Alphabet – Tax Terms & Tips

 

“Work Anywhere – includes an ice skating rink @ Hotel Del in Coronado, CA.

 

Almost a year ago, I presented my demo workshop titled “IRS Compliance and Strategy” for the University of Texas at San Antonio, Small Business Development Center (UTSA SBDC). My mentor, Ruben Lopez, MBA, and I identified the need for this class in our conversations. What I thought was important for a small business owner to know, Ruben, thought was important too. He suggested I create a class and if requested, present a demo, which I did, on 11/22/16. Since that time, I have taught this class, thankfully, several times for times for them and I look forward to teaching more.

While the students were learning from me, I, too, was learning from them. Their questions identified new topics that could be taught in class.

Every well-built house begins with a blueprint; I created this class as an IRS Business Basics- a blueprint for entrepreneurs and new small business owners. In today’s “Sharing Economy”, “small business owners” include independent contractors and freelancers. If you are just collecting your 1099-Miscellaneous forms and not tracking expenses, you are probably paying too much tax.

What we don’t know can often hurt us financially and education can prevent a problem.

This blog was created to help others learn, understand, and apply general income tax rules and procedures. I thought the alphabet format would be a fun way to teach tax terms & topics and hope you think so too.

A is for:

  • Accounting Method is how income and expenses are reported for taxation purposes:
  • Cash Method: Income is reported when constructively received (not earned) and expenses when paid (not incurred).
  • Accrual Method: Income is reported when earned (not necessarily received) and expenses when incurred (not necessarily paid).

B is for Basis of an Asset

  • Basis, in an asset, is its cost plus sales tax and other expenses incurred to acquire the property or to place the asset in service for tax purposes. This basis is used to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of the property
  • The Initial basis can be increased or decreased for various items = Adjusted Basis
  • Maintain your basis for each asset to determine the accurate gain/loss
  • Retain supporting documentation for the life of the asset
  • Basis Limitation, is the limit on deducting losses, to the extent of the shareholder’s basis in the S Corporation or partner’s basis in the partnership

 

C is for Corporation

  • C-Corporation: “Double-Taxation” applies: the profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends
  • S-Corporation: Corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S Corporations report the flow-through of income and losses on their personal tax returns

 

D is for Depreciation:

  • Depreciation is an annual deduction that allows taxpayers to recover the cost of property used in a trade or business or held for the production of income. The amount of depreciation depends on the basis of the property, its recovery period, and the depreciation method.
  • Depreciation Recapture: Amount of depreciation or section 179 deduction that must be reported as ordinary income when property is sold at a gain.

 

E is for: Estimated Tax

  • Method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony)

 

F is for:

  • Failure to File (FTF) Penalty is 5%, of the additional taxes owed amount, for every month, or fraction of a month, the return is late, up to a maximum of 25%.
  • Failure to Pay (PTF) Penalty is the most common penalty issued by the IRS. 0.5% per month, or fraction of a month, up to 25%.

Tax Tip: Note there are 2 penalties. If you cannot afford to pay, at least file, and save yourself the cost of 1 penalty.

 

G is for Gig Economy:

  • Also known as the Sharing Economy or On Demand economy
  • File and Pay estimated taxes
  • Note that Self-Employment Tax is in addition to the Income Tax
  • Expect that a 1099-Misc will be issued to the IRS and to you if payments were more than $600/annually

 

H is for: “Hobby”

  • An activity is either a Hobby or a Business
  • An activity is, generally, presumed to be a Hobby if a profit is not earned in at least 3 of 5 taxable years
  • Tax deductions for hobby losses are limited to the income produced

 

I is for Independent Contractor

  • The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
  • The basic rule is that you must file 1099MISC whenever you pay an unincorporated independent contractor (sole proprietor or member of a partnership or LLC) — $600 or more in a year for work done in the course of your trade or business.

 

J is for Joint and Several Tax Liability

  • Married Filing Joint: Both you and your spouse are generally responsible for the tax and interest or penalties due on the return
  • This means that if one spouse doesn’t pay the tax due, the other may have to
  • Or, if one spouse doesn’t report the correct tax, both spouses may be responsible for any additional taxes assessed by the IRS

 

K is for Kiddie Tax:

Investment income of a child is taxed at the parent’s tax rate

 

L is for Limited Liability Company (LLC)

  • Notice that this is not a corporation
  • An LLC is created by state statue and is not an IRS filing status

 

M is for: Meals and Lodging:

  • You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to perform your duties. In most cases, you can deduct only 50% of your meal expenses.
  • You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests: Directly –Related test or Associated test
  • In general, you can deduct only 50% of your business-related meal and entertainment expenses

 

N is for Net Operating Loss

  • If your deductions for the year are more than your income for the year (line 41 of your Form 1040 is a negative number), you may have a net operating loss (NOL). You can use an NOL by deducting it from your income in another year or years.

