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The Tax Benefits of Net Operating Losses

CaptureFor many businesses, profits vary from year to year. However, with proper planning, even a bad year can be helpful from a tax perspective. Where business deductions exceed gross income, a taxpayer may have a net operating loss (NOL) that can be used to offset income in another tax year, potentially generating a refund of previously paid taxes.

Who May Use an NOL?

NOLs are available to individual business owners, corporations, estates, and trusts. Partnerships and S corporations do not take NOL deductions, though their partners and shareholders may use “passed through” losses on their own returns.

How Is an NOL Applied?

The general rule is that a taxpayer may carry an NOL back two years and forward 20 years, though certain limited exceptions may apply. For example, an individual with an NOL that was caused by a casualty, theft, or disaster may use a three-year carryback period.

In general, the taxpayer will carry back an NOL to the earliest year it can be used and then carry it forward, year by year, until it is used up. The taxpayer may also elect to forego the two-year carryback and carry the loss forward for the 20-year period. However, the general preference is to use an NOL sooner rather than later because a dollar of tax saved today is generally worth more than a dollar saved in the future.

How Is an NOL Calculated?

Calculations of NOLs can be complicated. For example, a noncorporate taxpayer’s NOL is calculated without regard to any personal exemptions or NOLs from other years, and certain deductions for capital losses and nonbusiness items are limited.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

Getting a Handle on Payment Issues

Most small business owners love what they do. But that’s not to say things can’t get a little difficult, especially when customers don’t pay their bills on time. Even one or two slow-pay or no-pay customers can be enough to throw your company’s finances off.

Understanding what might be going on with your customers and being proactive can help you keep your accounts receivable on steady ground.

Purchase Order Predicaments

Not all customers use purchase orders, but those that do rely on them to coordinate ordering and accounts payable functions. If there’s a mix-up involving a purchase order and your invoice doesn’t match up with the customer’s purchase order, your invoice could end up on the “problem” pile instead of the “pay” pile. Be proactive by verifying that the purchase order numbers on your invoices are correct before they are sent.

Strapped for Cash

Lack of money is a common excuse for not paying. One reason your customer may not be able to pay you is because your customer’s customers haven’t paid their bills. Regardless of the reason, be the squeaky wheel and keep communicating with your past due customers.

You can help reduce your exposure to customer cash shortfalls by tightening your credit requirements.

Disputes, Dilemmas, and Other Disappointments

Misships, damaged goods, late deliveries. Plenty of things can go wrong during the fulfillment process. Rather than make a phone call, customers may just “file” your invoice at the bottom of the pile.

Follow-up e-mails or phone calls to find out if your customers are satisfied will help smooth any ruffled feathers and could improve how quickly you get paid.

Vanishing Invoices

“We never received your invoice” is a weak excuse, but you still have to find a way around it. Once again, early follow-up is key. Paperless billing and the potential to monitor whether e-mailed invoices have been opened can also help eradicate this excuse.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

How to Follow the Rules when Writing off Bad Debts

istock_000002942341_large-5In any economic environment, businesses typically have a percentage of customers who don’t pay their invoices. Here are some tax guidelines.

Cut Your Loss

If a customer or client owes your business money you can’t collect, you might be able to claim a bad debt deduction on your business return. You must be able to show the debt is partially or totally worthless. This may be the case if you have taken reasonable steps to collect a debt and there is no longer any possibility you will receive payment. Business bad debts typically arise from credit sales to customers.

Timing Is Critical

The tax law doesn’t allow a deduction for any part of a debt after the year in which it becomes totally worthless. To ensure you don’t miss out on bad debt deductions this year, review your records carefully to pinpoint any potentially worthless receivables you may still be carrying on the books. Make sure you carefully document your failed collection efforts in case the IRS challenges the bad debt deduction.

Note that bad debt deductions generally aren’t available to businesses that use the cash method of accounting. To deduct a bad debt, you must have previously included the amount in your income. Since cash-method taxpayers don’t report income until payment is received, no deduction is allowed for uncollectible amounts, even if the money is owed to you for services you performed.

