Author Archives: Cindy Toran

Start-Up Costs for a New Business

By: Cindy Toran, MBA, BA

Start-up costs for a small business are often not “small” at all. These are costs for:

  1. Start Up Costs for Small BusinessInvestigating the creation of or acquisition of an active trade or business, OR,
  2. Creating the business, OR,
  3. Is a cost you pay before the day the business begins operation.

Examples include:

  • Travel to obtain customers and suppliers
  • Costs to conduct market surveys
  • Advertisements for the opening of the business
  • Costs to analyze available facilities, labor, supplies, etc.
  • Salaries to train employees (Last week’s blog was about Hiring Your Spouse and Providing Health Benefits).
  • Fees for consultants and other professional services

These costs must be amortized over 15 years unless you make an irrevocable election to expense up to $5,000 in the first year, reduced by any amount of costs that exceed $50,000. For example, if you spent $52,000 on start-up costs you could write-off $3,000 in the first year of the business [$5K less ($52K minus $50K)] plus amortize $49,000 over 15 years beginning with the month the business commenced.

The business begins on the date it starts to function as a going concern and performs the activities for which it was organized.

If the attempt to go into business is not successful, the start-up costs may or may not be deductible:

  • Costs incurred before making a decision to acquire or begin a specific business are personal and non-deductible. (e.g., A taxpayer in public relations work was denied a deduction for expenses in investigating a candy dispenser business and sandwich vending machine business in which he didn’t actually engage.)
  • Costs incurred in the attempt to acquire or begin a specific business are capital expenses and can be deducted as a capital loss. (e.g., a lawyer’s fee for negotiating a lease or the cost of a land survey to purchase business assets). Note that these costs would be capitalized as part of the basis of the business if successfully started, so they would not qualify as amortizable start-up costs per se.

Whether or not to elect to expense or amortize start-up costs depends on the situation. If you expect a loss or only small gain in the first year of business and significant gains thereafter, it may make sense to amortize 100% of the costs to offset future profits. Your accountant or tax professional can provide advice on your specific situation.

Do you have a trusted tax professional?

Are you are at a place in your business you need tax advice. Do you have thoughts, questions or concerns regarding how to claim the start-up costs for your small business? Please feel free to contact us, leave your comments below or post to on our FacebookGoogle+ or LinkedIn pages.

Maybe you know someone who can benefit from this information, feel free to share:
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Tax Season is Here!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

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photo credit: StockMonkeys.com via photopin cc

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Hiring Your Spouse and Providing Health Benefits

By: Cindy Toran, MBA, BA

hiring your spouseHave you ever thought of hiring your spouse? If you did, should you provide them with health insurance?

There are potential advantages and disadvantages to formally hiring your spouse if you own a small business as a sole proprietor or single-member LLC. Keep in mind that you can only do so if he or she plays a bona fide role in providing services to your business, such as office work or marketing.

The disadvantage to hiring your spouse is that it may result in added employment tax filing (such as FICA, Medicare, but not FUTA). However, this also reduces taxable income.

Advantages to Hiring Your Spouse

  • Your spouse is able to build up Social Security benefits.
  • Reduction in self-employment tax for sole proprietor (15.3% up to $117,000 earnings for 2014). However, 50% of the amount paid reduces the Adjusted Gross Income (AGI). This could impact other tax deductions.
  • Your spouse can be provided health insurance coverage that includes all family members (including the sole proprietor).

NOTE: This can be a significant advantage. If you are hiring your spouse as your only employee, this will provide the maximum benefit. This fringe benefit will reduce both income tax and self-employment tax.

Here is how the last advantage works for hiring your spouse. There is a 100% tax deduction for the following medical expenses for the employee and family (including the employer’s spouse):

  • Health insurance premiums
  • Uninsured medical, dental and vision care expenses
  • Other deductible benefits, such as premiums for term life insurance up to $50K, accident and disability.

Thus, all medical expenses and insurance premiums would be 100% deductible expenses of the business, assuming the total compensation package is considered reasonable for the duties being performed.

Keep in mind, however, that ALL employees must be offered the same benefits.

Here is an example:

John is a self-employed consultant with no employees. John hires his spouse, Peggy. Peggy’s job description is to perform bookkeeping and research duties for John.

