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.

Advertisements

10 Quotes to “Invest in Your Success”

In honor of ‘Small Business Week 2016”, I offer you 10 quotes to help you ‘Invest in your Success’, the theme for this years celebration.

Dreams, put into action, are the initial seeds we sow before we might become an Entrepreneur or Small Business Owner

  • “We all have dreams. But in order to make dreams come into reality, it takes an awful lot of determination, dedication, self-discipline, and effort”- Jesse Owens

Education

  • The road to success is always under construction” – Paul Harvey

Experience

  • “In theory, there is no difference between theory and practice. In practice, there is” – Yogi Berra

Self-Development Growth

  • It may be hard for an egg to turn into a bird: it would be a jolly sight harder for it to learn to fly while remaining an egg.”  – C. S. Lewis

Process – Think, Plan, Execute, Monitor, Measure – Repeat

  • “Change does not roll in on the wheels of inevitability, but comes through continuous struggle. “ – Martin Luther King, Jr.

Investments – Time & Money

  • “Price is what you pay; value is what you get” – Warren Buffet

Measure – Return on Investment (ROI)

  • “The most dangerous kind of waste is the waste we do not recognize” – Shigeo Shingo

Business Efficiencies

  • “I cannot say whether things will get better if we change; what I can say is they must change if they are to get better.”  – Georg C. Lichtenberg

Improvement – Mentor- an easier way to learn and increase efficiencies – Avoid learning the “hard way”

  • That’s the result of Leadership. To make sure that which shouldn’t happen, doesn’t happen” – Tony Blair 

Success- is not a seamless journey. Probably boring if it was. We learn as we grow.

  • I don’t want to get to the end of my life and find that I lived just the length of it. I want to have lived the width of it as well.” Diane Ackerman 

The10 most powerful 2 letter words; If It Is To Be, It Is Up To Me

Thanks for reading!

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health. Her mission is to be an affordable & accessible resource to help answer money questions for individuals and small business. She can help by being your compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com 

 

 

SBW2015: Showing Gratitude for all Small Business Owners

Risk

America is celebrating National Small Business Week all over the country & special events will be held May 4 – May 8, 2015 in cities across the United States & via the web. It is a time that we as consumers can show our appreciation for local business by shopping locally & promoting them by sharing their information with others.

As a small business owner myself, I also thought it would be fun to share a few financial tips that may be helpful to other small business owners. It is another small way to say thank you & show support to my community.

Take Time to Work On Your Business & Not Just In It:
• Financial Statements & Tax Returns both tell a financial story & can be used as a road map or a compass to help guide profitability
• On at least a quarterly basis, Compare your Budgeted/Forecasted Amounts to Actual Results to identity differences (variance)
• Try to determine why there was a difference, if any, & adjust as necessary
• Also compare Year to Year Actual Results – where is your value being created & lost?

Watch The Bottom Line by Protecting your Assets & Managing your Risk:
• On 10/1/15, the financial responsibility (liability) starts to shift for fraudulent transactions to U.S. merchants if they have not upgraded their payment systems to accept EMV Chip Payment Cards. This is true if the card issuing company has added the chip to their card & you have not upgraded your POS system. Rules vary by issuing card companies & products sold. More information can be found from http://www.darkreading.com at : http://t.co/1OqiwTLY0P
• Know your Net Worth & make a conscious decision about how much of it you want to protect by buying insurance & how much you want to “self-insure”

Try Not to Leave Money on the Table:
• Avoid financial pitfalls, fines, & penalties by knowing & applying FLSA laws correctly including classifying Exempt, Non-Exempt, & Independent Contractors & treat them & pay them correctly
• Use the tax laws to strategically plan your business operations to minimize tax expense & keep more money “in your pocket”

Deborah Ann Fox, CPA helps individuals & small business owners build & protect their financial wealth. She is available for in-person, or remote appointments. See http://www.debfoxfinancial.com for more information.