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:
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:
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.