Consider a Mid-Year Business Self-Audit

The word “audit” makes most of us uncomfortable. But by using auditing principles within your own business, you may quickly discover ways you can enhance your firm’s full-year performance. Here are some factors to consider.

Prepare with a pre-audit. Perhaps the most obvious use of a self-audit comes to play as you prepare for a pending or potential tax audit. For example, if you receive notice of a sales tax audit, conduct your own self-audit before the auditor arrives. Your self-audit might find areas in the state sales tax code where the state actually owes you money.

Internal controls. Consider auditing areas in your company that may be tempting for potential thieves. This may be your inventory, cash register, or accounts receivable. Understand your vulnerabilities and create two different ways to independently verify their accuracy. Internal control self-audits can discover theft, but most often they will identify ways you can reduce the chance of theft ever occurring.

An eye towards ID theft. Consider auditing your data to ensure it is property protected. This has become more important as most small businesses are now using cloud-based services to take orders, pay bills, and receive payments.

Focus on key financial areas. In your self-audit, focus on the areas of your company that make the most financial sense. For most of us it’s auditing those financial processes that impact cash flow. A good place to start is an independent review of your bank accounts and their related reconciliations.

Look at performance progress. Another benefit of a mid-year self-audit can simply be creating year-to-date performance reporting, forecasting your full year, and then comparing it to your plan. If you find problems, you still have plenty of time before the end of the year to take corrective action.

If you need assistance with any of these steps, be sure to consult your tax professional.

Zombie Payer – Keep Your Automatic Payments in Control

When it comes to paying bills, many people cannot imagine returning to paying and sending bills via the U.S. Postal Service. But, the “turn it on and forget it” nature of automatic payments can create zombie payers who no longer challenge or review the details of bills. Here are some ideas to keep this from happening to you.

Create a list. Make a list of the companies you authorized to use automatic payments to pay your bills. Include in the list the card or account each company uses for the automatic payments, as well as payment amounts and frequency. If you use credit and debit cards to pay companies, record the expiration date, in case you need to update any company that has your card on file. When there is a change in a card or bank account, you will be able to consult the list to find the companies you need to notify.

Watch for fees. Make sure the bill payment system you’re using is low cost or no cost. Some companies will charge you a fee for automatic payments. If your biller wants to charge you, pay them with a traditional check.

Beware of price creep. Paying for a product or service automatically can create a situation where you do not notice when your price changes. Monitor your on-going payment amounts so you are able to question any price increase or discontinue service (if applicable).

Review underlying bills. Along with automated bill payments is the vendor’s desire to stop sending hard copies of your bill. However because you’re not receiving a bill, you may be unaware of changes. You may want to opt to continue receiving email or paper billing statements (if possible) so you can verify that your payment has not changed and there are not additional fees or errors.

Take care to review your accounts and statements to avoid zombie paying, and in turn protect yourself and keep your finances in your control.

Five Reasons Business Owners Incorporate

Most new businesses start with no thought about legal structure. In the eyes of the IRS, the default structure is a “sole proprietor,” in which your business profits are taxed on your personal tax return. This can serve you well to start, but there are several reasons business owners consider incorporating as their business grows.

  1. To protect your personal assets from creditors. When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game.
  2. To provide a personal liability firewall. The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.
  3. To issue shares of stock. You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation.
  4. To gain tax flexibility. A corporation can provide you with more tax flexibility. Deliberate planning can help optimize the taxable division between corporate income, dividends, and your personal wages.
  5. To enhance your business presence. Being incorporated sends a signal that your business is a serious enterprise, and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors, and other businesses often prefer to do business with incorporated companies.

If you are still reviewing the pros and cons of incorporating your business, be sure to consult your tax professional for advice.

