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5 Annual Tax Essentials, The IRS Loves Your Business, & Growing Your Business Without Borrowing- Newsletter – November 2018 #taxtip #taxinfo #smallbiz

It’s November and the holiday season is upon us. With the end of the year less than two months away, now is the time to run down your annual year-end checklist. Check out the 5 Annual Tax Essentials article for some year-end tips you can use every year. Also included in this issue is a warning to retirees regarding their federal tax withholdings,  an article detailing the areas the IRS scrutinizes a business during an audit, and some tax strategy tips.

Please call if you would like to discuss how any of this information relates to you. If you know someone that can benefit from this newsletter, feel free to forward it to them. In this issue:

5 Annual Tax Essentials

The more things change the more they stay the same. This is especially true when it comes to reviewing your tax situation. Mark your calendar to review these essential items each year to ensure you are not missing something that could cause tax trouble when you file your tax return:

Alarm clock, calendar, and 1040 form

  1. Required minimum distributions
    If you are 70½ or older, you may need to take required minimum distributions (RMDs) from your retirement accounts. RMDs need to be completed by Dec. 31 every year after you turn the required age. Don’t forget to make all RMDs because the fines are extremely hefty if you don’t – 50 percent of the amount you should have withdrawn.
  2. Your IRS PIN
    If you are a victim of IRS identity theft you will be mailed a one-time use personal identification number (PIN) as added security. You can expect to receive your PIN in the mail sometime in December. Save the PIN as it is required to file your Form 1040. If you would like to sign up for the PIN program, you can do so on the IRS website. Note that once you are enrolled in the program, there is no opt out. A PIN will be required for all future filings with the IRS.
  3. Retirement Contributions
    You may wish to make some last-minute contributions to qualified retirement accounts like an IRA. This can be $5,500 for traditional or Roth IRAs plus an additional $1,000 if you are 50 or older. Contributions to traditional IRAs need to happen by April 15, 2019 to be deducted on your 2018 tax return.
  4. Harvest Gains and Losses
    Profits and losses on investments have their own tax rates from 0 percent to as high as 37 percent. Knowing this, make plans to conduct an annual tax review of investment moves you wish to make. This includes:

    • Understanding investments held longer than one year have lower tax rates as long-term capital gains.
    • Trying to net ordinary income tax investment sales with long-term investment losses.
    • Making full use of the annual $3,000 loss limit on investment sales

    Timing matters with investment sales and income taxes, so having a year-end strategy can help lower your tax bill.

  5. Last-Minute Tax Moves
    While your last-minute tax move opportunities may be limited, here are a few ideas worth considering:

    • Make donations to your favorite charities to maximize your itemized deductions.
    • Consider contributions of up to $100,000 from retirement accounts to qualified charities if you are older than 70½.
    • Make tax efficient withdrawals from retirement accounts if you are over 59½.
    • Delay receipt of income or accelerate expenses if you are a small business.
    • Take advantage of the annual $15,000 gift-giving limit.

Understanding your current situation and having a plan will make for a smooth tax filing process and maximize your tax savings.

Retirees Should Check Withholdings…or Else…

According to a recent announcement by the IRS, retirees might not be withholding enough for taxes this year. This is due to vast tax changes in 2018, making old withholding levels obsolete. The IRS is urging retirees to check their withholdings now and make adjustments if needed to avoid penalties.

Could it be you?

How do you know if you are withholding enough? While the IRS offers a new withholding calculator online, it’s designed for employees who are paid wages – not a great option for retirees. The only good way to avoid a tax surprise is to conduct a projection based on your specific situation. You will need to consider taxes already paid, taxes yet to be paid, and estimate total income and deductions to come up with an accurate projection.

Retirees enjoying a meal

Steps to take

If the results of the projection show that you are lagging behind, you still have a bit of time to adjust withholdings or make estimated tax payments. Here are some ways to do this:

  • Adjust pension withholding. In order to change your pension withholdings, you need to fill out Form W-4P and give it to your pension plan provider.
  • Adjust IRA distribution withholding. To change IRA withholdings, typically you can go online or call the account provider to update the withholding amount or percentage.
  • Adjust Social Security voluntary withholding. To adjust the voluntary withholding on your Social Security payments, you need to fill out Form W-4V and return it to your local Social Security office by mail or in person.
  • Make an estimated payment to the IRS. If withholdings won’t be enough or you are worried about timing, you can make a payment to the IRS directly. Form 1040-ES has a voucher that can be sent with the payment and needs to be postmarked by Jan. 15, 2019 to be applied to your 2018 taxes.

Remember, penalties can be added to your taxes if you don’t pay enough during the year, so it’s important to review your withholdings as soon as possible to avoid a surprise when you file your taxes. Sound complicated? It can be. Please call if you want help evaluating your situation.

