Category: Newsletters

DEDUCTION ERRORS

According to the Treasury Inspector General for Tax Administration, the IRS allowed business owners to claim $57 million in potentially erroneous qualified business income deductions on 2019 tax returns. The way this pass-through deduction is written is very complicated, and it’s part of the reason for the deduction errors.

SLASHED CONTRIBUTIONS

The COVID-19 pandemic caused many businesses to change how they contribute to employees’ 401(k) accounts. It’s estimated that 46,000 401(k) plans were affected because companies paused discretionary funding to employees’ accounts, cutting back on matching contributions or ditching all matching contributions.

ECONOMIC EDUCATION

A new study in the Journal of Children and Poverty revealed that youths with a savings account in their name, regardless of the balance, were approximately six times more likely to attend college than those with no account. Additionally, growing up in a family that manages assets well — such as savings and equity in a home — shows that assets, not income is associated with college success.

MOM FACTS

According to a study by the Pew Research Center, the median age that a woman becomes a mother is 26, up from 24 in 1994. And highly educated women are increasingly becoming moms. Eighty percent of women with a Ph.D. or other professional degree have given birth. And a rising share of births to foreign-born mothers is increasing diversity as nearly one-third of all births in California, New York and New Jersey were to mothers who were born outside the US.

QUESTION:

I recently moved. How do I notify the IRS of my new address?

ANSWER:

You will need to officially notify them of your new address. Changing your address with the post office won’t cut it. You can accomplish this in a few different ways. First, you can complete Form 8822, the change of address form, or write a letter. If your address changes before filing your tax return, you can simply use your new address on your return and the IRS will make the update for you.

QUESTION:

Does providing my customers with an early payment discount make sense for my new business?

ANSWER:

Start with asking yourself do you need to have customers pay faster because you need the cash? If you’re in a pinch to make payroll or pay rent, then it might make sense. But remember that offering a discount cuts into your profit margin. So ensure your business can afford it. And just because you provide an early payment discount to speed up cash flow doesn’t mean your customers will take it. Be sure to have a backup plan to meet any short-term cash flow needs.

QUESTION:

How long should I keep my tax records?

ANSWER:

Generally, three years, but up to seven if you’re self employed or reported losses.

Company culture is defined as the values, goals, practices and attitudes that represent the personality of an organization. Worker satisfaction is highest when employees’ personal views are in sync with a clearly defined company culture.

WHAT DO YOU VALUE?

Start by establishing the beliefs, philosophies and principles that will drive business. Do you value individual effort or collaborative approaches? Do you stick with a traditional hierarchy or prefer something more fluid? Dialing in on these foundational views empowers your employees to make the right choices.

LET IT DEVELOP

After you’ve identified your company values, norms of behavior will naturally develop. If you value employee autonomy, you may allow employees to set their own schedules. Employees will learn that as long as they complete their work on time, it doesn’t matter when they get it done.

SUSTAIN IT

Your business success relies on maintaining your corporate culture. Openly and regularly communicate the company’s values with employees. Celebrate successes and include everyone, not just those who “sealed the deal”. Building a community reminds employees what they’re working towards.

The American Rescue Plan Act, signed into law in March 2021, made significant changes to the child tax credit for 2021 only — unless Congress extends these changes.

OLDER CHILDREN COVERED

The tax credit now includes children who are age 17 as of December 31, 2021.

INCREASED AMOUNT

The credit amount increased from $2,000 to $3,000 per child aged 6 to 17 and $3,600 for children under age six, as of December 31, 2021.

ELIGIBILITY

Calculating the total credit is difficult, because there are two phaseout rules that apply. The credit is reduced—or eliminated—for parents who earn above a certain amount. Your tax professional will be able to calculate how much, if any, tax credit you might receive.

ADVANCE PAYMENTS

The IRS will estimate your child tax credit for 2021 and half of it will be paid to you in monthly installments from July through December 2021.

The remaining amount due to you will be credited when you file your 2021 tax return. However, if you file your 2021 tax return and the advance payments you received exceeded your actual credit, with a few exceptions for low and moderate-income taxpayers, you’ll have to repay the excess.

The Roberts family hired a live-in au pair to help care for their children while the parents work. One of their co-workers mentioned something about a “Nanny Tax,” and the Roberts aren’t sure if it applies to their situation.

