In a survey of small businesses conducted by the National Small Business Association, 59% of respondents said taxes were more of an administrative burden than a financial one. Most businesses put payroll taxes at the top of the list of taxes with the greatest administrative burden. Payroll taxes also outranked other taxes, such as income, property, and sales taxes, as the top financial burden to businesses.
Click here for an introduction to McFadyen & Sumner’s preferred payroll solution and how it will benefit you, your employees, and your business.
Saving for education
- Section 529 plans include prepaid tuition programs and college savings accounts. Prepaid tuition programs let you buy future tuition credits at today’s rates, while college savings accounts let you set aside funds in an investment account. You get no tax deduction, but you can use the money tax-free for qualified college expenses.
- Coverdell education savings accounts have some characteristics of Section 529 plans – and a few important differences. Nondeductible annual contributions of $2,000 can be made not only for qualified college costs, but also for many K-12 expenses. Unlike 529 plans, phase-out rules prevent contributions when your income exceeds certain levels.
Paying for education
- If you’re currently paying college expenses, your tax planning should take the various available deductions and credits into account. These include the American opportunity credit, the lifetime learning credit, and the student loan interest deduction.
If you have education expenses to pay now or in the future, planning will help you take advantage of the tax breaks. Contact us for details and assistance.
Taxes may be the last thing on your mind when you’re changing jobs, but overlooking their impact could mean missed tax-saving opportunities. Issues to consider include:
- Your retirement plan. Distributions from retirement plans are generally taxable and may also be subject to an early withdrawal penalty. The penalty would also apply to amounts withheld for income taxes. When you leave a company, any unpaid 401(k) loan is also considered a taxable distribution if you don’t repay the loan according to the terms of your plan.
Planning tip: Have the money in your retirement account transferred directly into another qualified plan or an IRA. A direct rollover avoids automatic income tax withholding and income taxes.
- Job-hunting expenses. You can deduct the costs of looking for a new job in your present line of work, even if you don’t get the job. Typical expenses include travel to job interviews, resume costs, and employment agency fees. You must itemize your deductions, and your total miscellaneous deductions must exceed 2% of your adjusted gross income.
- Moving expenses. If you meet two tests, you can deduct the costs to move your household and personal effects, including your in-transit travel expenses and storage expenses.
First, the distance from your old home to your new workplace must be at least 50 miles farther than the distance from your old home to your old workplace.
Second, you must work full time in your new location for at least 39 weeks during the 12 months following your move. The time test doesn’t apply if you’re laid off from your new job or later transferred for your employer’s benefit.
- Residence sale. You can exclude from taxation up to $250,000 of gain ($500,000 for joint filers) if you own and occupy a home as your principal residence for at least two of the five years preceding its sale. If you sell your home due to a change in employment, you can still exclude part of the gain even though you don’t meet the ownership and use tests.
To discuss the tax issues relating to a job change, call us. We are here to help.
Summer is here and so are tax-saving opportunities. Here are seven suggestions for cutting your tax bill.
- Rent out your vacation home. If you own a second home, rent it out this summer when you’re not using it. Generally, you can offset the rental income with rental-related expenses, leaving you with little or no tax liability.
- Harvest capital gains or losses. Use your semi-annual portfolio review to spot investments with built-in capital gains or losses that can offset transactions from earlier in the year. Any excess capital loss can be deducted against $3,000 of ordinary income in 2015.
- Hire your kids. Does your child need a summer job? Hire her to work in the family business. The wages earned will be taxed using your child’s lower tax bracket.
- Send the kids to camp. Are you the working parent of under-age-13 children? You may be able to claim a tax credit for the cost of day camp. Just remember, overnight camps don’t qualify.
- Combine pleasure with business. When you travel out of town for business reasons, you can deduct the full cost of your airfare, even if you spend time sightseeing while you’re away. Expenses for side trips aren’t deductible.
- Entertain business customers. Generally, you can deduct 50% of the cost of entertaining customers before or after a substantial business discussion. This includes golf outings or an evening of dinner and drinks.
- Host a staff get-together. The usual 50% limit on entertainment deductions doesn’t apply to summer barbecues and picnics if the entire staff is invited. In that case, you can write off 100% of the cost.
