Tax Planning

If you experience a job loss, you will of course have numerous questions as to how it will impact your job situation. Whether you are an employee who lost your job or a business owner who had to lay off your workers, here are some important details to keep in mind.

How Will Your Job Loss Affect Your Tax Situation?

When you lose a job, it may create many changes related to your tax situation. As an example, severance pay as well as payments for accrued sick leave or vacation pay are considered taxable income. Because of this, you may have a larger tax bill due to this income, especially if a minimal amount of taxes were withheld originally. In addition, any unemployment compensation you receive is also taxable income, which is something many people overlook at tax time. As for income you may be receiving after your job loss that is not taxable, this will include SNAP benefits or other public assistance, as well as the recent stimulus payments sent due to the COVID-19 pandemic.

Are You Eligible to Receive Unemployment Compensation?

When trying to decide whether or not you are eligible to receive unemployment compensation, a number of different factors may come into play. Depending on your individual circumstances, there are several types of unemployment compensation for which you may be eligible, including:

• State unemployment benefits from Federal Unemployment Trust Fund
• Railroad compensation unemployment benefits
• Assistance from Disaster Relief and Emergency Assistance Act
• Disability payments paid to you as substitute for unemployment benefits
• Trade readjustment allowances via Trade Act of 1974
• Pandemic Unemployment Assistance via CARES Act of 2020

Remember that if you are self-employed or have other circumstances that normally disqualify you from receiving standard unemployment benefits, the CARES Act of 2020 has expanded unemployment assistance to you and many other individuals. To prove your income, you must use a current-year tax form.

What if You Voluntarily Quit Your Job?

If you voluntarily quit your job due to your concern about possible exposure to COVID-19, most likely you will not be eligible for Pandemic Unemployment Assistance. However, since individual situations can vary and extenuating circumstances may have been present at the time, certain scenarios are possible that could in fact make you eligible for PUA. Therefore, it is best to apply for benefits and learn whether or not you do qualify for assistance.

Is Unemployment Compensation Considered to be Tax-Free?

Unfortunately, the answer is no. Whether you receive unemployment benefits from your state or from the federal government, United States law dictates that all unemployment compensation received by individuals is considered to be taxable income, and thus must be reported as such on your federal tax return. In addition, if you belong to a union and receive benefits paid to you by your union, this must also be included as income on your tax return. However, if you made contributions to a special union fund that are not deductible, you will only report as income the amount you received that exceeds your contributions.

Can Federal Income Tax be Withheld from Unemployment Benefits?

Here, the answer is yes. But to do so, you will need to fill out Form W-4V, Voluntary Withholding Request. By filling out this form and submitting it to your state's Department of Labor, 10% of your total payment will be withheld as tax. Should you choose to not withhold taxes, estimated tax payments may need to be made during the year, and you may also owe taxes when you file next year's tax return, so keep this in mind. Prior to filing your tax return, you should receive Form 1099-G, Certain Government Payments. On this form, it will show the amount of unemployment compensation you received, as well as the amount of federal income tax you withheld.

Are Expenses Related to a Job Search Deductible?

While this was the case in years past, tax reform has eliminated many of these 
deductions. Thus, for the tax years 2018-2025, you will no longer be allowed to deduct such expenses as travel, outplacement agency fees, resume preparation services, and other related expenses when having your taxes prepared.

Are Individuals Required to Actively Seek Work During COVID-19?

While you normally would need to be actively seeking employment to receive unemployment benefits, that requirement has been waived due to COVID-19. Under the CARES Act of 2020, state unemployment agencies have the flexibility to determine if a person can or cannot actively seek work due to COVID-19 quarantines or movement restrictions such as stay-at-home orders, or due to a COVID-19-related illness.

What if Your Employer Goes Out of Business or Files for Bankruptcy?

Should your employer go out of business or file for bankruptcy, they are required to provide you with a W-2 form no later than January 31. On this form, all wages you earned as well as any taxes withheld will be displayed. While waiting to receive your W-2, it is vital you keep up-to-date records along with previous pay stubs. If for any reason your employer or their representative fail to provide you with a W-2, do not panic. Instead, contact the Internal Revenue Service as soon as possible, since the IRS can provide you with a substitute W-2 form.

What if Your 401(k) Plan was Liquidated?

If your employer went out of business or filed for bankruptcy, there is a chance your 401(k) plan may have been liquidated. If this occurred, the good news is that you still have options available to you. In most cases, you will have up to 60 days to roll it over into another 401(k) plan or other type of qualifying retirement plan, so give this careful thought.

Since it is likely you will have many questions as to how your job loss will impact your tax situation, don't take chances on making critical and costly mistakes. Instead, turn to an experienced and knowledgeable CPA who can sit down with you and answer your questions in greater detail.

For most people, paying taxes is straightforward. You get a paycheck from your employer and the employer has already deducted the amount you owe to the IRS. When it comes time to file your tax return, the discrepancy between what you owe and what you already paid might be minimal. You might have to cut a check to the IRS, but it’s fairly manageable. However, if you get a 1099 or you had other income where taxes weren’t taken out ahead of time, the amount you wind up owing come tax time might come as a shock. What now? What’s the best course of action if you can’t pay your taxes?

