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Entrepreneur Tips and Strategies for Business

The TCJA changes some rules for deducting pass-through business losses

Posted by Mark Martukovich Posted on Aug 08 2018
 

The TCJA changes some rules for deducting pass-through business losses

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It’s not uncommon for businesses to sometimes generate tax losses. But the losses that can be deducted are limited by tax law in some situations.
 
The Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can currently deduct — beginning in 2018.
 
This could negatively impact owners of start-ups and businesses facing adverse conditions. Before the TCJA Under pre-TCJA law, an individual taxpayer’s business losses could usually be fully deducted in the tax year when they arose unless: The passive activity loss (PAL) rules or some other provision of tax law limited that favorable outcome, or The business loss was so large that it exceeded taxable income from other sources, creating a net operating loss (NOL). After the TCJA The TCJA temporarily changes the rules for deducting an individual taxpayer’s business losses. If your pass-through business generates a tax loss for a tax year beginning in 2018 through 2025, you can’t deduct an “excess business loss” in the current year. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of: Your aggregate business income and gains for the tax year, and $250,000 ($500,000 if you’re a married taxpayer filing jointly).
 
The excess business loss is carried over to the following tax year and can be deducted under the rules for NOLs. For business losses passed through to individuals from S corporations, partnerships and LLCs treated as partnerships for tax purposes, the new excess business loss limitation rules apply at the owner level. In other words, each owner’s allocable share of business income, gain, deduction or loss is passed through to the owner and reported on the owner’s personal federal income tax return for the owner’s tax year that includes the end of the entity’s tax year. Keep in mind that the new loss limitation rules apply after applying the PAL rules. So, if the PAL rules disallow your business or rental activity loss, you don’t get to the new loss limitation rules.
 
Expecting a business loss?
 
The rationale underlying the new loss limitation rules is to restrict the ability of individual taxpayers to use current-year business losses to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains. The practical impact is that your allowable current-year business losses can’t offset more than $250,000 of income from such other sources (or more than $500,000 for joint filers). The requirement that excess business losses be carried forward as an NOL forces you to wait at least one year to get any tax benefit from those excess losses. If you’re expecting your business to generate a tax loss in 2018, contact us to determine whether you’ll be affected by the new loss limitation rules. We can also provide more information about the PAL and NOL rules. Call us at 727-530-0036

Why the “kiddie tax” is more dangerous than ever

Posted by Mark Martukovich Posted on July 27 2018

Once upon a time, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets.

To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever. A short history Years ago, the kiddie tax applied only to children under age 14 — which still provided families with ample opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income). What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.

A fiercer kiddie tax The TCJA doesn’t further expand who’s subject to the kiddie tax. But it will effectively increase the kiddie tax rate in many cases. For 2018–2025, a child’s unearned income beyond the threshold ($2,100 again for 2018) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2018 taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000. Similarly, the 15% long-term capital gains rate takes effect at $77,201 for joint filers but at only $2,601 for trusts and estates. And the 20% rate kicks in at $479,001 and $12,701, respectively. In other words, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income.

As a result, income shifting to children subject to the kiddie tax will not only not save tax, but it could actually increase a family’s overall tax liability. The moral of the story To avoid inadvertently increasing your family’s taxes, be sure to consider the big, bad kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring such assets to them. Please contact us for more information about the kiddie tax — or other TCJA changes that may affect your family. Contact us for a free strategy session on your tax situation at 727-530-0036.

A midyear review should go beyond financials

Posted by Mark Martukovich Posted on July 17 2018

A midyear review should go beyond financials

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Every year is a journey for a business. You begin with a set of objectives for the months ahead, probably encounter a few bumps along the way and, hopefully, reach your destination with some success and a few lessons learned. The middle of the year is the perfect time to stop for a breather.
 
A midyear review can help you and your management team determine which objectives are still “meetable” and which one’s may need tweaking or perhaps even elimination. Naturally, this will involve looking at your financials.
 
There are various metrics that can tell you whether your cash flow is strong and debt load manageable, and if your profitability goals are within reach.
 
But don’t stop there. 3 key areas Here are three other key areas of your business to review at midyear:
 
1. HR. Your people are your most valuable asset. So, how is your employee turnover rate trending compared with last year or previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.
 
2. Sales and marketing. Are you meeting your monthly goals for new sales, in terms of both sales volume and number of new customers? Are you generating an adequate return on investment (ROI) for your marketing dollars? If you can’t answer this last question, enhance your tracking of existing marketing efforts so you can gauge marketing ROI going forward.
 