To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.

Staying One Step Ahead of Tax Issues

Itemized PersonalThe last thing you need as a small business owner is to have to spend time unraveling tax problems you could have avoided. There are many tax issues that can trip up small business owners — here are a few.

Mixing Business and Personal

Keeping your personal bank and credit card accounts separate from your business accounts isn’t always easy. But “commingling” business and personal accounts creates a recordkeeping nightmare. When it’s tax time, you may not be able to identify all the appropriate business expenses. As a result, it could be difficult to accurately determine your business income and you might lose deductions.

Not Keeping Track

Keeping track of business expenses can be a challenge. However, you’ll need proof of purchase for any expenses you plan to deduct. Proof can be a canceled check (or legible image of the check) or a credit card, debit card, or electronic funds transfer (EFT) statement showing the payee, the amount of the purchase or transfer, and the transaction date.

You’ll also need an invoice or a receipt identifying the purchase. If the business purpose for the purchase isn’t immediately obvious, attaching a note of explanation or writing directly on the invoice or receipt can save time later should questions arise. There are specific substantiation requirements for business travel and entertainment expenses. Check with us if you have questions.

Making the IRS Wait

The employment taxes you collect should always be remitted to the IRS in a timely manner — without exception. As an employer, you’re responsible for withholding federal income tax and FICA (Social Security and Medicare) taxes from your employees’ wages and remitting them, along with your company’s FICA contributions, to the IRS. Penalties for noncompliance can be harsh.

Misclassifying Workers

Misclassifying workers as independent contractors when they are actually employees can be a thorny issue because they are treated differently for income-tax withholding and employment-tax purposes.

> Employees: You must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes.

> Independent contractors: You’re not required to withhold income tax, and the worker is fully liable for his or her own self-employment taxes. FICA and unemployment taxes do not apply.

It’s important to get it right to avoid penalties. Generally, the more control you have, the more likely it is that the worker is an employee.

Whether you need individual or business tax advice, give us a call. We’ve got the answers you’re looking for, so don’t wait. Call us today.

Don’t Miss these Tax Credit Opportunities

Itemized PersonalTax deductions aren’t the only things to consider when looking for ways to reduce your tax bill. There are a number of tax credits that you may be able to claim. A tax credit reduces your tax liability dollar for dollar (and, in some instances, may be fully or partially “refundable” to the extent of any excess credit).

Child-related Credits

Parents of children under age 17 may claim a child tax credit of up to $1,000 per qualified child. The child tax credit is phased out for higher income taxpayers.

A different credit of up to $13,400 is available for the payment of qualified adoption expenses, such as adoption fees, attorney fees, and court costs. The credit is phased out at certain income levels, and there are certain restrictions as to the tax year in which the credit is available.

Look into claiming the child and dependent care credit if you pay for the care of a child under age 13 while you work. It’s available for 20% (or more) of up to $3,000 of qualifying expenses ($6,000 for two or more dependents). This credit isn’t confined to child care expenses — it may also be applicable for the care of a disabled spouse or another adult dependent.

Higher Education Credits

The American Opportunity credit can be as much as $2,500 annually (per student) for the payment of tuition and related expenses for the first four years of college. A different credit — known as the Lifetime Learning credit — is available for undergraduate or graduate tuition and for job training courses (maximum credit of $2,000 per tax return). You’re not allowed to claim both credits for the same student’s expenses, and both credits are subject to income-based phaseouts and other requirements.

Sometimes Overlooked

One credit that taxpayers sometimes miss is the credit for excess Social Security taxwithheld. If you work for two or more employers and your combined wages total more than the Social Security taxable wage base ($118,500 in 2015), too much Social Security tax will be withheld from your pay. You can claim the excess as a credit against your income tax.

