Tax Considerations When Selling Your Small Business

Selling a small to medium-sized business is a complex venture, and many business owners are not aware of the tax consequences.

If you're thinking about selling your business the first step is to consult a competent tax professional. You will need to make sure your financials are in order, obtain an accurate business valuation to determine how much your business is worth (and what the listing price might be), and develop a tax planning strategy to minimize capital gains and other taxes to maximize your profits from the sale.

Accurate Financial Statements

The importance of preparing your business financials before listing your business for sale cannot be overstated. Whether you use a business broker or word of mouth, rest assured that potential buyers will scrutinize every aspect of your business. Not being able to quickly produce financial statements, current, and prior years' balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements may lead to loss of the sale.

Business Valuation

Many business owners have no idea what their business is worth; some may underestimate whereas others overestimate--sometimes significantly. Obtaining a third-party business valuation allows business owners to set a price that is realistic for potential buyers while achieving maximum value.

Tax Consequences of Selling

As a business owner you probably think of your business as a single entity sold as a lump sum. The IRS however, views a business as a collection of assets. Profit from the sale of these assets (i.e., your business) may be subject to short and long-term capital gains tax, depreciation recapture of Section 1245 and Section 1250 real property, and federal and state income taxes.

For IRS purposes each asset sold must be classified as capital assets, depreciable property used in the business, real property used in the business, goodwill, or property held for sale to customers, such as inventory or stock in trade. Assets are considered tangible (real estate, machinery, and inventory) or intangible (goodwill or trade name).

The gain (or loss) on each asset sold is figured separately. For instance, the sale of capital assets results in capital gain or loss whereas the sale of inventory results in ordinary income or loss, with each taxed accordingly.

Depreciable Property. Section 1231 gains and losses are the taxable gains and losses from Section 1231 transactions such as sales or exchanges of real property or depreciable personal property held longer than one year. Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your Section 1231 transactions.

When you dispose of depreciable property (Section 1245 property or Section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any remaining gain is a Section 1231 gain.

Business Structure. Your business structure (i.e., business entity) also affects the way your business is taxed when it is sold. Sole proprietorships, partnerships, and LLCs (Limited Liability Companies) are considered "pass-through" entities and each asset is sold separately. As such there is more flexibility when structuring a sale to benefit both the buyer and seller in terms of tax consequences.

C-corporations and S-corporations have different entity structures, and sale of assets and stock are subject to more complex regulations. For example, when assets of a C-corporation are sold, the seller is taxed twice. The corporation pays tax on any gains realized when the assets are sold, and shareholders pay capital gains tax when the corporation is dissolved. However, when a C-corporation sells stock the seller only pays capital gains tax on the profit from the sale, which is generally at the long-term capital gains tax rate. S-corporations are taxed similarly to partnerships in that there is no double taxation when assets are sold. Income (or loss) flows through shareholders, who report it on their individual tax returns.

Help is Just a Phone Call Away.

Selling a business is more complicated than it seems and often involves complicated federal and state tax rules and regulations. If you're thinking of selling your business soon, please contact the office to schedule a consultation with a tax and accounting professional you can trust.

Changing Jobs? Don't Forget About Your 401(k)

One of the most important questions you face when changing job is what to do with the money in your 401(k) because making the wrong move could cost you thousands of dollars or more in taxes and lower returns.

Let's say you put in five years at your current job. For most of those years, you've had the company take a set percentage of your pretax salary and put it into your 401(k) plan.

Now that you're leaving, what should you do? The first rule of thumb is to leave it alone. You have 60 days to decide whether to roll it over or leave it in the account. Resist the temptation to cash out. The worst thing an employee can do when leaving a job is to withdraw the money from their 401(k) plans and put it in his or her bank account. Here's why:

If you decide to have your distribution paid to you, the plan administrator will withhold 20 percent of your total for federal income taxes, so if you had $100,000 in your account and you wanted to cash it out, you're already down to $80,000.

Furthermore, if you're younger than 59 1/2, you'll face a 10 percent penalty for early withdrawal come tax time. Now you're down another 10 percent from the top line to $70,000.

If you separate from service during or after the year you reach age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan), there is an exception to the 10 percent early withdrawal tax penalty. This applies to 401(k) plans only. IRA, SEP, SIMPLE IRA, and SARSEP Plans do not qualify for the exception.