How the IRS Views the Situation

The IRS has a stern but understanding view of taxpayers who can’t pay their tax liability. As long as you are a taxpayer who is trying to be honest and upstanding, you probably won’t be in legal trouble. It’s only those who willingly try to defraud the government of their due taxes who face criminal charges.

If you find that you are unable to pay your taxes there are provisions in place for such a scenario. However, the IRS does expect you to apprise them of your situation so that a solution can be put into place.

Steps to Take if You Can’t Pay Your Taxes

The first thing you should do is file your tax return anyway. Even if you can’t pay your taxes, the IRS expects you to file your tax return on time, whether by the initial filing date or by the extension deadline. (Be aware, though, that even if you file for an extension, you’re still expected to pay by the initial due date.)

When you pay later than the initial filing deadline, you’ll be on the hook for penalties and interest charges. Therefore, if you can only pay a small amount of the taxes you owe, that’s better than paying nothing. That way, you’ll pay less in interest.

You should also contact the IRS directly if you find yourself unable to pay your taxes. Ordinarily, you can call the IRS on their 800 number. Once you get through, you can request a payment extension or ask to be put on an installment plan. If this is the first time something like this has happened, the IRS may even waive a penalty charge. You should know that if you fall through on the payment plan, you may get dinged with the penalty after all, as well as accrue more interest charges.

If you are offered an installment plan, take it. Paying taxes on an installment plan doesn’t ruin your credit or cause any negative reporting against you. The only way an installment plan can hurt you is if you don’t hold up your end of the bargain.

Don’t feel like you should take the “high road” and try to save up so you can make a lump sum payment by the time your extension deadline comes up. This is a mistake that many taxpayers make, and it invariably causes more problems. If you think you’ll be able to make the payment by the extension deadline and then can’t do it, you’ll incur more interest, plus the penalty, plus the wrath of the IRS for not contacting them to begin with.

Ramifications of Not Paying Taxes

If you don’t take a proactive approach to your tax payment problem, the situation could turn even more serious. Technically, the IRS is within its legal right to file criminal charges. This is isn’t commonplace, but it does happen in certain situations.

What is commonplace is for the IRS to garnish your wages. If your taxes go unpaid, the IRS will contact your employer directly with a garnishee order. Your employer will be forced to withhold money from your paycheck that will go toward back taxes. The worst thing is, there’s no limit to how much the IRS can ask to be withheld. Theoretically, you could be left with a paycheck less then ten dollars. The IRS doesn’t take responsibility for how you’re supposed to pay your bills after a paycheck garnish order.

This can all be avoided by simply contacting the IRS to let them know your situation. As long as you do everything in your power to get your taxes paid and adhere to the installment payment agreement, then you’ll likely be okay.

Remember, keep copies of all your correspondence to and from the IRS. When your back taxes are paid off, you’ll receive a written notice from the IRS, which you should keep in your permanent files.

How to Avoid This Situation Next Year

If you were unable to pay your taxes by the deadline, take a good hard look at why this happened. If you’re self-employed, you should have been making quarterly tax payments on your income all during the year. Ask your CPA how to do this if you are unsure how to do it.

If your W-2 employer hasn’t been taking enough out of each of your paychecks, maybe you’re claiming too many exemptions. You might want to file a new W-4 form so you have the proper amount taken out.

Whatever the reason, it’s very important that you don’t repeat the mistake in the future. If the IRS starts to see a pattern, they may look at it like tax evasion instead of a simple case of not having enough to pay when it’s due.

Talk to your CPA about your tax payment difficulties as soon as you become aware of it. Together you can come up with a solution that will help you avoid having the situation occur again in the future.

In this gig economy, more taxpayers than ever before are receiving tip income. Whether the tips are from waiting tables, driving for Uber, or making home deliveries, those tips are considered taxable income. However, there is a lot of confusion over how to report tip income, what is the threshold for reporting and who should report it. Here is all you need to know about reporting tip income.

How Does the IRS Regard Tips?

Tips are considered regular income by the IRS. The IRS categorizes the following types of income as tips:

• Cash tips directly from customers
• Electronic tips through credit card, debit card and gift card payments
• Non-cash tips, such as tickets and other valuable items
• Tips paid out as disbursements from a tip “pool”

All tips in any form noted above are required to be reported as regular income, and they are taxable as such.

What Are The IRS Regulations Regarding Tips?

It may come as a surprise to some, but the IRS actually stipulates that anyone who regularly receives tips in the course of their employment must keep a daily record of tips received. The method of keeping the record is up to the taxpayer.

Another IRS regulation has to do with reporting to the employer. The taxpayer who receives tips must report those earnings to the employer by the 10th of the following month in which the tips were received. For instance, if you earned $1,200 in tips in January, you must report that figure to your employer by February 10th, or on the next business day. There is a specific IRS form for reporting tips to employers, Form 4070, available in Publication 1244. Alternatively, the employer may provide another form—hard copy or digital—for employees to report tips. Furthermore, an employer may, at their discretion, require that an employee report their tips to the employer more than once a month, but not less than once a month.

