Reminder: Tax records needed for 2018 returns

Tax filing season kicks off in a few weeks. What records should you assemble? Due to recent tax law changes, you may not need all the records you’ve kept before. Here are several key areas to focus on:

  • Personal information: You still must provide your Social Security number (SSN), and SSNs for your spouse and dependents.
  • Employment information: Have all Forms W-2 for you and your spouse. A self-employed person must report income from Forms 1099-MISC and Forms K-1, plus information for calculating the new deduction on qualified business income (QBI).
  • Child expenses: Provide information for claiming the increased Child Tax Credit (CTC) and Child and Dependent Care Credit. This may include details for a dependent care provider.
  • Investments: Include all information on various Forms 1099 for capital gains and losses (including cost/basis information), dividends and interest. Fortunately, this can often be scanned electronically.
  • Retirement plans/IRAs: Report contributions to plans and IRAs, the value of accounts and distributions received on Forms 1099-R.
  • Rental properties: This requires records of income received and expenses paid in 2018, including amounts, dates and places.
  • State and local taxes (SALT): Recent legislation limits annual SALT deductions to $10,000 for 2018-2025, but itemizers still need relevant records of SALT payments.
  • Charitable donations: If you itemize, you generally need records for both monetary gifts and donations of property, plus appraisals for property valued above $5,000.
  • Mortgage interest: Itemizers must have Forms 1098 for mortgage interest on acquisition debts that remain deductible.
  • Medical expenses: Collect records and receipts for medical expenses that may push you above the “floor” of 7.5 percent of adjusted gross income (AGI) for 2018.
  • Education expenses: Provide information required for claiming higher education credits, including Forms 1098-T.

Under the new legislation, you may not need records this year for miscellaneous expenses, many casualty and theft losses, moving expenses and home equity debts. Call Carl Heinemann, your Chattanooga CPA, if you have tax record questions about your particular situation.

3 investment blunders everyone should avoid

Whether you’re a seasoned investor or new to the game, you’ll want to make a conscious effort to avoid these three common investment mistakes:

  • Relying on emotions. According to Essentia Analytics, behavioral scientists have studied biases that shown to drive investment choices. For example, you might fall into anchoring bias. That’s the irrational decision to hold on to something — a stock, a car, a piece of information — just because you already own it. Or there’s recency bias, which involves the tendency to lean more heavily on recent investment performance when considering future returns. This type of bias can unduly impact investment decisions as people approach retirement.

    One idea to skirt such emotional hazards may be to place investment contributions on autopilot and readjust portfolios annually to align with long-term goals.

  • Taking or avoiding risk. You might pack your investment portfolio with individual stocks that have performed well in recent years. Unfortunately, if stock in one of these companies takes a dive, your retirement account may never recover. On the other hand, if you’re too averse to risk, inflation may eat up the purchasing power of your money as it languishes in low-interest accounts. To avoid such pitfalls, many people consider investing in a few well-diversified low-cost mutual funds to allow money to grow without undue risk.
  • Not investing at all. If you live only for today and don’t save enough for retirement, you’ll likely struggle to meet expenses later. The good news: Because of compounding returns, the earlier you start saving, the less you may need to save. And if your employer provides matching contributions to your retirement account, take full advantage.

Considering a franchise? Review the risks first

Franchise opportunities abound. A solid franchise company can offer a proven business model, staff training, advertising expertise and many other benefits for jumpstarting a business. But whether you’re selling fast food or repairing cars, it makes sense to identify and scrutinize potential risks before you sign a contract. Here’s what to look out for:

  1. Unrealistic forecasts. The company may have highlighted only successful franchisees in booming markets in its sales pitch. Average income can be deceptive, explaining little about how individual franchisees have performed. Rosy predictions based on historical data don’t always pan out. Obtain market research for the areas you’ve staked out, and talk to other franchisees to identify a realistic timeframe for breaking even.
  2. Unexpected costs. Advertising, initial inventory, legal costs, training, ongoing royalty fees — these expenses and many others can tank a business early on. Identify every potential outlay and build a reserve to cover costs while waiting for revenues to grow. When it comes to expenses, guess high.
  3. Unusually high turnover. The Federal Trade Commission requires franchise companies to provide potential buyers with a Franchise Disclosure Document (FDD). Among other important details, the FDD provides contact information for current franchisees and others who have opted out of the franchise system. Talk to these folks about their experiences, both positive and negative. If the franchise company has been buying a significant number of properties from unit owners, take note. Storm clouds may be brewing.
  4. Unfulfilled promises. Franchise companies may pledge the moon, but deliver something entirely different. For example, you may expect the company to use your advertising fees to promote your local outlet. Instead, the company may pump those dollars into unrelated national advertising.

Franchise companies can help you build a successful business. But don’t forget to analyze the details before signing up.  Call Carl Heinemann, your Chattanooga CPA, for assistance.

Keep your business tax info safe

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.
  • Create an information privacy policy. Establish a company policy for protecting the information your customers provide. For instance, require your employees to shred account receivable records instead of tossing them in the trash, or employ the services of a document-shredding company.
  • 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.

Your health savings account refresher

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.

Owe money to the IRS? You may have options

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:

  1. There is doubt as to the tax liability
  2. There is doubt that the full amount owed can be collected
  3. 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.

Installment agreement

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.

Small business owners: Consider an SEP

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.

Keep track of your digital assets during estate planning

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.

3 tips for determining the value of a business

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.

Saving for school? Check out the updated 529 plan

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:

  1. 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.
  2. 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
  • Books
  • 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.