The IRS Loves Your Business … and That is NOT Good

The IRS continues to focus their audit activities in key small business areas. The wise business owner is well advised to be able to defend the following five areas to keep the IRS at a comfortable distance:

  • Business or hobby? Be ready to provide proof your business is truly a business and not a hobby. Those who fail in the eyes of the IRS can have their expense deductions severely limited, while still required to report the income. Make sure you can answer and provide documentation for these four questions:
    1. What is your profit motive?
    2. Are you an active participant in the business?
    3. Are you conducting the activity in a business-like manner?
    4. What expertise do you have in the service or products your business provides?
  • Reasonable shareholder salary. S corporations are in the unique situation where some compensation is excluded from payroll taxes. Many businesses take this too far. The IRS is looking closely at businesses who avoid paying a reasonable salary in order to lower their Social Security and Medicare bills. When determining salaries for shareholders, consider their experience, duties, responsibilities and time devoted to the business. Once you have a picture of their ongoing contributions to the business, research comparable positions and salary ranges to pinpoint a fair salary. Save your findings and calculations as backup to provide in the event of an audit.
  • Bulletin board with small business notes
  • Contractors or employees? Make sure consultants and other suppliers are not employees in disguise. The IRS looks at how much control you have over the work being done – the more control you exert the higher likelihood you may have an employee versus a contractor. Penalties can be very steep if the IRS decides your consultant is really your employee. If in doubt, ask for a review.
  • Expenses for meals and entertainment. The IRS is now disallowing any entertainment deductions, even if there is business conducted before or after the event. That means business meal documentation is now more important than ever and should include receipts, who attended the meal, and the business purpose of the meal. Bringing food in for business lunches rather than going out is a safe way to show business intent. If you have an event with both entertainment and food included, get two receipts – one for the entertainment and one for the food.
  • File your Forms W-2 and Forms 1099. Don’t forget to file all required 1099s and W-2s. Most of them are due on or before Jan. 31. The IRS is penalty crazy in this area with up to $270 per missing or incorrect form.

Knowing what the IRS is looking for helps you prepare should it turn its focus to your business.

Growing Your Business Without Borrowing

Taking out a business loan may be your first plan of action for financing business growth. But there are excellent reasons to consider other options for finding capital to expand your business.

For one, it can be very difficult for a small business to secure financing, especially in the early days. You’ll need to prove to a lender that you aren’t a high risk, with financial documentation that shows your company has been profitable for a few years.

When you take out a loan you’ll need to consistently make payments toward the principal, interest, or both, depending on your agreement. If for some reason you can’t make your payments, the problem can snowball from losing the assets you pledged as collateral to more devastating losses, including bankruptcy.

Consider these four ways to finance growth without approaching a lender for money.

  • Ask for pre-payment

This option is as simple as asking your customers to pay you in advance of receiving your products or services. Explain that you are changing your payment policies and your new terms are that you receive payment on the first of the month, at the beginning of a project—whatever works for you. As the owner of your business, you get to decide when and how much you need to be paid in order to deliver your products and services.

On a related note, you might consider using a subscription model for a new income stream. Some possible subscription-based services with a recurring pre-paid fee are:

  • a password protected website offering valuable info and community for your customers
  • a monthly service membership website (i.e. beauty, dry cleaning, home maintenance)
  • box kits for DIY enthusiasts (i.e. cooking, crafting, and other hobbyists)

 

  • Try Crowdfunding

Crowdfunding campaigns connect individuals with a community of willing donors via a platform such as KickstarterFundable, or Indiegogo in exchange for some reward.

In addition to providing an inexpensive source of financing, crowdfunding allows entrepreneurs to gain market validation for a new idea before overinvesting—and provides an opportunity to market to potential new customers. You’ll be able to start selling before your new product or service is ready so you can continue to avoid the small business debt trap.

  • Form an alliance


Partnering with other businesses is mutually beneficial: each company can increase their sales by introducing each other’s products and services to their own customers at no added cost. You can potentially attract brand new customers, too, by increasing your range of offerings by way of your alliance.

Likewise, a marketing alliance is a simple strategy where two companies agree to spread the word about each other’s products and services with their customers.  Each partner would earn royalties on sales to the other partner’s customers, bringing in easy growth revenue without any additional marketing or advertising costs.

As you move forward with your next phase of business growth—no matter how you fund it—be sure to touch base with a business advisor.  Seeking the guidance of experienced business experts who can help you update your business plans, and choose the best strategies to cut costs, increase profits, and achieve your short and long-term goals, will lead to greater success.

 As always, please click here to schedule a phone call if you have any questions or concerns regarding your tax or small business situation.