Tips totaling less than $20 in any month need not be reported. However, for the sake of consistency, if a taxpayer routinely reports tips on a month basis, it may behoove them to report something in every month, even if the total is less than $20. Otherwise, this may raise a red flag and look like an oversight rather than a choice.

Clever Ways to Keep Track of Cash Tip Income

If you have a job where you get tips every shift you work, it can quickly become tedious to try and keep track of all your tips; especially if you get cash tips. Yet, it’s important that you do so. You can incur serious and costly IRS penalties if they determine that you have not been accurately reporting your tip income. It’s definitely worth it to come up with a tip tracking system that works for you. Here are some clever ways to keep track of tip income.

Keeping Track of Waiter Tips

If you wait tables for a living, it’s likely that you wear some kind of apron or other uniform apparel with pockets. An easy way to keep track of cash tips. Simply designate one pocket for all your tip earnings; don’t keep anything else in that pocket. At the end of the night, just add up all the bills and coins and record them in a little notebook, along with the date. The notebook will serve as proof should the IRS ever decide to question the accuracy of your cash tips reporting.

Keeping Track of Driver Tips

If you work for Uber, Lyft or drive a limousine service, cab, airport shuttle or work in some other driving capacity, it can be awkward to track your cash tips income. You may even occasionally have to dip into your own wallet to give a customer change for a large bill. Since you’re sitting down and may have little time in between pickups, you need a system that is quick and accurate. The easiest way is to just keep a small notebook on the passenger seat next to you. Date each page ahead of time. When you get a cash tip that day, just note it on the page. You can add up your cash tips at the end of each day or wait until the end of the week to do daily tallies.

How to Report Tips to the IRS

When your employer issues your W-2, they will have already included all your reported tip income in Box 1 of the form. In other words, your tip income was added to your regular income and entered in Box 1. If for some reason you did not report all your tips to your employer, then you can add that amount when you file your tax return. If your employer allocated tips to you, such as from a general tip “pool,” that will show up in Box 8 of your W-2 form.

What if You Don’t Report Tips?

Bear in mind that even if you assert that you don’t receive tips, your employer is reporting a certain percentage of tip income to the IRS under your social security number. So eventually the IRS will contact you about your unreported tip income. At that point you’ll need to pay taxes on that unreported income, possibly along with a penalty. Your tips are considered part of your regular income, even though they may seem like they’re extra “bonus” money. It’s always best to be completely honest and forthright about all of the tip money you receive.

There are nuances and details about tip income that your accountant can help you with. You can also refer to IRS Publication 531 for more information about reporting tip income.

Do you have an elderly parent or adult relative that you take care of? It doesn’t have to be a parent; it could be an adult child with special needs, an elderly aunt or another close relative. As long as it is a qualifying relationship, the IRS allows you to claim such a persons as a dependent on your tax return. There are certain criteria and it must be done in a certain way, but it can be done. Below are the general guidelines, but you should consult with your tax professional for details.

They Don’t Necessarily Have to Reside With You

The great thing about claiming an elderly parent or relative as a dependent is that they don’t necessarily have to live with you. This is great news for people with parents who wish to live in their own home for the sake of independence. Since there are so many services these days to help independent-minded seniors, this allowance makes it easier for both the senior and the adult child.

You Might be Entitled to Extra Deductions

If the relative does reside with you, you might be entitled to extra deductions on things like your mortgage and utilities. You would need to break down what percentage of money you spend on the relative for their care. Your CPA can guide you on how to do this.

They Have to be U.S. Citizens

The person needs to be a U.S. citizen, U.S. resident alien or U.S. national with a social security number in order for them to qualify as your dependent. This may seem obvious, but consider a case where a person marries a foreign national. The mother-in-law resides in another country but you take care of all her expenses because she’s disabled or for another reason. Unfortunately, even if all the other criteria are met, you wouldn’t be able to claim her as a dependent. There are exceptions for persons residing part-time in Mexico or Canada, but you’d need to consult with your CPA for details about possible dependent-status.

They Don’t Need to be Elderly

This claim isn’t only for elderly adults. If you take care of any adult and you satisfy these criteria, you might be able to claim them as a dependent. Their marital status and how they file their own taxes will affect whether or not you can take the claim, so be sure to consult with your CPA.

They Can’t Have Gross Income Over a Certain Amount

Whether or not your elderly relative lives with you, they can’t make over a certain amount in gross income. This amount changes each year, so you should check with your CPA to make sure of the exact figure before you file. When calculating your elderly relative’s gross income, don’t include social security income or other tax-exempt income.

They Have to Get Over Half Their Support From You

Another criteria to keep in mind is that your elderly relative must get over half of their support from you. This may include things like housing costs, food, medical expenses, transportation, home health aid, housecleaning services and other expenses. If you share the financial support with siblings, this could pose a problem. Whoever is going to take the claim must be providing over half of the support. If you want to take the claim, you might consider upping your financial support and letting your siblings contribute in non-monetary ways. Whichever way you decide to do it, be sure to do a thorough and comprehensive breakdown of all your elderly relative’s expenses so that you can be sure you’re actually entitled to claim them as a dependent.