In the IRS’s eyes, au pairs and nannies fall into the category of household employees. With a few exceptions, if your au pair is considered an employee because you control when and how they work, you’ll need to withhold and pay Social Security and Medicare taxes if they earn at least $2,300 in 2021. You may also need to pay federal unemployment tax if they earn more than $1,000 in a calendar quarter. This is on top of any state employment taxes you may be required to withhold or pay.

And while you’re not required to withhold federal income tax, your employee may ask you to. You would need to get a Form W-4 from them. If you withhold any taxes from your employees, you’ll need to provide a W-2 each January. Incorrectly classifying your au pair as an independent contractor to avoid paying payroll taxes can have harsh consequences.

_{Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.}

Knowing how much your business is worth can do more than figure out how much money you can get when you sell it. Creating an accurate valuation is part of an ongoing business strategy.

COMPARING AND PROJECTING

Think of a business valuation as an appraisal, which is generally created by analyzing a company’s tangible and intangible assets relative to its liabilities and debts. Some valuation methods will also consider how profitable the company is on an annual basis, and others will compare your business’s financial statements with similar companies. There are numerous valuation methodologies and which one is best for you will depend on your business.

KNOW WHEN

Business valuations are most often completed when a company is being sold. But valuations can also be useful when there are tax disputes with the IRS or when additional owners are brought in, or old partners are cashing out and leaving. And if a business wants to secure a sizable loan or investor funding, a valuation can offer credibility to justify the risk.

Valuations also help owners measure progress, identify hiccups or gaps in company infrastructure, and provide a benchmark as to how your company performs against your peers or industry best practices.

Maybe you weren’t planning to sell. But if the value of your business has increased significantly, selling now might make sense.

MAKE A CHOICE

You can run your own informal valuation at any time. But if you need a third-party valuation, you’ll need an experienced independent appraiser trained to use unbiased methods. And if your company operates in a heavily regulated industry, hiring someone with in-depth regulatory knowledge is a must.

BEYOND VALUATION

Make sure all aspects of your operation are up-to-date. A few examples include: record-keeping, outstanding legal matters, insurance coverage and intellectual property documentation.

Valuing Your Business – creating an accurate valuation is part of an ongoing business strategy.

Professional Financial Designations – knowing the differences between the various professional designations will help.

Understanding Your Business Insurance Binder – your insurance agent will provide a binder that can serve as your temporary proof of insurance before an insurance policy is issued.

May 2021 Client Profile

Big Changes to Child Tax Credit – the American Rescue Plan Act, March 2021, made significant changes to the child tax credit for 2021 only.

Defining Company Culture – worker satisfaction is highest when employees’ personal view are in sync with a clearly defined company culture.

May 2021 Questions and Answers

May 2021 Short Bits

PRESIDENTIAL SALARIES

U.S. Presidents earn $400,000 per year as the commander in chief. On top of that, they receive a $50,000 expense account annually for things like dry cleaning and food. After leaving office, former Presidents receive an annual pension for life along with permanent Secret Service protection.

401(k) CONTRIBUTIONS

According to a recent study, for the 12-month period ending in September 2020, the average 401(k) participant saved $7,270 while earning another $4,010 in employer contributions. Based on participants’ average income, this amounts to a 13.5% combined contribution, which is slightly less than the financial expert’s recommended savings rate of 15%.

DECLINE AND RECOVERY

Recovering from the economic impacts from the COVID-19 pandemic will take some time. According to the Brookings Institute, it will take until 2023 for the average American to spend the same amount as they did in 2019. While the off-premise food and beverage (i.e. grocery stores) sector saw an increase of $84 billion in consumer spending in 2020, health care spending dropped by $148 billion as many Americans delayed or skipped visits to health care professionals.

IRS BACKLOG

Some taxpayers have waited six months or longer to have their 2019 federal tax returns processed. As of December 31, 2020, the IRS website indicated there were still 7.1 million unprocessed 2019 individual returns. Office closings due to COVID-19 and 20% fewer employees since 2010 levels are to blame. With approximately 26% of its employees eligible to retire in 2021, the IRS is asking for more funding to hire customer service representatives.