Plan Your 2016 Taxes Now

The year is quickly coming to an end. However, before getting busy with holiday activities it would be prudent to consider you individual 2016 income tax picture now.  There is still time to make an adjustment or two that could make a difference.

Let’s take a look at a few.

Capital Gains and Losses – If stock has been sold earlier this year or you are considering some moves before year end and these stocks have a gain, review your portfolio and determine if there are any stocks that appear to be permanent losses.  If so consider selling those by the end of the year.  The losses can offset the gains and reduce or eliminate any taxes associated with those stock sales.  However, your financial advisor should be consulted before making any changes.

Pay State and Local Taxes- Most individuals are considered to be cash basis tax payers meaning that all deductions are recognized when the money is spent.  Therefore, paying all state income and local real estate taxes by December 31st would allow the deduction to be recognized in 2016 this includes estimated state income taxes.  For individuals that find it difficult to itemize consider making double property tax payments every other year.  This would allow itemizing every other year if the real estate taxes puts them over the threshold.  Most real estate taxes are due in January anyway so moving those up my help create a larger deduction and reduce the tax liability.

Delay distributions – If you take a retirement distribution in December consider delaying it until January.  That moves income out of 2016 and into 2017.  With the entire year to play with, there might be other things that can be done in 2017 that can minimize that income for 2017.

Premium Tax Credit – The Affordable Care Act (ACA) has been with us for several years now.  Even with all the talk about wishing it to be repealed it has it tentacles in too many places for that.  Instead the conversation should be centered on how to fix it.

If you purchased your medical insurance on the exchange you may have received a credit (reduction in premium) due to the income projected. If that amount is now too high there is a good chance you will loose the credit that has been received each month.  Going back to the exchange and adjusting your income will change the amount of credit at least for the last month or two.  If it is too late to make any changes then be prepared to pay some if not all of that credit back with the filing of your tax return.

For taxpayers without minimum essential coverage and do not qualify for an exemption will pay a higher penalty this year. The penalty is $695 for each household member over 18 not to exceed the bronze-level plan for the household size.

All taxpayers will receive a 1095 (-A, – B or –C) this year. That information must be included in with your tax return.  Make sure you receive yours by the end of January and that you put it in your tax documents.

These are just a few ideas. Consulting with your tax specialist for these or other suggestions could save some heart ache in April.

Deductions, Deductions, Deductions

Frequently, when I meet with new business owners they will get around to asking the question “What can I deduct”.  The short answer is any expense that is directly related to the business activity.  However, the official IRS answer is “An expense that is both ordinary and necessary to the business”. 

An ordinary expense is defined as one that is common and accepted by that industry. 

A necessary expense is one that is helpful and appropriate for that industry.  That cleared it up for everyone, didn’t it?!

 Most business owners understand that they can deduct the cost of any materials they are purchasing, supplies, rent, wages, advertising, small tools, postage, printing, etc.  What they are generally perplexed about are what are referred to as capital expenditures, personal money put into or spent for the business, vehicles, and meals and entertainment.  These expenditures do get a little more confusing and are sometimes looked at more closely by the IRS.  

Let’s take a look at these five. 

Capital Expenditures – Costly is a fuzzy term and can be a different amount for different companies.  However, for small businesses costly can be considered to begin around $1,000.  (For County Property Tax returns it is usually around $500.)  These are items that are more expensive than every day supplies and usually will last more than a year.  They can be things such as computers, desk, chairs, drills, saws, lifts, shelving, etc.  These types of expenditures are called capital expenditures.  They are not immediately expensed out but expensed out over their useful life through depreciation. 

Money Invested – Often, especially during a business start-up phase, a business owner will pull money out of his or her own pocket and purchase something for the business.  Or perhaps to open a bank account they might deposit personal funds into the business account.  In both of these cases the business owner has invested money into the company.  When or if the company pays back the owner is a return of that investment and not an expense.  This is true of loan repayments.  They are a return of borrowed money not an expense.  What the money purchased might have generated an expense but it depends on whether it fits the definition of an expense. 

Vehicles – Vehicles include work trucks and vans as well a passenger vehicles.  Many business owners want to buy a new expensive car and call it a company car.  However, in recent years the IRS has tagged company vehicles as an abused expense area and has begun to eliminate the advantages of this deduction.  Without getting into the lengthy details about personal vehicles here are five things to consider about company vehicles. 

