert your required minimum distribution to a Roth. You can, however, use the distribution to pay the federal income tax due on the conversion.

If you have questions about required minimum distributions, contact Carl Heinemann, your Chattanooga CPA. We’re here to help.

Do you know your partner’s money story?

Where finances are concerned, young newlyweds may enter into matrimony blind. With little training in money matters, either in school or at home, unresolved financial stresses may strain new marriages to the breaking point. In fact, several studies have shown that conflicts over money are a major contributing factor to divorce. To counter that result, address financial expectations, attitudes, and habits early on. Here are four tips to jumpstart the conversation.

  • Discuss expectations. Some people grow up in frugal households where every dollar must do double duty. Others are raised in families that spend freely, live beyond their means, and fully embrace a pay-as-you-go mentality. When young people from these two extremes meet and fall in love, conflict is inevitable. That’s why knowing your partner’s “money story” is crucial. Take time to learn the reasons that underlie attitudes toward finances so you can avoid or minimize emotional triggers that may lead to conflict.
  • Don’t spend too much, too soon. Avoid starting your marriage with unrealistic expectations. Before you sign a contract that may constrain future financial decisions, take a hard look at your needs and your cash flow. As a rule of thumb, keep your mortgage or rent payment below 30% of your income. If you have student debt to pay off, be willing to sacrifice a few luxuries in the short term to clear that account. Start small, save, and build wealth over time.
  • Agree on priorities. Schedule time for regular budget talks. Draft a budget to use as a starting point for negotiations. Be willing to compromise. Then hold each other accountable.
  • Prepare for emergencies. Build up an easily-accessible account with enough money to cover three to six months of expenses. Make sure your spouse has a current list of account numbers, user names, and passwords.

Contact Carl Heinemann, your Chattanooga CPA, for assistance with these and other money management questions.

Improve your business email etiquette

Like it or not, email is here to stay. When your message must be absolutely clear and defensible, composing and sending a carefully crafted letter in the postal mail may be appropriate. But your customers, vendors, and employees most likely prefer the convenience and efficiency of email. It’s fast, easy, and often doesn’t require much deliberation.

Unfortunately, the expediency of email can be one of its greatest pitfalls. After all, business communication, whether typewritten on fine paper or shared electronically, reflects on your company and your staff. Each email has the potential to enhance or degrade your firm’s reputation. Here are simple rules of email etiquette that can help keep your digital communication from giving a bad impression.

  • Make the subject clear. Every day, email recipients wade through bulging inboxes. Your message may get lost in the shuffle if the subject line is vague or generic. For example, instead of typing “vendor issue” in the subject line, write “ABC Company invoice number 1255 needs attention.”
  • Get to the point. Busy people generally have no time to read five paragraphs before the real message emerges. Keep your email short and simple. Describe the action you’d like the reader to take or the information you’d like to convey in the first sentence or two.
  • Proofread before sending. What impression do you think the recipient will form if your email is replete with grammatical errors, spelling mistakes, and poorly worded sentences? To avoid creating a negative image, take a few minutes to fix these problems before hitting “send.” If the email contains sensitive information or the recipient is an especially important customer or client, ask a coworker to read through the message first.
  • Take a deep breath. When an obnoxious email pushes your emotional buttons, resist the temptation to fire back in anger or frustration. Slow down. Put your draft reply in a separate folder. Revisit your response when your emotions have cooled off. You’ll be glad you did.
  • Keep private matters private. You’ve no doubt heard about a highly sensitive business deal or a stellar reputation that was ruined because a careless worker or manager sent an incautious email. When your text contains private or potentially confidential information, take care. If a sensitive message must be communicated right away, pick up the phone or schedule a face-to-face meeting.

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