Contact us for details on these and other summertime tax-saving ideas.
Although the tax code contains some exceptions, income is generally taxable in the tax year received and expenses are claimed as deductions in the year paid. But “carryforwards” and “carrybacks” have special rules. In this case, certain losses and deductions can be carried forward to offset income in future years or carried back to offset income in prior years, providing tax benefits.
- Capital losses. After you net annual capital gains and capital losses, you can use any excess loss to offset up to $3,000 of ordinary income. Remaining losses can be carried over to offset gains in future years. The carryforward continues until the excess loss is exhausted.
- Charitable deductions. Your annual charitable deductions are limited by a “ceiling” or maximum amount, as measured by a percentage. For example, the general rule is that your itemized deduction for most charitable donations for a year can’t exceed 50% of your adjusted gross income (AGI). Gifts of appreciated property are limited to 30% of your AGI (20% in some cases) in the tax year in which the donations are made. When you contribute more than these limits in a year, you can deduct the excess on future tax returns. The carryover period for charitable deductions is five years.
- Home office deduction. If you qualify for a home office deduction and you calculate your deduction using the regular method, your benefit for the current year can’t exceed the gross income from your business minus business expenses (other than home office expenses). Any excess is carried forward to the next year. Caution: No carryforward is available when you choose the “simplified” method to compute your home office deduction.
- Net operating losses (NOLs). Business NOLs can be carried back two years and forward 20 years. Tip: As an alternative, you may opt to forego the carryback and instead carry the entire NOL forward.
Give us a call for help in maximizing the tax benefits of carryforwards or carrybacks.
Are problems beginning to surface in your business? Have profits been dwindling? Are customers complaining with greater frequency? Are competitors encroaching on your market share? These are warning signs that you’re headed in the wrong direction – and you don’t want to ignore them until it’s too late. Here are suggestions for turning things around.
- Focus on the money-makers. Perhaps your business has developed products your customers aren’t willing to buy. If so, it may make sense to redirect your company’s available resources. Does that mean you should never create new product lines or expand into new markets? No. But new products must eventually improve the bottom line. If they don’t make money within a reasonable time, refocus.
- Establish (or reestablish) your brand. Identify what you do best; then tell everyone. Your goal is to educate customers, vendors, and employees on the reasons why your product or service is better than the competition. Be specific. Of course, to remain credible you must back up your claims, so be realistic as well. Win trust by following through.
- Track results. Once you’re refocused on the money-making segments of your business, keep a close eye on the numbers. Know whether customer complaints are down, cash flow is improving, back orders are declining, and market share is holding steady or increasing. If profits aren’t showing an upward trend, take another look – then adjust and remeasure.
For help getting your business back on track, give us a call.
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McFadyen and Sumner, CPAs PA
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Are mutual funds part of your portfolio? As you begin your mid-summer investment review in preparation for year-end, think about how your funds can affect your federal income taxes.
Here are two things to consider.
Dividend income. The dividends you receive from mutual funds held in nonretirement accounts are included in the calculation of net investment income. When your 2015 modified adjusted gross income exceeds $250,000 ($200,000 when you’re single), a portion of your net investment income will be taxed at a rate of 3.8% over and above your ordinary tax liability.
Planning tip. The tax form the mutual fund company sends you at the beginning of 2016 may classify some dividends as “qualified” – meaning they meet the requirements for a lower tax rate. However, you have to own the mutual fund shares for more than 60 days to get the lower rate on your federal return.
Capital gains. Mutual funds generally distribute short-term and long-term capital gains from in-fund sales to shareholders. Even if you reinvest the distributions in additional shares instead of opting for cash, the gain remains taxable to you.
Short-term distributions, for sales of fund investments held one year or less, are taxable at your ordinary income tax rate. The tax rate for long-term capital gains may be as high as 20%, depending on your adjusted gross income.
You might also have a capital gain or loss when you sell shares of a mutual fund. That’s true even if you “exchange” one fund for another and receive no proceeds.
Planning tip. You have options for calculating the cost of mutual fund shares you sell during the year. Remember to include reinvested distributions in your basis.
Please call for more information.