  1. Only the portion that is used for business can be deducted. Traveling from home to the work place is considered commuting and is not deductible.
  2. A mileage log must be maintained in order for any deduction (actual expenses or a deduction based on mileage).
  3. Any employee driving a company vehicle should also be covered by workmen’s compensation.
  4. A company titled vehicle that is involved in an automobile accident could put the company at risk for a law suit which could devastate the company.
  5. The current mileage allowance is $0.575 per mile which is usually higher than actual costs especially for newer vehicles with low repair costs.

Meals and Entertainment – This expense is either abused or under utilized by small business owners.  There doesn’t seem to be a middle ground.  I have business owner who hardly claim any meals at all and those that go to Starbucks a couple of times a day and charge at least one meal a day to the business.  Neither of these extremes are appropriate.

The guidelines state:

  1. Ordinary and necessary expenses to entertain a client, customer, or employee are deductible if the expenses meet the directly-related test or the associated test.
  2. You cannot deduct expenses that are lavish or extravagant under the circumstances.
  3. Generally only 50% of your entertainment expenses will be deducted on the tax return.  

Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and/or meals provided to a customer or client

Directly-related test states that the entertainment took place in a clear business setting or the main purpose of entertainment was to actively conduct business and business was conducted during the entertainment period and their was more than a general expectation of getting income or some other specific business benefit from the activity. 

 Associated test states entertainment is associated with your trade or business and the entertainment is directly before or after a substantial business discussion. 

I’m of the opinion that it isn’t worth spending $100 on something I don’t really need to save $20 or even $30 in taxes.  The company is its own entity and not an extension of the business owner.  Cash is King in small businesses.  I’ve seen quite a few business go under because they did not protect the cash.  So, business owner be a Knight and protect the King! 

North Carolina Income Taxes

In July, 2013 the North Carolina state law makers signed into law what was considered to be a sweeping state income tax change.  The changes became effect on January 1st of 2014.  I am willing to wager that most North Carolinians didn’t pay it much attention because most of the news around it centered on the new flat tax rate. 

The flat tax rate beginning in 2014 was 5.8% on all income levels where previously income was taxed between three ranges from 6.0% to 7.75%.  On the surface that sounds pretty good. 

Beware when government proposes a tax decrease.  Along with the lower tax decrease came along the elimination of many tax credits.  The loss of these credits will actually increase many taxpayers’ state income taxes.  From the looks of it, it will be the middle income class family that will suffer the most.  

Here is why it looks that way, at least to me.  Take an older empty nest couple that has a mortgage, real estate taxes, no private mortgage insurance on their home loan, and no miscellaneous deductions such as unreimbursed business expenses.  Let’s also assume they have a taxable income of $270,000.  In 2013 they would have paid 7.5% on that income or around $20k.  In 2014, with the new flat tax they will pay around $16k.  This is a $4,000 decrease.  

Now let’s look at some of the same facts concerning a family with children and with less income.  Let’s assume the combined Federal taxable income is around $105,000 with two dependents, some medical, unreimbursed business expenses, property tax (vehicle), and state withholding.  For 2013 the state income tax would be around $4,500k.  In 2014 the tax will be around $7,400, over a $3k swing.    

Everyone’s situation is different and no two years are alike for the same family.  Therefore, there will be some variables that are not accounted for in this example.  However, the point is that a family struggling to survive will actually end up having to shoulder a larger tax burden while some higher income earners will actually pay less.  While a flat tax does level the tax playing field so that everyone is paying the same amount; it does put a bigger tax burden on those that sometimes can’t afford to loss additional family income.  

It might not be too late to affect 2014.  At the end of January, the North Carolina Association of CPAs (NCACPA) met with state legislative leaders to discuss potential tax reform.  Some of the representatives are interested in making some modifications.  Action is required right away in order to make changes effective this filing season. 

They (NCACPA) are encouraging all North Carolinians to contact their representative to request action now for this tax season.  It would be beneficial for all of us to follow their recommendation.

‘Tis the Season to Budget

Has your bank account been coming up a little short lately?  Has your paycheck been downsized instead of super sized?  Or maybe you’re down to one income.  Well don’t feel alone.  Lots of folks are struggling to make ends meet these days. 