 

O is for Ordinary and Necessary:

  • A business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.

 

P is for Profit and Loss

  • Profit & Loss statements are required for small business loans, for a mortgage, and to determine tax owed for the IRS and/or your state
  • Review at least quarterly to determine if Self-Employment Tax & Estimated Tax payments are required

 

Q is for Quarterly Tax Reporting & Payments

  • The U.S. Tax system is “Pay as You Go” and generally not at the end of the year
  • Accounting records must be kept current to determine if quarterly payments are required

 

R is Refundable Credit

  • A Refundable tax credit means you get a refund, even if it is more than you owe
  • A Non-Refundable tax credit means you get a refund only up to the amount that you owe

 

S is for Self-Employment Tax:

  • 2017 Self-Employed Tax Rate, on net earnings of $400+, is 15.3%
  • 4% for Social Security and 2.9% Medicare Tax = 15.3%
  • For 2017, Social Security wages are capped at $127,200
  • Medicare Tax applies to all income; i.e. a wage limit does not apply

 

T is for Taxable Income

  • Gross income, minus any adjustments to income, any allowable exemptions, and either itemized deductions or the standard deduction = Taxable Income

 

U is for Use Tax

  • A tax on purchases made outside the state for use in the state. Residents are responsible for paying the tax on purchases for which no state sales tax has been charged. The tax applies to transactions that would be subject to sales tax if the purchase were made in the state.

 

V is for Vehicle

  • IRS Deduction for operating a vehicle for business, charitable, medical, or moving; track each separately- different rates apply
  • Standard Mileage Rates or the Actual Costs of using the vehicle
  • A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

 

W is for Withholding (Federal Income Tax)

  • To avoid an Underpayment Penalty, estimate your 2017 tax liability, to see if you should adjust your withholding, or make an estimated payment before year-end

 

X is a tough one; X “Marks the Spot” or Solving for an Unknown:

  • You can fill in the blank on this one, or choose
  • X = Your Break Even Point
  • Unknown is your 2017 estimated tax liability

 

Y is for Year-End Tax Planning

  • There is still time to setup an appointment for year-end tax planning by December 31. Being in control of your finances & taxes is a great stress reliever.

 

Z is for Zero Based Budgeting (ZBB)

ZBB is a method to prepare cash flow budgets & operating plans. Each year these start from scratch and do not use incremental budgeting, in which past sales and expenses are assumed to continue. ZBB requires a systematic basis for resource allocation; cost-benefit analysis and priority ranking are part of the process.

 ©2017 Deborah Fox, CPA

 

Thanks for reading.

To your success,

Deb

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth though education, strategy, and proactive tax planning. Deb thinks this is the fun part of tax because it makes a financial difference for her clients, their business, and their families.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.DeborahFoxCPA.com 

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

The blog is provided as general information only and should not be considered a substitute for the advice and services of an attorney or Certified Public Accountant.

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Part 2: Financial Success : Our Kids: Money, Its Value & Values

piggy

Teaching kids about money, its value, & values can be frequently connected to each other.

Kids learn when they are young that money is something we trade for something else.

Teaching kids “value” is also something we can introduce to them when they are young.

How many times as parents, have we heard, “Mom/Dad, will you buy this for me?” We tell them, no, but you can spend your own money to buy it and then they decide they don’t want it. As the parent, you might think, I sure am glad I did not spend my money on something they don’t really want. I know I did & was glad that I had responded the way that I had.

Yes, the kids thought they wanted “it” & they did, when they did not have to pay for it. The “value” changed when they needed to spend their own money. Kids begin to learn that “value is what we think something is worth”. If we buy it, they don’t have to think about it. If they buy it, the value or the cost becomes a reality. Kids can become “pretty tight fisted” when it comes to spending their own money & that is a good thing.

Indirectly, they are also learning “relative value”. Yes, I want that, but I want something else more. Slowly, they begin to learn delayed gratification, priorities, & the need to save their money for what they want or think they need.