You Can Share the Exemption

If you do have siblings who contribute financially and you want to keep that arrangement, you and your siblings could also decide to alternate the claim in different tax years if you can show that in the aggregate the support test is satisfied. This would entail filing Form 2120, “Multiple Support Declaration.” Your CPA can help you to figure out the calculations and let you know if it’s possible in your situation.

Knowing when to claim an elderly parent or relative as a dependent and how to do so is fairly complicated. However, don’t let the complexity of it dissuade you from making the claim. If you care for an elderly relative or other qualifying person and you meet the criteria, you’re entitled to take the claim. Just let your CPA guide you and handle the details so that you can concentrate on caring for your loved one.

Selling cheesecakes on the side, or DJ’ing friend’s weddings? You’re not alone. Over 15% of Americans work a side hustle, for reasons ranging from building a savings account to paying off debt. The side hustle has become increasingly popular, especially in the gig economy where rideshare and grocery delivery apps have made it easy for people to monetize their spare time.

But even though that income is a side hustle, it’s still taxable. You’ll have to report it to the IRS. If you start accounting for its revenues and expenses like a business now, you’ll be able to take itemized deductions on your return. Plus, if the company ever grows to become your full-time gig, you’ll already have bookkeeping systems in place.

Here are some tips for accounting for your side hustle.

Keep Records of Income

If you’re depositing the check from the wedding DJ gig into your personal checking account, you’re making a mistake. When it’s time to file taxes, it will be harder to track income from your main job, side hustle, and birthday checks from Grandma if it’s all in the same account. Unless you’re keeping records.

While you should eventually open a business checking account, you might not want to go to the trouble until you know that your side hustle will make money. If that’s the case, at least keep accurate records of the income it’s producing. You can try using a free, online software tool, or just use an Excel spreadsheet, but dedicate some time weekly or monthly to updating it.

Tracking your side hustle income can tell you if it’s truly successful, or growing. It can also help you gauge if the time and money you’re putting into it are paying off. 

Keep Records of Expenses 

You’re making money, but are you producing a profit? It’s not enough to have income coming in; if the expenses associated with that income are higher, you’re actually losing money. In addition to tracking revenues, you need to monitor the costs of running your business.

Don’t buy the flour and eggs for your cheesecake business with your regular groceries - shop separately for supplies. Keep separate receipts and records of expenses that are directly related to your side hustle. As your side hustle grows, you might want to register it as an LLC with the state. You’ll receive a business license and won’t have to pay sales tax on some purchases. 

Business owners must track their net income. While you may not have a full-fledged company yet, starting to track net income now will help you later. Knowing if you’re making a net profit could motivate you to keep working on your side hustle, or tell you it’s time to let it go. Learning how large a net profit and if it’s growing could tell you when it’s time to do it full time. 

Tracking expenses throughout the year also prepares you to file taxes. Deducting those costs from your business revenues reduces your tax burden. If you’re unsure which expenses you can deduct, talk to an accountant.  You can claim business losses for two out of five years before running the risk that the IRS will deem your business a hobby.

Charge Sales Tax

Are you collecting sales tax on your sales? Do you even need to? One of the biggest mistakes small business owners make is failing to collect or not collecting enough sales tax. 

Tax laws vary by state, but if you sell goods and services that your state taxes, you’re required to collect it from customers. It’s essentially a pass-through tax - you collect it from the buyer and pass it along to the state. 

What happens if you don’t collect it? You’re still required to pay it, so you would have to pay the tax out of your revenues. The same principle applies if you don’t collect enough or fail to set aside the sales tax collected. It’s a good idea to develop the discipline to move sales tax collected from operating accounts into its own savings account. Don’t use it to pay business expenses, or you could struggle to assemble the needed funds when it’s time to remit the tax to the state. 

Make Estimated Tax Payments

Once your side hustle begins generating significant income, you may need to make quarterly estimated tax payments. For a while, the taxes set aside from your W-2 employment might cover any business taxes you owe. But after the first year you owe more than $1,000 in taxes due to your side gig, you’ll need to start making estimated payments.

If you file your personal taxes with an accountant, they’ll give you an idea of how much you should send directly to the IRS going forward. This reduces your tax burden the following year and helps you avoid interest fees and penalties. Last year’s revenues will be the basis for estimated payments, but if your business grows, you might have to pay more. 

Be aware that your side hustle will impact your personal taxes. You could receive a 1099 from a company if you’re working through an app or as an independent contractor. That income could affect your tax bracket and financial aid if you’re in college or sending a child off to college soon. 

If you just started your side hustle to make extra cash, now might be the time to think through all its financial implications. 

Side Hustle or Job?

After a while, accounting for your side hustle could feel like another full-time job. Accurately tracking the work involved in running it, the expenses associated with it, and paying taxes on the income could reduce your love of selling knitted hats on Etsy.  

A side hustle may represent a lifelong dream, or just a quick way to make some cash. But, either way, you’re responsible for reporting its income and knowing its tax implications. Talk to an accountant before filing taxes if you have any questions or concerns.