The alternative minimum tax (AMT) credit is another credit that’s easy to overlook. If you paid the AMT last year, you may be able to take a credit for at least some of the AMT you paid. The credit is available only for AMT paid with respect to certain “deferral preference” items, such as the adjustment required when incentive stock options are exercised.

We can provide more details regarding these and other tax credits that may be available to you or your business, so give us a call today.

There are a Variety of Steps You Can Take to Benefit Your Next Tax Year

istock_000002942341_large-4The tax year is pretty much a wrap. There’s not too much individual taxpayers can do to change the outcome. But there are a variety of steps you can take this year that will affect how your next year’s tax year plays out.

Review Tax Payments

If you customarily get a healthy tax refund, you may want to rethink how much is being withheld from your pay. Your withholding amount is based on the Form W-4 you filed with your employer. If you file a new W-4 that results in lower withholding, your take-home pay will increase. But don’t go overboard. You’ll want to make sure you’re having enough withheld to avoid underpayment penalties. Similarly, self-employed individuals and other taxpayers who make quarterly estimated tax payments should be careful to pay the appropriate amounts in a timely manner.

Make the Most of Tax-favored Accounts

Contribute as much as possible (up to the federal limit) to your 401(k), 403(b), 457, individual retirement account (IRA), or other retirement plan. Also, take full advantage of any other tax-favored accounts you’re eligible for, such as a health savings account (HSA) or a flexible spending account (FSA). Managed properly, these accounts can provide considerable tax savings.

Nurture Your Future

If you plan to change jobs and take a distribution from your employer’s tax-deferred retirement plan, be careful. It’s usually best to have your plan trustee directly transfer the funds to the trustee of your new employer’s qualified plan or to the institution that has your IRA. Although you could request a cash distribution and do the rollover yourself, required income-tax withholding can complicate the transaction. If you make a mistake and don’t roll over the full amount of the taxable distribution within 60 days, you’ll owe income taxes — and perhaps a 10% early withdrawal penalty as well.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

What to do When Checks go Unclaimed

account and financeMaybe it was lost, or got tossed out. Maybe the dog ate it. While it may be hard to understand how payroll checks can go uncashed, it happens. Unclaimed wages (and other property, such as commission checks, shareholder dividends, checks to vendors, and unredeemed gift cards) create problems for businesses — and revenue opportunities for cash-strapped state governments. That could be an unfortunate combination if your company isn’t in full compliance with state law.

When Wages Go Unclaimed

Generally speaking, businesses are not permitted to hold on to uncashed checks indefinitely. Each state has its own laws regarding unclaimed property, and employers must follow the rules for reporting and remitting such property to the state.

Most states consider unclaimed wages to be “abandoned” after a year. During that period, employers must make a good faith effort to contact the wage earner so the property can be claimed. If these attempts fail, employers must turn over the abandoned wages to the appropriate state agency.

States Want To Know

To supplement tax revenues, states have generally been stepping up their audit and enforcement efforts regarding abandoned property. For businesses, the cost of noncompliance can be quite high, especially if they haven’t been keeping reliable records. In the absence of records, auditors may — and often do — estimate a business’s liability, which may result in an exaggerated assessment.

Protect Your Business

In addition to paychecks, you might have other unclaimed property to contend with, too. Take steps to protect yourself by putting someone in charge of handling your business’s unclaimed property, keeping accurate records, regularly filing required reports of unclaimed property with the appropriate state agency, and promptly turning over any unclaimed property according to state law. Your time and effort will be well spent if it helps avoid costly problems in the future.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

How to Decide Between Taxable and Tax Exempt Investments

istock_000002942341_large-4Suppose you are considering two investments. One is tax-exempt and the other is taxable. Which should you choose?

Make the Comparison

The first thing you should determine is the taxable investment’s after-tax yield. If two investments are offering the same rate of return and are of equal quality, you’re better off with the tax-exempt investment. However, taxable investments generally pay a higher rate of return. Thus, you can’t make a fair comparison without considering the taxes you would pay in your tax bracket on the income from the taxable investment.