Kids often think that they need a certain brand of clothes or perhaps shoes & there are a lot of reasons for them to think this way. As parents, we can choose to re-enforce this belief or use it as a springboard for education. Yes, they might need a new pair of jeans or shoes, but you could set a dollar limit on what they can spend. If you want to spend $60 for that item & they want something more expensive, tell them they can earn the difference & you will give them the $60 when they have enough money to pay for it, Until then, they wait or can have the $60 item.

Teach your kids to count & also teach them what counts
• Tell your kids that advertisements are designed to try to get people to buy things
• Educate them that retailers place “impulse items” at the check out in the hope that you will decide to buy it while you were waiting in line
• Teach them to comparison shop: buy the store brand or the name brand? What is the difference in cost? Let them know that sometimes you can taste the difference, but most of the time you cannot. Why spend more money on something you can’t even taste?

Perspective on our possessions can help us learn about value as we develop our values:
• When my son, Jason, was in 9th grade he tutored Hispanic children in the Colonia’s outside of McAllen, TX. Most of the children’s parents only spoke Spanish & lacked education to help their children with their homework. Jason tutored one day a week for the school year & grew to be more thankful for what he had. After his 1st visit, he told me he was glad to even have a pair of shoes. Serving others that had so much less, made his heart more sensitive to other people – less judgmental, more caring. Of course a boy is not going to tell you that, but I could see it in his actions. For example, when he was older, he & a friend bought pizzas & served them to the homeless, who were living under the bridges in Houston.
• Learning to appreciate what we have helps us value our possessions; it subtly teaches perspective & gratitude

Build their self-esteem. Become an advocate & a role model to show them “who you are is more important than what you own”
• Share good examples of living “beneath your means” – tell them Warren Buffet is one of the richest people in the world & he is well known for being “frugal” with his money
• Tell them that even though Warren is worth billions, he still lives in the same house he bought before he had very much money
• Let them know there is a big difference between what you make, what you have, & what you keep
• To have money, we need to learn how to earn it, how to spend it, how to keep it, and how we try to make more money by saving & investing

    Marty Rubin said, “A scale can tell what a body weighs, but not its value.” Like wise, our value comes from within – not outside of ourselves.

Thanks for reading,
Deb

Deborah Ann Fox, CPA uses her “money” knowledge to help families & small business with budgeting, homeownership/debt, tax planning (saving), cash management, etc. She is available for side-by-side, local, & remote appointments. She offers free 30-minute consultations.

http://www.debfoxfinancial.com

Money Spent, Wisdom Gained, & 20 Helpful Tips

piggy

Many of us have said, “I wish I had known then what I do now; I would have done things differently”.

This is particularly true when it comes to money & our financial situations. Money trouble or challenges occur for a variety of reasons:

We spend when we shouldn’t or we spend without understanding the true cost:

As a student, perhaps we used some of our student loan to go shopping. Maybe, we bought things we knew we couldn’t afford because we wanted or deserved it, or signed contracts without reading or fully understanding them.

We spend because we lose our job & spent our financial safety net to survive

Sometimes we end up in money trouble just because of unexpected life events. This has happened a lot since 2008 when people suddenly found themselves with a “pink slip” & not able to get another well paying job. Even if you had the now outdated 3-6 months livings expense safety cushion, it wasn’t enough. Debt piled up.

We spend because we don’t have any other choice; it is a revolving circle:

When debt piles up, we may play the “rob Peter to pay Paul” tactic & move debt from one card to another.

We pay the bills for the services that are the most important to us – housing, electric, phone, gas, & food and hope we can pay the rest of the bills -soon. We hope something will change and actively seek solutions.

We spend to pay high service fees: Fringe Banking, Unbanked, & Under -banked:

The movie “Spent: Looking for Change”, is about hardworking Americans who do not have access to traditional banking services. The film tells us that there are nearly 70 million Americans that are unbanked & financially underserved. They use check cashers, pawns shops, payday lenders, & money order services. These alternative financial services are expensive & those that least can afford it spend more than traditional bank users to cash their payroll checks & to pay their bills.

We spend because we want our tax refund now:

Low to moderate income tax payers pay extremely high interest rates & fees to get some or part of their tax refund now rather than wait a couple of weeks and avoid these needless high expense charges.

The National Consumer Law Center’s website provides the following description:

  • Refund anticipation checks (RACs) – RACs are a financial product used to deliver refunds and to pay for tax preparation fees by deducting them from the consumer’s tax refund.
  •  RALs from non-bank lenders – A few payday and other non-bank lenders are offering RALs. These loans could be more expensive and riskier than bank RALs.

Since the 2008 recession, many people have permanently changed the way they spend their money.