Whether you run a brick and mortar business or an ecommerce business, you have to deal with charging sales tax. How and when to charge sales tax has always been a confusing issue for business owners. And since more people are now running both an ecommerce operation in tandem with a brick and mortar operation, the issues are even more confusing. Here are the answers to some of the more commonly asked questions about charging sales tax.

Must You Charge Sales Tax?

The questions of whether you need to charge sales tax has to do with whether your business is required to pay sales tax. The reason why businesses charge sales tax in the first place is so they can turn around and hand it over to the state. Once you understand this process, it’s easier to figure out if you must charge sales tax.

If you do business in a state that has no state sales tax, then your business won’t ever be required to pay that sales tax to the state. Currently, there are five states that have no sales tax. They are New Hampshire, Delaware, Oregon, Montana and Alaska.

Now, if your business is incorporated in a state that has sales tax, but your operations are in another state, the question of whether you must charge sales tax gets stickier. Let’s say you incorporated in Delaware, a sales tax free state, but you run your business out of Florida, where sales tax is currently 6%. Even though Delaware isn’t going to require you to pay sales tax, the state of Florida will. So you do need to charge sales tax on goods and services sold. Wherever your business’s physical presence is (called a nexus), that’s the state where you have to adhere to sales tax requirements.

Do You Have to Pay Sales Tax on Services Sold?

The proliferation of digital goods sold online has made many newer business owners confused about their sales tax obligations, too. For instance, let’s say you sell online courses through a platform like Lynda, Teachable, or something else. Or maybe you sell downloadable files from your website. Depending on where your business is physically located, you’ll be responsible for paying sales tax to that state’s government. So even though technically you don’t have a physical presence because your business is just a website or you operate through a platform, wherever you file is where you have to pay sales tax if applicable in that state. And, if you run a service-oriented operation such as a plumbing service or an event entertainment service, you also must pay sales tax for wherever your state of operations is, if applicable.

What Are The Exceptions to These Rules?

The biggest exception is that if you are selling to a consumer who is located in a state that doesn’t charge sales tax, then you don’t have to charge them sales tax, even if the state where you do business does charge sales tax. An easy way to think about is, sales tax is the responsibility of the buyer, not the seller. You’re basically collecting sales tax on behalf of the state where the consumer is located. So, if they live in one of those five states without sales tax, your customer doesn’t need to pay it to you, whether they’re buying a physical product or a digital product.

Another big exception is that each state has different laws about which products and services are taxable and which aren’t. For example, currently only 24 states charge sales tax on internet transactions. Further, most of those only collect if the seller has a minimum of $100,000 in sales in a tax year, or over 200 internet transactions. Your CPA can help you to determine if your business is required to pay sales tax on internet transactions.

How Should You Collect Sales Tax?

Sales tax should be collected at the point of sale, added on to the regular price of the goods or service. When your bookkeeper enters the transaction into your records, they should separate out the tax income from the sales income.

How Should You Pay Sales Tax?

You’ll first need to register in each state in which you sell goods or services. The State Department of Revenue is the department where you need to register your business. Next, you need to figure out the tax reporting requirements for each state. If you sell online to numerous states, this will prove to be a complex and time consuming task. Most business owners that sell online have set processes in place so they can efficiently keep track of each state’s sales tax liability for the tax years.

What’s the Best Way to be Able to Pay Your Sales Tax Liability?

Remember that technically, you are just holding the sales tax money until you hand it over to the relevant state government. It would be a mistake to mentally count sales tax income as part of your regular business income. Make sure that any bookkeeper you hire understands sales tax liabilities and how to handle that income as it comes in. This way, when you file and have to pay that sales tax, it’s already sitting and waiting for you to pay it to the relevant state.

State sales tax is one of the messier parts of doing business, but it must be addressed. Your CPA will prove to be invaluable when it comes to tracking and paying your state taxes each year. Set aside some time to talk to your CPA about be best way to organize this part of your business so that when tax time rolls around everything is as organized as possible.

As a business owner, you’re entitled to a plethora of tax deductions. These tax deductions can help you to offset business income, which ultimately helps you be more profitable. Of course, you need to be careful with your tax deductions. Always consult with your CPA about which deductions are available to you, and how to take them. You don’t want to get into trouble with the IRS. Here are some common business deductions to be especially careful with.

Mileage Deductions

If you have a dedicated company car, the mileage expense deduction is pretty straightforward, although you do have to be meticulous about recordkeeping. You need to show that all the mileage was used for business purposes, which may entail a coordination between business appointments and the distance between your office and the client’s place of business. If your business driving is more speculative rather than appointment based (for example, you drive around town and knock on doors looking for business), it’s harder to prove that 100% of the mileage is business-related.

If you use one vehicle for both business and personal reasons, it’s even harder to avoid raising red flags. At least 50% of the use of the car must be for business purposes in order for you to be able to deduct mileage. And you’d better have really good records to back up your claim, too. Talk to your CPA about acceptable ways to track mileage that the IRS will be happy with.

