I own a small business, but I’m required to give my personal social security number when I apply for business credit. Do I need to know my business credit score, too?
Answer:
It can’t hurt. Many small business owners receive credit based primarily on their personal credit strength, but building a business credit rating can help some firms grow. Dun & Bradstreet is a primary source of business credit reports, which other companies often seek to determine the creditworthiness of future business partners and their ability to pay their bills. Creditors can also decide lending rates for your business with this report, while insurance companies may use it to figure premiums.
Question:
Last year I paid the Alternative Minimum Tax (AMT) and I wonder how I might avoid paying it again for 2019. I heard there are a few things I can do.
Answer:
There are. For starters, make sure you itemize on your tax return. Then, increase qualified retirement contributions up to the maximum your plan or account allows. Consider increasing contributions to a Health Savings Account (HSA) and qualified charities, too. Talk to your tax professional to learn other ways to save and, for that matter, whether you even have to pay the AMT in light of generous new limits.
While Black Friday – the day after Thanksgiving – has become one of the biggest sales events of the year for the largest retailers, small business owners look forward to Small Business Saturday – the next day – as one of their busiest days. If you own a small business, here’s how you might position yourself for success that day.
ADVERTISE
If you depend on foot traffic, as many Main Street businesses do, advertise prominently on your storefront so that people walking by notice. Advertise sales in your community paper and especially via apps and social media. Perhaps you’ll publicize a promotion where the winners come away with merchandise as their prizes.
INCENTIVIZE
You’ll have to start by cutting prices in line with what your competitors charge. Consider providing services like free wrapping, and offering additional incentives for shoppers on your preferred and frequent customer lists. You might also give a small bonus or increased commissions to workers who serve your clients on this big day.
TRAIN
Your employees are your customers’ first and last impression. Train them to greet everyone with a smile and a comprehensive knowledge of the merchandise they’ll sell.
In the wake of a record stock market, the last thing most investors think of is a coming bear market. Expect one, though, because history shows that what goes up almost always comes down. The steps you take now will determine how well you survive the next bear market.
IT’S NOT ALL BAD
A bear market is one in which prices decline at least 20% from their high, as often measured by the Standard & Poor’s (S&P) 500 or the Dow Jones Industrial Average (DJIA). While you wouldn’t normally associate bear markets with good news, there is some during a down market.
When you realize more investment losses than profits during a given year, you get to deduct the difference on your income tax return, just as you have to report realized capital gains. (Unrealized gains and losses have no effect on your tax picture.) Your tax professional can tell you which investments qualify, the annual limits and more.
REVIEW YOUR INVESTMENTS
You can take some common-sense steps that may help you survive a bear market before one happens. Rebalance your portfolio regularly. Recent stock market increases, for instance, can increase stocks as a percentage of your portfolio more than you intended.
Don’t panic, either. If you have conservative investments that match short-term goals and you can wait out price swings on solid investments for your long-term goals, you may want to wait out the volatility.
Amy is giving her employees large year-end bonuses in December for increasing sales, and some employees asked about putting their bonuses into their 401(k) plan. Can they, and what does she have to do to allow these lump-sum contributions?
If Amy’s qualified retirement plan documents don’t allow for lump-sum contributions, her company will need to work with legal and tax professionals to add the stipulation. This may take a pay period or more, so consider making the change now if you intend to allow future lump-sum contributions.
Amy will also need to ensure that making this change doesn’t trigger unintended consequences. For instance, will her company match the lump-sum amount?
Will the one-time contribution fall within the limits established by the plan? In the latter case, top earners who already contribute an amount close to IRS limits may exceed it with the lump-sum contribution, triggering penalties and other tax consequences.
While generous, Amy should first examine these and other considerations before making a decision.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.
Divorce is emotionally painful, and it can also hurt financially. From splitting retirement and other assets to negotiating child and spousal support, there are tax and financial landmines that forethought and planning can help you avoid.
RETIREMENT ASSETS
Retirement plans are often a source of disagreement in divorces. When proper procedures are followed, the transfer of retirement assets to a divorcing spouse’s retirement account is typically tax-free. It’s important to consult legal and tax professionals to learn how to avoid setting off tax alarms, as procedures for a tax-free split of IRA and 401(k) plan assets differ. And a divorcing individual will usually want to avoid taking a direct distribution to give to a spouse, due to its negative tax effect.
DOING THE SPLIT
Other asset splits will produce varying tax and financial consequences. Is a buyout better than paying capital gains taxes on property? If so, a divorcing individual who buys out previously joint property in a settlement should try to avoid withdrawing retirement assets to pay for it, which can trigger early distribution penalties and additional income taxes.