New Job? Four Choices For Your Existing 401(k)

Changing jobs and companies can be an exciting opportunity, but you have a choice to make. What will you do with the retirement savings you have accrued in your 401(k) plan? Consider these four choices:

  1. Withdraw the money and don’t reinvest it. This is usually the worst choice you can make. Generally, you’ll owe taxes on the distribution at ordinary income rates. (Special rules may apply if you own company stock in the plan.) Unless you’re over age 59-1/2, you’ll pay a 10 percent penalty tax too. More importantly, you’ll lose the opportunity for future tax-deferred growth of your retirement savings. And once you have the funds readily available, it’s all too easy to spend the money instead of saving for your retirement.
  2. Roll the money into an IRA. You can avoid immediate taxes and preserve the tax-favored status of your savings by rolling the money into an IRA. This option also gives you full control over how you invest the balances in the future. You have a 60-day window to complete the rollover from the time your close out your 401(k). However, you should also ask for a “trustee-to-trustee” rollover to avoid potential problems.
  3. Roll the balance into your new employer’s plan. If your new employer allows it, you can roll the balance into your new plan and invest it according to your new investment choices. However, there may be a waiting period before you can join your new plan.
  4. Leave the money in your old employer’s plan. You may be able to leave the balance in your old plan, at least temporarily. Then you can do a rollover to an IRA or a new plan later. Check with your employer to see if this is an option.

If you need help making the right choice for your circumstances, contact your tax professional.

IRS Announces Business Vehicle Deduction Limits for 2017

The IRS has published depreciation limits for business vehicles first placed in service this year. These limits remain largely unchanged from 2016 limits. Because 50% bonus depreciation is allowed only for new vehicles, these limits are different for new and used vehicles.

  • For new business cars, the first-year limit is $11,160; for used cars, it’s $3,160. After year one, the limits are the same for both new and used cars: $5,100 in year two, $3,050 in year three, and $1,875 in all following years.
  • The 2017 first-year depreciation limit for trucks and vans is $11,560 for new vehicles and $3,560 for used vehicles. The limits for both new and used vehicles in year two are $5,700, in year three $3,450 (up $100 from 2016), and in each succeeding year $2,075.

For details relating to your 2017 business vehicle purchases, contact your tax professional.

 

Disability Insurance – What You Need to Know

Say “insurance” to most people and auto, health, home, and life are the variants that spring to mind. But what if an illness or accident were to deprive you of your income? Even a temporary setback could create havoc with your financial affairs. Statistics show your chances of being disabled for three months or longer between ages 35 and 65 are almost twice of those of dying during the same period.

Yet people with financial savvy often overlook disability insurance. Perhaps they feel adequately covered through their job benefits. However, such coverage can be woefully inadequate. The fact is, most individuals should consider disability insurance in their financial planning. When considering disability insurance, think in terms of long term and short term. Many employers provide long-term disability coverage for all employees. Find out if your employer does. If you have long-term disability insurance you need to consider short-term coverage to supplement during the period of disability before your long-term coverage begins. To get the right coverage for you, take the following steps.

Scrutinize key policy terms. First, ask how “disability” is defined. Some policies use “any occupation” to determine if you are fit for work following an illness or accident. A better definition is “own occupation,” whereby you receive benefits when you cannot perform the job you held at the time you became disabled.

Check the benefit period. Ideally, your policy should cover disabilities until you’ll be eligible for Medicare and Social Security.

Determine how much coverage you need. Tally the after-tax income you would have from all sources during a period of disability and subtract this sum from your minimum needs.

Decide what you can afford. Disability insurance is not inexpensive. Plan to forgo riders and options that boost premiums significantly. If your budget won’t support the ideal benefit payment, consider lengthening the elimination period (but be sure that accumulated sick leave, savings, etc., will carry you until the benefits kick in).

 

Four Tips for Working Beyond Retirement Age

 

Many people choose to work into their retirement years. If this is something you’re considering, here are some tips to make sure you get the greatest benefit from your efforts.

  1. Consider delaying Social Security. You can start receiving Social Security retirement benefits as early as age 62, but if you continue to work, it may make sense to delay as later as age 70. Your Social Security monthly benefit increases approximately 8 percent for every year you delay receiving them. These increases in monthly benefits stop when you reach age 70. Social Security benefits may be reduced or be subject to income tax due to your other income.
  2. Don’t get bracket-bumped. You may have multiple income streams during retirement that can bump you into a higher tax bracket and make other income taxable. For instance, Social Security benefits are only tax-free if you have less than a certain amount of adjusted gross income, otherwise up to 85 percent of your benefits are taxable. Required distributions from pensions and retirement accounts, which you are required to take at age 70-1/2, can also add to your taxable income. Be aware of how close you are to the next tax bracket and adjust accordingly.
  3. Be smart about health care. When you reach age 65, you’ll have the option of making Medicare your primary health insurance. If you continue to work, you may be able to stay on your employer’s health care plan, switch to Medicare, or adopt for a two-plan hybrid option that includes both. Consider these options to determine which makes the most sense.
  4. Consider your expenses. If you’re reducing your working hours or taking a part-time job in retirement, consider the cost of your extra income stream. The costs of parking every day, meals, clothing, dry cleaning, and other expenses should be considered in determining your pre-tax income.