3. Production. If you manufacture products, what’s your unit reject rate so far this year? Or if yours is a service business, how satisfied are your customers with the level of service being provided? Again, you may need to tighten up your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals.
 
Necessary adjustments
 
Don’t wait to the end of the year to assess the progress of your 2018 strategic plan. Conduct a midyear review and get the information you need to make any adjustments necessary to help ensure success. Let us know how we can help.
 
Contact us for a free strategy session at 727-530-0036.

What businesses need to know about the tax treatment of bitcoin and other virtual currencies

Posted by Mark Martukovich Posted on July 09 2018

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges. Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance. The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars. When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee. When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients. Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

Deciding whether to go virtual Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.

To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers — contact us at 727-530-0036. 

The new tax law gives pass-through businesses a valuable deduction

Posted by Mark Martukovich Posted on May 29 2018

Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law.

Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI). A 20% deduction For tax years beginning after December 31, 2017, and before January 1, 2026, the new deduction is available to individuals, estates and trusts that own interests in pass-through business entities. Such entities include sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). The deduction generally equals 20% of QBI, subject to restrictions that can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000.

QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction. The limitations For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of: 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property. Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income. Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses.

Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture). The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

Careful planning required Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit. Please contact us for more details at 727-530-0036.

 

Research & Development credit — what are the potential tax savings and what businesses are eligible

Posted by Mark Martukovich Posted on May 11 2018

The Tax Cuts and Jobs Act (TCJA) may create opportunities for research and development (R&D) credits to be used for tax savings not previously considered. The topics listed below should be evaluated for prospects to use R&D credits:

  • Alternative Minimum Tax (AMT)
  • Tax Rates – Corporate & Pass-Through
  • Net Operating Loss (NOL) Limitations
  • Amortization of R&D Expenditures
  • Retention of Qualified Small Business Payroll Credits
  • Retention of Eligible Small Business Credits

What’s Changed Under The New Laws?

  • Corporate tax rate is now at a flat 21 percent, down from previous top rate of 35 percent
  • Pass-through tax rate deduction of 20 percent of domestic qualified business income; subject to limitation; expires after December 31, 2025
  • NOL deduction is limited to 80 percent of taxable income for losses arising in tax periods beginning after December 31, 2017; no carryback and indefinite carryforward for losses arising in tax periods ending after December 31, 2017
  • AMT higher exemption for individual taxpayers; expires after December 31, 2025
  • AMT is repealed for corporations; AMT credits are refundable from 2018 through 2021.
  • Amortization of certain R&D expenditures (including software development costs) would be required for tax periods beginning after December 31, 2021. These R&D costs would be required to be capitalized and amortized over a five-year period.
    Note:  Current efforts are underway to postpone or eliminate enactment of the Internal Revenue Code (IRC) Section 174 provision.

Why Cash Flow Planning is Critical in 2018

Posted by Mark Martukovich Posted on Mar 26 2018

Why cashflow planning is critical in 2018

Cashflow is simply the amount of money coming in versus going out.  Sounds simple right?

Sometimes it is not a matter of simply having more coming in than going out, but how the ebb and flow is structured and if there is a plan in place to assure that positive cashflow is consistent.

 

Cash is King

Without cash in, your business is basically a hobby. Your business needs cash to run. Expenses like rent, people who work for you, raw materials, supplies, and material you resell are required daily to keep the doors open. Positive cashflow means that everything is going well, and more money is coming in than going out. The higher the positive cashflow, the easier it is to grow your business with new equipment, more people or even added places you do business.

 

Cashflow Planning

However, to manage your cashflow you need a plan. Cashflow in most businesses is somewhat of a moving target. Some months, cash flow in can fluctuate while your cashflow out can remain static (rent, employees, etc.). Management of cashflow is critical so that you can predict fluctuations and maintain your ability to provide cashflow out.

Your company history can provide insight into seasonal fluctuations as can an intelligent review of expenses that are recurring and might be coming on the horizon.

These reviews can often uncover issues that can affect a business negatively. Annual licenses, rental agreements, inventory predictions, and capital equipment like computers and machinery often impact a business with “surprises”. However, these surprises could have been predicted with a thorough review.

 

Improving Cash Flow with Planning

A review of how billing is structured is often a place quick gains can be made. Are you losing money in collections or slow billing? Could you structure payment differently to ensure cashflow (especially for longer projects or long-term goals)?