In addition, because distributions are taxed as ordinary income, at the end of the year, you'll have to pay the difference between your tax bracket and the 20 percent already taken out. For example, if you're in the 32 percent tax bracket, you'll still owe 12 percent, or $12,000. This lowers the amount of your cash distribution to $58,000.

But that's not all. You also might have to pay state and local taxes. Between taxes and penalties, you could end up with little over half of what you had saved up, short-changing your retirement savings significantly.

What are the Alternatives?

If your new job offers a retirement plan, then the easiest course of action is to roll your account into the new plan before the 60-day period ends. This is known as a "rollover" and is relatively painless to do. Contact The 401(k) plan administrator at your previous job should have all of the forms you need.

The best way to roll funds over from an old 401(k) plan to a new one is to use a direct transfer. With the direct transfer, you never receive a check, and you avoid all of the taxes and penalties mentioned above, and your savings will continue to grow tax-deferred until you retire.

One word of caution: Many employers require that you work a minimum period of time before you can participate in a 401(k). If that is the case, one solution is to keep your money in your former employer's 401(k) plan until the new one is available. Then you can roll it over into the new plan. Most plans let former employees leave their assets several months in the old plan.

60-Day Rollover Period

If you have your former employer make the distribution check out to you, the Internal Revenue Service considers this a cash distribution. The check you get will have 20 percent taken out automatically from your vested amount for federal income tax.

But don't panic. You have 60 days to roll over the lump sum (including the 20 percent) to your new employer's plan or into a rollover individual retirement account (IRA). Then you won't owe the additional taxes or the 10 percent early withdrawal penalty.

If you're not happy with the fund choices your new employer offers, you might opt for a rollover IRA instead of your company's plan. You can then choose from hundreds of funds and have more control over your money. But again, to avoid the withholding hassle, use direct rollovers.

Leave It Alone

If your vested account balance in your 401(k) is more than $5,000, you can usually leave it with your former employer's retirement plan. Your lump sum will keep growing tax-deferred until you retire.

However, if you can't leave the money in your former employer's 401(k) and your new job doesn't have a 401(k), your best bet is a direct rollover into an IRA. The same applies if you've decided to go into business for yourself.

Once you turn 59 1/2, you can begin withdrawals from your IRA without penalty, and your withdrawals are taxed as ordinary income. The IRS "Rule of 55" allows you to withdraw funds from your 401(k) or 403(b) without a penalty at age 55 or older.

With both a 401(k) and an IRA, you must begin taking required minimum distributions (RMDs) when you reach age 72, whether you're working or not.

Questions about IRA rollovers? Help is just a phone call away.

Tips to Help You Figure Out if Your Gift is Taxable

If you've given money or property to someone as a gift, you may owe federal gift tax, but in many cases, you will not. For example, there is usually no tax if you make a gift to your spouse or a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year.

In 2021, you can give any amount up to $15,000 per person per year with no gift tax liability. However, gifts exceeding that amount are counted against a gift tax exemption of $11,700,000 and are subject to gift tax. At your death, these gifts could become your taxable estate (with credit for gift tax paid).

Education-related Gifts

Many grandparents and parents contribute to the cost of their child or grandchild attending college or boarding school. With tuition payments at most college and boarding schools due in July, they may be wondering whether the amount they are contributing to their grandchild's education is taxable. Here are a couple of common scenarios:

Contributions to a qualified tuition plan. Contributions by a parent or grandparent to Section 529 programs are treated as completed gifts even though the account owner - typically the child or grandchild - has the right to withdraw them. As such, they qualify for the up-to-$15,000 annual gift tax exclusion in 2021 (same as 2020).

Anyone contributing more than $15,000 may elect to treat the gift as made in equal installments over that year and the following four years so that up to $75,000 can be given tax-free in the first year.

Direct payments of tuition to an educational institution.Tuition payments made directly to an educational organization are exempt from the gift tax even if the amount exceeds the $15,000 annual exclusion amount. No gift tax return needs to be filed.

Spousal Gifts

You and your spouse can make a gift up to $30,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting.

You can also give an unlimited amount of property to your spouse unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 indexed for inflation; the 2021 amount is $159,000 ($157,000 in 2020) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes.

Gift Tax Returns

Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year, which in 2021 is $15,000. You do not have to file a gift tax return to report gifts to political organizations for its use, charities, and gifts made by directly paying someone's medical expenses.

Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

Federal Income Tax

Making a gift does not ordinarily affect your federal income tax, and you cannot deduct the value of gifts you make (other than deductible charitable contributions).