An employment contract is prepared. The contract states that Peggy will receive $20 per hour. John prepared a written medical reimbursement plan. The plan states the following: “The employer will reimburse all employees for medical care expenses of each employee, his or her spouse and his or her dependents.”

John paid Peggy $16,000 in wages in 2014 for 800 hours of work. He also filed all employment tax returns. John reimbursed Peggy $9,000 by check for medical expenses. These included doctor and dentist bills not covered by health insurance. These medical expenses were incurred during 2014.

Peggy’s salary, payroll taxes, and the medical reimbursement are all valid business expenses.

What about you?

If this scenario fits your small business, do some calculations to see if you would benefit financially from hiring your spouse. Also, check with a trusted tax professional to be sure you meet all qualifications.

Do you have a trusted tax professional?

Maybe you are too busy to work through the calculations for how hiring your spouse may affect your tax returns. Perhaps you are at a place in your business you need tax advice. Do you have thoughts, questions or concerns regarding this subject? Please feel free to contact us, leave your comments below or post to on our FacebookGoogle+ or LinkedIn pages.

Maybe you know someone who can benefit from this information, feel free to share:
Linkedin - Joseph Cahill / WorthTaxTwitter - Joseph Cahill / WorthTax / WorthTaxPrepFacebook - Joseph Cahill / WorthTaxGoogle+ - Joseph Cahill / WorthTaxalignable_logo - Joseph Cahill / WorthTax

 

Tax Season is Here!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

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Self-Directed IRA: 9 Things You Should Know – Buyer Beware

By – Cindy Toran

Nest Egg3Have you ever thought about how you could benefit from a self-directed IRA? Any ideas on how you might use one to your financial advantage? It would seems simple enough. Invest in any creative alternative idea you can dream up and reap the benefits tax free!  Some examples of investments that have been made are:  golf courses, freight truck fleets, tractors, race horses, mineral rights, sugar, and hardwood trees.

What are the rules and risks of a self-directed IRA?

Before you jump into your own self-directed IRA, here are some considerations:

  1. No self-dealing:  IRS rules prohibit transactions that benefit you or those deemed “disqualified” persons, including:
    •         IRA owner
    •         Spouse
    •         Descendants and their spouses
    •         Service providers, such as custodians or brokers.
    •         Must be real investments:
    •         No collectibles, such as art, coins, antiques, vintage cars, wine collections, etc.
    •         No tangible personal property or life insurance.
    •         No investment in an active business owned or managed by a disqualified person, including S-Corp, LLC or partnership.
  2. Real Estate can be financed with a mortgage but it must be non-recourse (i.e., neither the IRA nor its account owner or family may be liable on the loan).
  3. Gains on real estate held in a traditional IRA will be taxed at ordinary tax rates as distributions are taken, thus losing the favorable capital gains rate. However, gains in a Roth IRA would be tax free.
  4. Rental real estate must generate positive cash flow to cover all expenses. Loaning money even by writing personal checks for repairs, etc. are prohibited and will make the IRA fully taxable.
  5. No disqualified person may occupy real estate, including land, owned by a self-directed IRA.
  6. Assets in an IRA must be valued annually, which may require expenses for appraisals.
  7. Holding illiquid assets, such as real estate or equipment, in an IRA when the owner reaches 70-½ years and must begin taking distributions, could be a problem.
  8. There is a general lack of scrutiny in self-directed IRAs. Accounts administered by custodians lack regulation and seem to attract unscrupulous promoters of dubious investment schemes.  Administrators do not vet investments, that is the job of the IRA owner (i.e., “buyer beware”).

Self-directed IRA’s offer a wider variety of investment options. Those may seem more financially attractive than traditional accounts. However, be sure you know the rules and risks before taking this leap with your retirement funds.

What do you think?

Maybe you have some questions regarding a self-directed IRA, please feel free to leave your question below or post to our Facebook or Google+ page. You are also welcome to contact us.

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Tips on the Dependent Care Tax Credit

by Cindy Toran, Tax Manager

As any parent knows well, expenses for dependent care, such as child care or adult care, can be significant. The IRS provides a subsidy for working people who pay for dependent care while they work, look for work, or attend school full-time.