Home Office Space Deduction

The IRS understands that more and more small business owners are working from home. That’s why they generously allow a home office space deduction. You can calculate this deduction either by using a percentage method or a square-foot method. But what you can’t do is take a deduction for a home office space if you use that space for any other purpose than a home office. The home office must be dedicated space. In other words, if your home “office” is the kitchen table or a partitioned area of the living room, that’s not going to work as far as the IRS is concerned. And if you think they will never know, you might want to reconsider. First of all, your house layout can easily be accessed online. If you say you’re using an entire bedroom as a home office in a two bedroom home and you’re filing married with two child deductions, that’s definitely going to raise some eyebrows and probably a red flag.

Employee Rewards

The IRS wants business owners to be able to reward deserving employees and as such, some employee gifts and bonuses are deductible. However, not every employee gift is deductible. For instance, you can’t gift your employee anything valued over $25 per year (and expect it to be deductible). And bear in mind that bonuses are taxable for employees as ordinary income, although they are deductible to the business owner. Consider enclosing a small note about the employee’s tax responsibility if you want to help your employees stay out of hot water.

Memberships

If you’re in a position to be able to afford memberships for yourself, that’s great. But not all membership fees are deductible. You can deduct membership fees for professional and trade organizations such as ASCE, the American Society of Civil Engineers. But you can’t deduct memberships to your local private golf club, even if you plan to network with clients there. You can, however, deduct the cost of meals taken with clients at the private golf club; a small but important distinction. Currently, the meal expense deduction stands at 50% of allowable expenses.

Entertainment

If you’re accustomed to treating visiting clients to tickets for the big shows that are in town, be careful. As of tax year 2018, business entertainment deductions are no longer allowed. The only entertainment expenses you are allowed to deduct are those for promotional purposes, such as events your business hosts. 

Travel Expenses

Business travel expenses can land you in hot water if you don’t understand what’s allowed to be deducted and what isn’t. Your CPA can help to guide you as to what’s deductible so you can spend wisely while traveling for business. For starters, if you’re just traveling across town and back, that’s not considered deductible business travel because the travel must last “substantially longer than an ordinary day’s work.” In other words, the travel must be an overnight event. But too long is not good, either. The travel must be less than a full year. In addition, your business trip must be 100% business-related. It can’t be partly for business and partly for pleasure, though you’re certainly permitted to sightsee on your own dime. If you do personal activities, those expenses are not deductible. The best thing to do is to confine your business trip to business activities as much as possible, keep every single receipt and then give everything to your CPA when you’re ready to have your taxes done.

Donations

This is a tricky business deduction. Technically, you’re allowed to take deductions for donations to qualified charities, but there are rules involved. First, only corporate entities can take charitable donation deductible. If you’re not a corporation, you can still take a deduction, but it will be on your personal return. Second, the charity must be qualified by the IRS’s standards. Certain deductions are allowable and others aren’t. Cash and gifts are deductible, but time is not. So for instance, if you want to have your employees volunteer for an afternoon at the local charity around the holidays, you can’t deduct their payroll for that day. You may be able to deduct donations of business inventory and intellectual property such as patents, but only a percentage. Your CPA can provide details.

As you can see, there are numerous tax deductions that can help your business to offset income. But using these allowable deductions correctly requires knowledge and understanding that you may not have. It’s always a good idea to confer with your tax professional so that you can make sure you’re getting all the deductions you’re entitled to without raising any red flags.

Whether it’s carols blasting in the malls, or menorahs in the window, the holiday season is upon us. For small businesses, it can be a great time to say “thank you” to the clients who’ve helped you have a successful year. Some companies choose to send holiday cards, which only cost pennies, but others want to go above and beyond. Sending a gift can make a deeper impression.

When planning your holiday shopping, should you add your clients to your list?

Reasons to Give Clients Gifts

Your clients support your business and keep your business afloat. It’s only natural to want to show them appreciation. Giving them tokens of your gratitude for their business can build goodwill and develop a closer relationship. Strong business relationships are so important that a Harvard Business School study found that 85% of professional success comes from people skills.

Giving gifts ensures that you remain in the person’s mind, as it’s hard to forget someone who gave you something nice. While it may not bring it business immediately, if a future business need arises that you can fill, they’re more likely to reach out. If it’s been a while since they brought your company business, it’s a subtle reminder of the work you’ve done for them in the past.

Consider a gift as a long-term investment in the client relationship. It may not pay immediate dividends, and the return on the investment may not directly tie to the present, but it contributes to the overall goodwill between you and a client.

Check the Company’s Gifting Policies

Many organizations have gift-giving policies. These policies have been instituted to keep bidding on contracts and hiring new companies fair and balanced. Larger organizations want to avoid the reputation risk  should they appear to take bribes. Some industries, such as banking, are subject to laws and regulations related to bribery, and must comply. If you offer a gift that isn’t allowed by a client’s corporate policy, you could place them in an awkward situation.

Policies commonly place a limit on the dollar amount. Gifts over a certain threshold must be reported to Human Resources. Or, they could prohibit gift-giving to individuals. In those cases, you are allowed to send a box of chocolates, but it must be addressed and intended for the entire team. Before pulling out your credit card to order a client gift, pick up the phone and call your client.

You can ask your client directly, or reach out to Human Resources, to find out their policy. Use discretion when deciding who to approach. Abide by the policy, and get creative, if needed.