Following are 20 tips to help you make your money go further. This, then will provide you the opportunity to either pay down debt, build a safety cushion, or invest in your future.

Money Management & Spending Tips:

  1. Some “assets” appreciate and can go up in value; spending money here makes sense
  1. Other “assets” depreciate as soon as you buy them – cars, furniture; consider buying used or refurbished
  1. Accountants use a term called “Sunk Costs” which means a cost that has already been incurred & cannot be recovered; limit your sunk costs
  1. Opportunity Costs: the value of something that must be given up to achieve something else; limit how much you spend on a things that you want; you might need the money later for a need
  1. Good debt provides you an opportunity to get ahead; there can be a return on your investment; i.e. a mortgage on a home
  1. Bad debt includes high interest rates on unpaid credit card balances
  1. Borrowing on credit is expensive; debt makes you a slave to payments; you’re a hostage with limited life choices & flexibility
  1. Building & Maintaining a good credit score means it will cost you less to borrow money
  1. Forgo bad debt & instead, build toward your dreams
  1. When you want to spend instead of save, think about your long-term goals. Is going out to eat, buying coffee at Starbucks, going shopping because you feel depressed or want something new worth adding more debt or forgoing savings?
  1. Read your contracts & plan for both the best & the worse scenario- can you afford both?
  1. Know that managing money is becoming more simple and that there are is a lot of free help
  1. Use the internet to learn more about personal finance- Coursera offers free classes
  1. Use on line tools to help you determine your best money moves; I have several on my website, on the resources page
  1. Hire someone to help you understand & determine your best possible alternatives
  1. Avoid “problem pile-ups”- it is too hard to solve almost anything that way. Choose one thing to work on, resolve, choose another
  1. Don’t beat yourself up if you made what you consider a “money mistake”. Ideally, we all learn as we grow. This is a normal part of life & it is fully possible to recover & regroup
  1. Don’t assume you know the answer, because you think “it is true” or someone told you. Look for the answer yourself or try to get your answers in writing from an objective source
  1. If you are a parent, be careful that you are not unintentionally teaching your children poor money habits by saying things like, “I am not answering the phone, it is another bill collector”
  1. Sometimes we learned poor money habits as a kid and carried them with us in to adulthood without realizing it. This has become so common that there is a new field of study & help: Behavioral Finance. Learn about this is if it applies to you

Deborah Fox, CPA is working to make financial information affordable & accessible. She helps others improve or protect their personal or business financial health by answering specific money questions. She provides information while building knowledge & practical skill levels for her clients. She is available for local or remote appointments. Thanks for reading.

Website: www.debfoxfinancial.com

e-mail: debfoxfinancial@gmail.com

Phone: 619-549-2717

Financial Literacy – No App for That, but…

Over the past few years, we have heard or said “there is an App for that” and indeed, from a financial literacy perspective, there are applications for:

  • Mobile Banking
  • Budgeting
  • Cash Flow Management
  • Investing Loan Calculators

These are helpful but currently can only help us so much.  There are resources to help fill in the gaps such as:

  • The American Institute of Certified Public Accountants (AICPA) has a free community service program titled 360 Degrees of Financial Literacy.  http://www.360financialliteracy.org . The goal is to help people make smart financial decisions at every stage of life.  Information is included for both personal finance and for small business owners.
  • Feed the Pig: www.feedthepig.org was designed to encourage 25-34 year olds to take control of their personal finances.

Poverty-Action.org has a paper titled Keeping it Simple: Financial Literacy and Rules of Thumb http://personal.lse.ac.uk/fischerg/Assets/KIS-DFS-March2013.pdf .  The research suggests that reducing complexity can improve effectiveness. Rather than teach double-entry accounting, working capital management, and investment decisions to some business owners, Rules of Thumb could be used. Most of us use some of these in our personal life, but as a country we do not do a very good job in practice.

The Council for Economic Education: Survey of the States 2011: The State of Economic and Personal Finance Education in our Nation’s Schools http://www.councilforeconed.org/news-information/survey-of-the-states/ includes a lot of information that is important for our kids, ourselves, and our economic future.

We are all busy and we usually only seek information when we need it; i.e. “just in time education”.  Some people like to learn on their own and for you, I have provided some on- line resources. Others like to learn with someone and for you, perhaps, I can be your partner. As Benjamin Franklin said, “an investment in knowledge pays the best interest”. Please let me know if I can help.

Email: debfoxfinancial@gmail.com

I hope this information helps to empower you to navigate life’s uncertain financial seas. Life is meant to be good; enjoy.