To Qualify for Dependent Care:

  1. 2014_12_08 Dependent Care owned by AVSofficeBoth parents must have earned income or be a full-time student. Both parents must have earned income or one may be a full-time student.
  2. Children must be age 12 or younger or unable to care for themselves.
  3. Expenses must be directly connected to allowing the parent(s) to work (i.e., not off-hours babysitting for personal reasons and no overnight camps) or to attend school.
  4. Expenses cannot be paid to a spouse or parent of the child or other person who is a dependent of the taxpayer.
  5. Generally taxpayers must file jointly or as head of household.
  6. Parents must be able to provide the name, address and tax identification number of the care provider on your tax return.

How much is the Dependent Care credit?

The amount depends on the number of children and ranges from 35% to 20% of work-related dependent care costs depending on your adjusted gross income (AGI). As the AGI increases, the percentage decreases.

  1. The amount of expense is limited to $3,000 for one child and $6000 for 2 or more children.
  2. Your tax bill must exceed the allowable credit (i.e., any credit in excess of the tax is not usable).
  3. Eligible daycare expenses must be reduced by any dependent care benefits provided through an employer, such as a Flexible Spending Account.

The IRS subsidy will certainly not cover the total cost of child care but every little bit helps the family budget, and the dependent care tax credit should not be overlooked. If you have a question regarding any type of dependent care, feel free to leave it below or post to our Facebook or Google+ page.

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How Cancellation of Debt Becomes Tax Free – Federal vs. Massachusetts

 by Cindy Toran, Tax Manager

cancelled-debtHow does cancellation of debt become tax free? Is Federal versus Massachusetts different?

Generally debt forgiveness for a borrower who is personally liable on a loan is taxable income unless one of the following exceptions applies per Federal tax law:

  1. Occurs under Title 11 bankruptcy
  2. Occurs when the taxpayer is insolvent (Debts greater than Assets)
  3. Is qualified farm indebtedness
  4. Is qualified real property business indebtedness (other than C-corporations)
  5. Is qualified principal residence acquisition debt (up to $2M for MFJ) – expired December 31, 2013

Massachusetts, however, did not adopt the exclusion for mortgage forgiveness on principal residence.  Thus, for home mortgage cancellation of debt only one of the first 4 exceptions listed above will prevent the debt forgiveness from being subject to MA income tax.

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Don’t Expect the IRS to Take Your Word on Charitable Deductions – Substantiate

by Cindy Toran, Tax Manager

What do we have to say about charitable deductions? Three words, SUBSTANTIATE, SUBSTANTIATE, SUBSTANTIATE!

“Honestly, I attend church every week (religiously) and give $20 cash when the offering plate is passed. So $20 times 52 weeks = $1040 charitable deduction.”  Really?  Not trying to cast any stones here; you have never missed a week of church while on vacation?DSCN1774-300x225

The IRS will disallow such a deduction.  For cash donations the taxpayer must have either:

  1. Bank records (e.g., cancelled check or account statement) OR
  2. Written acknowledgment from the charity documenting the contribution amounts and dates received.

Obviously, for relatively small individual donations using a check may be preferable.

But it gets even more complicated…..

How about single donations of $250 or more?  These must have written acknowledgment from the donee (organization receiving the gift). The gift must:

  1. Be received by either the date the tax return is filed or the extended due date, whichever is earlier. AND
  2. State whether any goods or services were provided in consideration for the contributions; and, if so, an estimate of their FMV.

What if I have payroll deduction contributions?

Substantiation would consist of and require a:

  1. Form W-2 or other employer document AND
  2. Pledge card or other document prepared by the charity.

What about all those household goods and used clothing (i.e., non-cash) items donated?

If <$250 value for each donation, you need a

  1. Receipt unless impractical to obtain (e.g., left at a drop box) AND
  2. Reasonably detailed description of item(s) donated, FMV, method of valuation, date and name of donee.

If the donated item is:

  • >$249, you also must have an acknowledgment from the organization.
  • $250-$500, acquisition cost, approximate date, and how acquired are additional requirements.
  • >$5K, a written appraisal is also required.

Autos, Boats & Planes

Autos, boats and planes are the same as other non-cash donations; and, if the value is at least $250, Form 1098-C from the organization must be obtained.

Volunteer Out-of-Pocket ExpensesAnne-Frank-Quote-circle-300x225

For volunteer out-of-pocket expenses receipts, cancelled checks or other written records are required.  If the amount is >$249 considered separately (e.g., $250 airline ticket), an acknowledgement also mandatory.
Nonetheless, after all this information you may want to note …

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