Things to Consider when Selecting Client Gifts

Make it personal and thoughtful. Has the client mentioned that they love fly fishing? Send them customized fishing lures. Does the team solve complex problems?  Maybe they would enjoy a puzzle to set up in the break room. When deciding on a gift, ask yourself if you would like to receive it.

Be careful with branding and logos. A gift is meant to show appreciation for the client’s business; it’s not a marketing tool. Adding large branding turns it into a sales item, particularly if it renders the item virtually unusable. Again, ask yourself if you would want to use a wine cozy with a logo on it before you order 100.

If you’re going to send a food item, consider possible food allergies and try to pick something inclusive. Sending smaller gifts throughout the year, with a variety of food items such as cheese, meats, or candy, can also help build goodwill while avoiding the trap of excluding a key team member.

When selecting gifts, choose quality over price point. A cheap gift reflects poorly on your business. Sending a smaller, but higher-quality present is a better reflection. If their office is nearby and you know it would be acceptable, you can drop the present off in-person. If this would not go over well, or isn’t possible, have the gift professionally packaged and shipped. 

Tax Implications of Gift-Giving

When it comes to gift-giving, tax laws can be a bit odd. A gift of a turkey isn’t taxable, but a gift certificate redeemable for a turkey would be if the value was more than $25. In addition to respecting the client’s gift policy, you also don’t want to create a tax headache for them. Employers who give their employees gift cards must include them in wages.

What if you want to use your gifts as a tax deduction? The IRS has placed stringent rules around the deductibility of gifts. You can only deduct $25 per person, per year. Some companies try to get around this by taking clients to a show, as entertainment is 50% deductible, but the client must attend with you. Bottom line? Gift-giving shouldn’t be a major part of your tax planning strategy. Always talk to your accountant before making financial business decisions that have a tax impact.

Above all else, give cheerfully and gratefully. Your attitude towards the gift can communicate itself to your client, and it should never come from a place of obligation or resentment. A joyful attitude is always in season.  

The deadline for implementing the FASB’s new leases accounting standard, ASC 842, is fast approaching. Many private companies are only just now realizing that they need to examine their leases in light of the new requirements to bring most leases on-balance sheet. Adding right-of-use assets and corresponding liabilities could change important ratios and impact lending agreements, and more.

If you haven’t already, now is the time to think about how you will ensure compliance in 2020.

Overview of the Standard

The FASB passed this new standard due to concern that a company’s balance sheet did not truly reflect its assets and liabilities without including lease obligations. After all, they are an ongoing expense and, in some industries, can significantly impact the business’s results.

An agreement counts as a lease if it contains the right to control the use of a specific asset or the lessor obtains substantially all of the asset’s economic benefits. Both conditions must be met for you to consider your agreement to be a lease. Under ASC 842, companies can have three types of leases; a sales-type lease, a direct financing lease, or an operating lease.

Sales-Type Leasesunder ASC 842 for Small Companies

Only lessors can classify some leases as sales-type leases. With this type of lease, you derecognize the underlying asset and account for the net investment in the lease on the Balance Sheet. There are three main criteria that a lease must meet to qualify as a sales-type lease. The fair value of the leased property must vary from its carrying amount at the lease inception; it must involve real estate, and there must be a transfer of ownership to the lessee at the end of the lease.

The net investment is based upon the total of the present value of all future lease payments plus the unguaranteed residual value. Interest income is added to the net investment, and then payments are decreased from the net investment over time.

Finance Leases under ASC 842 for Small Companies

All leases with terms longer than a year and greater than $5,000 in value now count as a finance lease. In addition, the lease must transfer the underlying asset to the lessee at the lease’s end. A finance lease must have the option to purchase, and its term must represent the majority of the asset’s remaining economic life.

When you sign a new finance lease, you must record a liability based on the present value of future lease payments and offset this liability with a right-of-use asset. With a finance lease, you must determine the borrowing rate implicit in the lease. This can be your incremental borrowing rate.

If your business has no debt, and therefore no way to estimate its borrowing rate, private companies must reach out to their banks or other lenders to find out what they would be charged to borrow.

Operating Leases under ASC 842 for Small Companies

Leases with terms of twelve months or less are considered operating leases under ASC 842. This means that you will not have to bring them on-balance sheet. While you must recognize lease expense on a straight-line basis over the lease term, with an operating lease, you do not have to recognize the interest and amortization expense.

The FASB considers the lease’s term to begin from its inception date, which they have not clearly defined. Some companies are choosing to use the date the lease commenced as the inception date, while others have selected the date the lease was signed.

It’s important to note that, for the period of adoption, whether or not a lease is considered short-term does not have to do with the time remaining on the lease. Therefore, if there is only six months remaining on the lease on the adoption date but it was originally a three-year lease, you cannot consider it an operating lease.

Embedded Leases and Private Companies

Companies have been struggling with the concept of “embedded leases.” These are leases contained within a larger lease agreement. It could be an agreement within your master office lease to also lease storage space, or data hosting and other hosting arrangements could contain an embedded lease if specific resources are set aside and dedicated to your company.

Under the new standard, if you fail to identify and properly account for an embedded lease you could have to restate your results or face internal control risk.