Here is a simple three-step formula for comparing your after-tax return on a taxable investment with the return on a tax-exempt investment.

Step 1: Subtract your marginal tax rate from 100%. (For example, in a 28% tax bracket, 100% – 28% = 72%.)

Step 2: Multiply the rate of return on the taxable investment by the resulting percentage. (6% hypothetical return ´ 72% = 4.32% after-tax return.)

Step 3: Compare this rate with the rate of return on the tax-exempt investment.

In our example, the investor in a 28% marginal tax bracket would choose the taxable investment paying 6% over a tax-exempt paying less than 4.32%. A tax-exempt investment paying more than 4.32% would be the better deal, assuming it were of equal quality.

Give us a call today, so we can help you determine the right course of action for you.

What You Need to Know about IRAs and Taxes

Nest eggTax deferral is a key benefit of investing in a traditional individual retirement account (IRA). But the tax law doesn’t allow indefinite tax deferral. Starting at age 70½, IRA owners must withdraw a minimum amount — called a required minimum distribution, or RMD — every year. All funds withdrawn from a traditional IRA are taxed as ordinary income except for nondeductible contributions, which aren’t taxed again.

A beneficiary who inherits a traditional IRA doesn’t receive a pass on income taxes. If you inherit an IRA, be cautious about simply liquidating the account, since the tax bite could be quite large. Instead, talk with us about your distribution options.

 

As a Surviving Spouse . . .

You can leave the account as is and designate yourself as the account owner, assuming you are the sole designated beneficiary of your spouse’s IRA. Or you can roll the funds over into your own traditional IRA. Either way, you won’t have to take any money out until after you reach age 70½. Then, you’ll have to start taking RMDs. If you want to, you can allow the rest of your IRA to continue growing tax deferred.

A surviving spouse can also choose to be treated as the IRA beneficiary. This might be the better choice if you’ll need to take money from the IRA before you turn 59½, since withdrawals by IRA beneficiaries escape the 10% tax penalty on early withdrawals. What about RMDs? If you go the beneficiary route, you generally won’t have to start taking them until the year your spouse would have reached 70½.

 

As a Nonspouse Designated Beneficiary . . .

You can also stretch out withdrawals — and the related income taxes — by setting up an inherited IRA. The deadline for taking your first RMD is December 31 of the year after the year the account owner died. You may make additional withdrawals from the IRA at any time.

Somewhat different rules may apply if you receive an IRA that has passed through an estate instead of directly to you as the account’s designated beneficiary. To get the most from your IRA inheritance, you’ll want to carefully evaluate your options.

Give us a call today, so we can help you determine the right course of action for you.

Tax Rules for Selling Inherited Property

Sooner or later, you may decide to sell property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how that gain or loss is calculated may surprise you.

Your Basis

When you sell property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation). Inherited property is treated differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death (or an alternate valuation date elected by the estate’s executor, generally six months after the date of death).

These basis rules can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.

Example. Assume your Uncle Harold left you stock he bought in 1986 for $5,000. At the time of his death, the shares were worth $45,000, and you recently sold them for $48,000. Your basis for purposes of calculating your capital gain is stepped up to $45,000. Because of the step-up, your capital gain on the sale is just $3,000 ($48,000 sale proceeds less $45,000 basis). The $40,000 increase in the value of the shares during your Uncle Harold’s lifetime is not subject to capital gains tax.

What happens if a property’s value on the date of death is less than its original purchase price? Instead of a step-up in basis, the basis must be lowered to the date-of-death value.

Holding Period

Capital gains resulting from the disposition of inherited property automatically qualify for long-term capital gain treatment, regardless of how long you or the decedent owned the property. This presents a potential income-tax advantage, since long-term capital gain is taxed at a lower rate than short-term capital gain.

Be cautious if you inherited property from someone who died in 2010 since, depending on the situation, different tax basis rules might apply. Give us a call for details.