Regarding cashflow out, if you have cash on hand, you may be able to benefit from discounts for full payments, or be able to use payment terms to their fullest. You want to pay all your bills on time and in full, but there are specific strategies to setting up and even negotiating terms based on your business goals, from setting yourself up for a large capital purchase to even selling a business.

 

Cashflow Planning is Critical

Today’s business can weather changing business environments, tax changes and seasonal sale cycles with a good plan. It is not just if your business has money coming in, it is specifically how you spend that money. A smart cashflow plan can help you develop protocol for your business that will help you understand what is going on in your business, your employees understand procedures on how they handle payments and operations and help the people you pay set expectations of how they work with you and creating a level of trust for your company.

Speaking to a qualified business advisor can help your business increase profits from a good cash flow plan.  Call us at (727) 530-0036 to schedule a time for a free strategy session to review your current plan.

Tips For Finding the Right Accountant

Posted by Mark Martukovich Posted on Mar 22 2018

Finding the right Accountant for your business is a critical step in ensuring financial success. It’s important to find someone that will help you reach your goals. Many business owners fail because they do not have a trusted financial advisor that is invested in the long-term success of their business operations. The items below are points to consider when finding the right Accountant.

 

Experience: It is extremely important to find an Accountant that understands your business. Find out about their background, what they specialize in, and what types of clients they serve.

 

Services Match Your Needs: Make sure that the Accountant you choose offers the services necessary to effectively run your business. Gain an understanding of what is included in your services and what is not included in your services.

 

Personality and Communication: Financial matters are often challenging. You want to choose an Accountant that has a good personality and is easy to talk to. You want an Accountant that can communicate well and help you understand financial matters that affect your business.   

 

Valuable to Your Business Strategy: Gain an understanding from the Accountant as to how he/she will bring value to you and your overall business strategy.

 

Utilizing Cutting Edge Technology: You want an Accountant that is utilizing cutting edge technology to ensure your work is being done properly. Also, you want an Accountant that can effectively communicate and deliver relevant information and content in electronic format.

 

Research Customer Reviews: Consider performing an internet search to gather information about the Accountant’s reputation. You can often find customer reviews online.

 

Fee Structure: Make sure you gain a clear understanding of how the fees are structured and calculated so you don’t have any surprises once service begins.

 

Accountant’s Continuing Education and Memberships: Find out where and how the Accountant keeps up to date with industry knowledge and important changes to legislation that may affect your business. It’s also a good idea to know which memberships and networking groups the Accountant is associated with.

 

Contact us for a free strategy session regarding your accounting needs and find out how we might be able to help you. Click Here To Learn More.

The 5 Ways the New Tax Laws Will Force You to Change The Way You Do Business

Posted by Mark Martukovich, CPA Posted on Mar 08 2018

 

The new tax plan for businesses is solidly in place, but there are still a lot of questions being asked regarding if some of the activities that many businesses deduct “really” have changed. The short answer is yes!

There are a number of deductions that have been taken away, however, many of them appear to be balanced out by loosening of restrictions in other areas. Some of the changes may affect you more dramatically based on the ways you do business and cause you to change the way you do things involving your business, or quite possibly making it a good idea to hire a knowledgeable tax advisor to help you plan for these changes.

 

Here Are Some of The Ways Your Business Can Adapt to The New Tax Reform

 

You will have to control your income and profits. If your business is a pass-through business, like more than 90% of small businesses, you may benefit from a lowering of your taxable income from that business by 20%. This is meant to spur you to reinvest in your business or maybe even take on additional employees. However, many service type businesses, like doctors or lawyers, may not be able to take advantage of this in some instances so it’s important for you to understand how your business is regarded. Again, this is an area where your tax advisor can help to make sure you are using the most tax efficient strategies for your situation.  It is also important to consider paying yourself “reasonable compensation so that you are maximizing your benefit.

 

You can grow your company. A large drop in the tax rate for C corps and the introduction of the Qualified Business Income Deduction for pass-through entities might not only make a real difference to your company, but in the way you do business with others. This friendlier tax base percentage might be able to keep companies from going overseas to operate and make it easier for your business to keep more of your income. Theoretically, this also might be the year you are able to start looking at expanding your business as you run projections for your profits and the associated savings in taxes. This year, many businesses should employ tax-savvy business advisors who can guide them on the path to growth in this still-complicated tax environment.