Sale-Leaseback Transactions under ASC 842

With sale-leaseback transactions, the lessee (seller) sells an asset to a lessor (buyer) for consideration, and then turns around and makes rent payments to the lessor to retain use of the asset. In the past, a sale-leaseback transaction was off-balance sheet, but now these must be accounted for on-balance sheet.

The terms and conditions for these transactions can be quite complicated, and you are best served involving accounting professionals in both structuring and accounting for them.

Tax Implications of the New Standard

With the new standard, you could have the option of capitalizing certain transaction costs such as third-party commissions and recovering them through amortization. How you decide to handle these costs will impact your tax filings. If you have previously not capitalized theses costs and have decided to now follow your financial statements, you will have to file a form with the IRS to make this change.

It is important to discuss how this new standard will impact your taxes with your accountant and solicit their advice on the best path forward for your business.

The standard is effective for private companies in 2020, so if you have not begun the adoption process, you are fast running out of time. The good news is that many smaller companies could only have one or two leases in place, likely a lease for office space or a copier lease. As well, public companies have already adopted ASC 842, and you can look at their filings for a template and roadmap to adoption.

Which Items are Tax Deductible when Selling a House?

When you list your house on the market, you’re probably thinking about how much money you’ll make or where you want to move next, not about your taxes. A home sale does have tax implications which can either help or hurt you in April.

Find out everything you need to know about selling a house and personal income taxes before you plan on spending the profits from selling your home.

Which Common Home Selling Costs are Deductible?

Not all of the costs related to a home sale are deductible. Here are the costs which can be used to offset any profit and reduce your tax burden.

Repairs Related to the Home Sale. If your realtor insisted that you fix the wobbling back handrail, patch and paint the walls, or make other repairs before listing those costs can be deducted. However, these repairs must have taken place within 90 days of close.

Home Improvements. While 100% of repairs are eligible for deduction in the year you sell the home, the IRS treats improvements differently. Improvements such as adding a deck, installing A/C, or upgrading your kitchen countertops, are only eligible for deduction over a number of years. Talk to your accountant about setting up a depreciation and deduction schedule for them.

Mortgage Interest. Don’t worry, even if you sold your home mid-year you can still deduct the mortgage interest you paid during the year’s first half. The same applies to property taxes.

Realtor Commissions. Nationwide, the average realtor commission you’ll pay is 6%. It’s split between the buyer and the seller’s agent, so even if you decide to sell by owner, you’ll pay 3%.

Points: If you paid mortgage interest, or points, upfront when you bought the house and are still amortizing their deduction, you can take the remaining amount in one lump deduction the year you sell.

Legal Fees. Depending on the complexity of your home sale, you might have to pay a lawyer to prepare and review documents. These fees can be deducted.

Title Insurance. Any title insurance you purchased qualified as a deduction.

Advertising Costs. This deduction will be particularly helpful if you went the “For Sale by Owner” route and paid significant advertising costs. As long as they can be directly related to your sale, you can deduct them.

Escrow Fees. Any fees related to setting up and maintaining an escrow account before close can also be deducted.

If you plan on deducting any of these above expenses, make sure that you keep excellent records. Insist that your handyman provides you with an itemized invoice for repairs done related to selling, don’t lose receipts for paint from Home Depot, and give them all to your accountant at tax time.

Will I pay Capital Gains on my Home Sale?

The tax code contains a capital gains exclusion, which helps homeowners avoid paying taxes on the profit from their home sale. Up to $250,000 of the profit that a single homeowner makes on their sale, and up to $500,000 for married homeowners filing jointly, can be excluded from their taxes. However, the home had to be your primary residence for two out the last five years before sale.

What if I took a Home Office Deduction?

Many independent contractors or self-employed professionals write off a portion of their home on their taxes. The simplified deduction, for home offices of 300 square feet or less, is $5 per square foot. The more complicated method takes actual costs against the home’s overall expenses, allowing you to deduct a portion of your mortgage interest, maintenance and repairs, property taxes, insurance, utilities, and other expenses.

If you sell a property where you’ve been taking a home office deduction, you don’t have to break your profit between the personal and professional square footage for tax purposes. Since this profit is more likely than not to qualify for the home sale tax exclusion, you don’t have to worry about a thing.  

But what if you converted an old garden shed to your home office? Or built one above the garage? You do have to break out home offices not located within the four walls of the main house from your personal profit. You’ll have to allocate a portion of the gains on your sale to your home office, and you’ll owe taxes on this profit.

As well, if you lose the home office deduction, or the size of your home office will change, you’ll need to plan for how this will affect your taxes. Talk to your CPA or accounting professional for specific guidance.

What about my Depreciation Deductions?

One of the perks of writing off a home office on your taxes, deducting depreciation, will hurt you when it comes time to sell the house. Recaptured deductions are taxed at a 25% rate. This may look high, but could often be the same or less than the tax you would have paid if you hadn’t taken the deduction.

Selling a house is a large and complicated transaction. If you have concerns about its impact upon your personal or business income taxes, consult with a professional. They can offer advice for tax planning and reducing any negative effects from your home sale.