These are just a few factors to consider. Contact your tax professional with questions or to discuss your particular situation.

IRS Releases Interest Rates for Second Quarter 2017

Interest rates charged by the IRS on underpaid taxes and applied by the IRS on tax overpayments will remain the same for the second quarter of 2017 (April 1 through June 30). Therefore, the rates will be the following:

For Individuals:

  • 4% charged on underpayments; 4% paid on overpayments.

For Corporations:

  • 4% charged on underpayments; 3% paid on overpayments.
  • 6% charged on large corporate underpayments.
  • 1.5% paid on the portion of a corporate overpayment exceeding $10,000.

Be Tax Wise When Withdrawing Your Retirement Savings

You’ve spend years saving for retirement, but now it’s time to plan the best way to manage your retirement savings withdrawals. Here is a potential method to help maximize your funds using a tax-advantaged strategy.

First, look at Social Security and pensions. You can use these funds for daily living much the same as you used your salary and wages when you were working. These monthly sources of cash are considered taxable income by the IRS and should be your “go to” funds for living expenses.

Second, consider your savings. If you have some cash or investment savings outside of tax-deferred retirement savings accounts, these are readily available for you without extraordinary tax implications beyond investment interest, dividends, and capital gains taxes.

Third, look at tax-deferred accounts. And now the tricky part, if you have traditional tax-deferred retirement savings accounts such as IRAs and 401(k)s where your savings grew with pre-tax contributions and tax-deferred earnings, you will want to withdraw these funds as tax-efficiently as possible. Withdrawals from these accounts will be taxed as ordinary income, penalized if withdrawn too early, and severely taxed if not taken as required minimum distributions (RMDs) after you reach age 70-1/2.

Fourth, consider tax-free retirement funds. You may have a tax-free retirement savings account such as a Roth IRA or Roth 401(k). These were built with your hard-earned “after tax” contributions. Those contributions and all the related earnings can be withdrawn tax-free. But more importantly, they can continue to grow tax-free with no RMDs after age 70-1/2. These tax-free retirement savings should be your last resort.

Your retirement savings withdrawal strategy can get complicated. Each year you’ll need to consider current tax rates, your overall taxable income, your age and your particular tax situation. Taxation of your Social Security benefits could be affected. Your available tax deductions and credits can change depending on your income tax bracket. Getting advice from a professional could prevent an unnecessarily taxing withdrawal mistake. Call your tax professional for help.

Alimony in the IRS Spotlight

A couple of years ago, the U.S. Treasury released a report highlighting a disturbing level of non-compliance in alimony reporting on tax returns. Since the report was released, the IRS has increased the scrutiny they place on tax returns with alimony claims. If you file a tax return involving alimony, make sure you know the facts so you can avoid any potential audit problems.

If you receive alimony. Report alimony as “received as income” on your tax return. If you receive income from an ex-spouse that you believe is child support, retain documentation to support this claim, as child support is not income to you.

Alimony payment requires proper reporting. You must report the Social Security number (SSN) or the tax identification number (TIN) of the person receiving the alimony you are paying. Failure to provide this identification will result in a $50 penalty.

Mismatch audits on the rise. The IRS has implemented audit filters that will catch alimony mismatches, so you should expect scrutiny or an audit  if there is a major alimony discrepancy. A quick discussion with your ex-spouse regarding claimed alimony will help you ensure your tax returns match up.

Documentation is crucial. Because you know your chances of an audit may be higher if there is alimony noted on your tax return, double-check your documentation. If you pay alimony, having it automatically deducted from your paycheck is one way to make it easier to accurately report and substantiate your payment amounts.

Double-check with an ex-spouse. Each year the IRS sees hundreds of millions of dollars in claimed alimony deductions that have no corresponding income tax returns filed reporting the alimony as income. These instances of non-reporting are an audit target by the IRS for both taxpayers.

If you have questions regarding the tax treatment of your alimony payments or receipts, be sure to contact your tax professional.