My household is certainly struggling.  But following Dave Ramsey’s advice I made up a household budget.  I listed out all of our expenses for the past several months.  Then I reviewed each category, looked at where we were spending, found the category with the highest unessential expenditures, and began to chop.  But in addition to eliminating niceties such as pedicures and dining out, I looked for ways to reduce essentials items.   Many service providers like phone, cable and internet will offer a discount if you put all these services under one roof.

Another thing I did, I got my kids involved.  I wanted them to learn how to budget but more importantly learn how to make financial choices.  We would discuss things such as would you rather cut the grass or do without cable. Or perhaps clean the house ourselves or have new cell phones.  I was surprised by their response.  Things I thought were “must haves” from them were not.  And now with their buy in when they ask for new cell phones or expensive shoes I can honestly say “No, it’s not in the budget.”   And if it is a “must have” for them, they are now figuring out how to either earn the money or to make a financial trade off. 

Since this worked so well at home I decided to renew my budgeting efforts in my business.  But the method of taking the most expensive line item and trying to cut it back is not always the answer.  For instance, I recently meet with a client who’s Net Income (Sales less Expenses) was running about $3k short every month.  He was looking at his overhead costs to see where he could cut.  The few hundred that he was going to save wasn’t going to make a dent in the thousands he needed.  I offered to take a look to see if I could offer any other suggestions.  

I looked at all the expense categories but I really didn’t see anything that jumped off the page.  So I began digging into his sales numbers.  He had two main service lines.  I sorted the costs associated with each line something that the business owner had never done.  Once completed, I noticed that the costs associated with one of the lines were higher.  Digging some more and aligning the costs further the business owner discovered that carrying that line was actually costing him money and not making him any money.  By cutting this one product line he solved his $3k a month short fall.   

Not all budget issues can be solved this easily.  But the process will illuminate not only cost savings opportunities but also business development opportunities.  Happy Budgeting!

 

10 Year End Tax Tips for 2014

As the holidays season approaches so does the end of the year. With the New Year comes tax filing season. Like you I can’t believe it is here again so soon.

Talking about taxes is not a fun topic but a little planning now might make a difference when filing your return in April. Many popular tax provisions are scheduled to expire this year and there could be penalties associated with the Affordable Care Act. Consider these 10 year end tax tips included in Grant Thornton’s Year-End Tax Guide for 2014.

1. Accelerate deductions and defer income. There are a few income and expense items within your control. Consider the expenses you can pay early and defer income into next year.

2. Bunch medical deductions. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses.

3. Make up a tax shortfall with increased withholding. Check your withholding and estimated tax payments now while you have time to fix a problem. If you are endanger increase your withholding or consider making an estimated tax payment.

4. Leverage retirement account tax savings. It’s not too late to increase a contribution to a retirement account.

5. Reconsider a Roth IRA rollover. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future. If you converted your account this year, reexamine the rollover. If the value went down you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.

6. Leverage state and local sales tax deduction. If you made big purchases this year such as a car or boat, your sales tax deduction might be higher than if you use the state income tax deduction.

7. Don’t squander your gift tax exclusion. You can gift up to $14,000 to as many people as you wish in 2014 and you get a new exclusion every year.

8. Understand the new home office deduction safe harbor. You can deduct some of the cost of your home if you use it as your principal place of business, use it to meet clients, and customers in the normal course of business, or your office is a separate structure not attached to your home. The amount of the deduction has long been a source of controversy, but the IRS has a new safe harbor this year that allows you to deduct up to $5 per square foot of home office space up to $1,500 per year.

9. Maximize “above-the-line” deductions. These deductions are deducted before you calculate your AGI. Common deductions are traditional IRS’s and health savings accounts (HSA’s) contributions, moving expenses, self-employed health insurance costs and alimony payments.

10. Perform an overall financial checkup. The end of the year is always a good time to asses your current financial situation and plan for the future. You should think about cash flow, health care, retirement, investment and estate planning. Check wills, powers of attorney and health care proxies for changes that may have occurred during the year. Reconsider employer-sponsored programs that could reduce next year’s taxable income.

The time you invest in planning is well worth it. It is never to late or too early.

Works Cited
O’Bannon, I. M. (2014, October 20). 10 Year-End Income Tax Tips for 2014. CPA Practice Advisor.