 

You Can Reinvest in Your Business. Now is a great time to put some money into your business as elements of depreciation under Section 179 have changed in favor for many businesses that want to purchase certain types of vehicles and even used equipment.  There are exclusions of course and getting advice on not only what can be deducted but how to structure the purchases can make sure you maximize your deductions.

 

You May Change How You Give To Charities.  The new tax laws have eliminated the business deduction for charity golf and other special charity sporting events. You can no longer deduct either participating in, or even attending a charity sporting event. You must now claim the deductions as basic charitable deductions, giving you a much smaller deduction than before. If you are involved in specific charities, there may be ways in which you can continue to help yet maximize your deductions.

 

You Can Start Talking. Presentation expenses are now completely deductible. While having an intimate dinner might be a great way to show one client how smart you are, presentations allow you to show lots of people also how smart you are. This can lead to better prospects being taken to those previously mentioned non-deductible meals. The big word in this deduction is “the public”. If you prospect and give a presentation to a small group of business owners, that is “the public”, and 100% of your expenses are deductible.

 

As you can see, there are many changes in the tax law that affect your business and can cause you to think about the ways you actually run your business. This should be the year you start to look for a tax advisor that can not only navigate the new tax laws, but the ways you actually structure your business moving forward to maximize your profits and reach your goals.

 

 

Posted by Admin Posted on Aug 31 2017

Entrepreneur Tips and Strategies

Posted by Admin Posted on Aug 30 2017

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Entrepreneur Tips and Strategies for Business Owners

Do you want to start your own business and be an entrepreneur? Though the idea is attractive you should know the pitfalls that lie ahead and what you need to do to make a success of it. And while it can be stressful, the flipside is that it can also be professionally, personally and financially enriching.

Ten Important Entrepreneur Factors

To guide you, here is a checklist of Ten important factors to keep in mind so that you are successful. Use these as guidelines to see that you are the right path and you have a viable business plan, accurate information and clarity on various aspects of the business.>

Is your product or service what people want? Entrepreneurs always have to identify a need or want and then go for it rather than assuming that people will go for what they want to sell.

Cash is essential. Ensure that you have enough money to start and run the business and keep in mind that you need to start generating profits quickly so that you can keep your business afloat, rather than having to keep on pumping money to do so, which can make you cash poor fast.

Reduce costs. When you reduce your costs you are increasing your profits (or potential profits). You need a positive cash flow so that more money comes in than goes out.

Err on the side of caution by overestimating expenses and underestimating income. Most people do the reverse and then get shocked when they find they are losing money. When you start a business you are bound to have some fixed and recurring expenses and some variable ones, so budget for those.

Marketing and sales are the lifeblood of the business. You need marketing so people know what you are selling, but you also need sales to generate cash. A satisfied customer should turn into a repeat customer. Entrepreneurs need to start selling the product as soon as possible.

Improve your profitability. A social media presence and a website will help in marketing, generating leads and converting these into sales. As you increase the sales price point average and boost the number of repeat customers you will enhance your profit margins.

Evaluate, appraise and calculate everything. You need facts and figures in place so that they can be quantified and checked and it is only then you will know your business’s strengths and weaknesses and which areas need more work.

Never be complacent and stop learning. As you keep learning you will keep earning – and that is the bottom-line that you want when you start a business, particularly if you have never started a business before.

A successful business depends on many factors including providing a quality product, sales, marketing, operations and knowing your customer. You never stop learning when you are running your own business.

If there are particular aspects that you feel you don’t know enough about or don’t have the time or expertise to handle, hire an expert and/or delegate the work. All entrepreneurs have to go through the learning curve. 

Once you are committed to growing your business and follow the right path, your business can grow exponentially and reach stratospheric height, leading to greater satisfaction and more money.

As far as your product is concerned, avoid discount, but add value. When you offer a discount, you are reducing your profitability directly. Offering additional value (apart from the actual value of the product) is a further enticement to the customer to buy.

Take help. A coach, a mentor or a professional can help you find the answers you need and look at your business and figures dispassionately and objectively, identify areas that need more work, improve profitability and keep your business afloat.

 

FMA, C.P.A. Can Help Your Business

At FMA, C.P.A., we take pride in being a proactive trusted advisor that helps our clients meet their goals, stay in compliance and help them grow their business.  Our business advisory team can help you with four key areas including compliance, tax efficiency, organization and strategic financial services.  Call us today to get more information about our business advisors and how they can help you get the most out of our services.  

 

Articles on this blog are for information only. Always consult with your tax advisor before following any course of action regarding your business, taxes, or finances.