How will a state’s community property laws affect the transfer of assets? Divorcing couples need the answers to these and other questions, including the tax treatment of spousal and child support and who gets to claim children as dependents on their tax return after divorce.
PLAN NOW
No one gets married planning to get a divorce, but it happens. If this happens to you, try to resolve issues as swiftly and amicably as possible. The longer things drag out, the more complicated issues can become. And, if you are thinking about marriage and have substantial assets, consider a prenuptial agreement to protect what is yours.
As summer turns to fall, employers across the country are getting ready to present their annual open enrollment options for employee benefits. As an employee, whether you’re a newbie or an experienced hand at choosing employee benefits, it is crucial to do your homework before making your selections.
WEIGH YOUR CHOICES
Health and other benefit options can change from one year to the next, even when providers haven’t. Health insurance plans regularly change their premiums, deductibles and other out-of-pocket costs, and employers could pass increases on to employees. Plans add and subtract network health providers, and may do the same with peripheral benefits such as chiropractic care and acupuncture.
You’ll also want to examine any health savings plans offered, including the Health Savings Account (HSA) if you have a high-deductible health plan. HSA contributions are deducted pretax, and potential earnings and qualified withdrawals are tax-free. In 2020, contribution limits will increase to $3,550 for self-only coverage and $7,100 for family coverage.
And There’s More
While health insurance is the primary “want” of most employees, other benefits may play an important role in your financial and risk planning. Employer-sponsored life insurance – typically of the term variety – can provide a good foundation of insurance to help protect loved ones. Because it is group life insurance, it typically won’t need underwriting – an important consideration for employees with preexisting conditions.
Disability income (DI) insurance may also be an important coverage for younger employees, who are much more likely to become disabled than to die at their age. This insurance protects what is many employees’ largest asset – their ability to earn a living. Life insurance, DI and other benefits may also be tax-advantaged, reducing taxable income and, ultimately, taxes.
These are a few of what can be many benefit offerings. Discuss your choices with your financial and tax professionals.
Young architects working on project in office together
These days, most businesses need a website to remain competitive. It’s an easy decision to set one up and maintain it. But determining the proper tax treatment for the costs involved in developing a website isn’t so easy.
That’s because the IRS hasn’t released any official guidance on these costs yet. Consequently, you must apply existing guidance on other costs to the issue of website development costs.
Hardware and software
First, let’s look at the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.
In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.
For tax years beginning in 2019, the maximum Sec. 179 deduction is $1.02 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2019 is $2.55 million.
There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).
Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.
Software developed internally
If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.
An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.
A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.
Third party payments
Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.
Before business begins
Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.
We can help
We can determine the appropriate treatment for these costs for federal income tax purposes. Contact us if you have questions or want more information.
boost business concept, process from idea to result
Audited financial statements come with a special bonus: a “management letter” that recommends ways to improve your business. That’s free advice from financial pros who’ve seen hundreds of businesses at their best (and worst) and who know which strategies work (and which don’t). If you haven’t already implemented changes based on last year’s management letter, there’s no time like the present to improve your business operations.
Reporting deficiencies
Auditing standards require auditors to communicate in writing about “material weaknesses or significant deficiencies” that are discovered during audit fieldwork.
The AICPA defines material weakness as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.” Likewise, a significant deficiency is defined as “a deficiency, or a combination of deficiencies, in internal control that is … important enough to merit attention by those charged with governance.”
Auditors may unearth less-severe weaknesses and operating inefficiencies during the course of an audit. Reporting these items is optional, but they’re often included in the management letter.
Looking beyond internal controls
Auditors may observe a wide range of issues during audit fieldwork. An obvious example is internal control shortfalls. But other issues covered in a management letter may relate to:
Cash management,
Operating workflow,
Control of production schedules,
Capacity,
Defects and waste,
Employee benefits,
Safety,
Website management,
Technology improvements, and
Energy consumption.
Management letters are usually organized by functional area: production, warehouse, sales and marketing, accounting, human resources, shipping/receiving and so forth. The write-up for each deficiency includes an observation (including a cause, if observed), financial and qualitative impacts, and a recommended course of action.
Striving for continuous improvement
Too often, management letters are filed away with the financial statements — and the same issues are reported in the management letter year after year. But proactive business owners and management recognize the valuable insight contained in these letters and take corrective action soon after they’re received. Contact us to help get the ball rolling before the start of next year’s audit.