Gift tax laws can be confusing. If you have any questions about the gift tax, please contact the office for assistance.

Expat Compliance With US Tax Filing Obligations

Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. If you're an expat who has relinquished - or intends to relinquish - your U.S. citizenship but still has U.S. tax filing obligations (including owing back taxes), you'll be relieved to know there are IRS procedures in place that allow you to come into compliance and receive relief for any back taxes owed. Let's take a look:

Background

Intended for anyone who has relinquished or intends to relinquish their United States (U.S.) citizenship, the Relief Procedures for Certain Former Citizens apply to taxpayers who want to come into compliance with their U.S. income tax and reporting obligations and avoid being taxed as a "covered expatriate" under section 877A of the U.S. Internal Revenue Code (IRC). There is no specific termination date for the relief procedures; the IRS will make an announcement prior to terminating these procedures.

Relief Applies Only to Individuals

The Relief Procedures for Certain Former Citizens apply only to individuals (not estates, trusts, corporations, partnerships, and other entities) who:

• Have not filed U.S. tax returns as U.S. citizens or residents;
• owe a limited amount of back taxes to the United States; and
• have net assets of less than $2 million.

Furthermore, only those U.S. taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Typically, this situation involves someone born in the United States to foreign parents or someone born outside the United States to U.S. citizen parents, who may be unaware of their status as U.S. citizens or the consequences of such status.

The Details

Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer's tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.

There is no specific termination date associated with the new IRS procedures; however, a closing date will be announced prior to ending the procedures. Also, individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible as long as they satisfy the other criteria of the procedures.

Questions?

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Please contact the office if you have any questions about this topic.

What are Estimated Tax Payments?

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, and rent and gains from the sale of assets, prizes, and awards. You also may have to pay an estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. Here's what you should know about estimated tax payments:

Filing and Paying Estimated Taxes

Both individuals and business owners may need to file and pay estimated taxes, which are paid quarterly. The first estimated tax payment of the year is ordinarily due on the same day as your federal tax return is due. In 2021, however, the first estimated tax payment was due on April 15, but tax returns were not due until May 17.

If you do not pay enough by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you are filing as a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.

If you had a tax liability for the prior year, you might have to pay estimated tax for the current year, but if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.

Special rules apply to farmers, fishermen, certain household employers, and certain higher taxpayers. Please call the office for assistance if any of these situations apply to you.

Who Does Not Have to Pay Estimated Tax

You do not have to pay estimated tax for the current year if you meet all three of the following conditions:

• You had no tax liability for the prior year
• You were a U.S. citizen or resident for the whole year
• Your prior tax year covered a 12-month period

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold. You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return.

Calculating Estimated Taxes

To figure out your estimated tax, you must calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you estimated your earnings too high, complete another Form 1040-ES, Estimated Tax for Individuals, worksheet to re-figure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.

Try to estimate your income as accurately as possible to avoid penalties due to underpayment. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholding and credits, or if they paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller.

When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year's federal tax return as a guide and use the worksheet in Form 1040-ES to figure your estimated tax. However, you must make adjustments both for changes in your own situation and recent tax law changes.

Estimated Tax Due Dates

For estimated tax purposes, the year is divided into four payment periods, and each period has a specific payment due date. For the 2021 tax year, these dates are April 15, June 15, September 15, and January 18, 2022. You do not have to pay estimated taxes in January if you file your 2021 tax return by January 31, 2022, and pay the entire balance due with your return.

If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

Electronic Federal Tax Payment System

The easiest way for individuals and businesses to pay their estimated federal taxes is to use the Electronic Federal Tax Payment System (EFTPS). Make ALL of your federal tax payments, including federal tax deposits (FTDs), installment agreements, and estimated tax payments using EFTPS. If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc., you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments so you know how much and when you made your estimated tax payments.

Don't hesitate to call if you have any questions about estimated tax payments or need assistance setting up EFTPS.

How to Check the Status of Your Tax Refund

Taxpayers can start checking their tax refund status within 24 hours after receiving an e-filed return. The easiest and most convenient way to do this is by using the Where's My Refund? Tool on the IRS website. The tool also provides a personalized refund date after the return is processed and a refund is approved.

There are two ways to access the Where's My Refund? Tool - visiting IRS.gov or downloading the IRS2Go app. To use the tool, taxpayers will need the following information:

• Their Social Security number or Individual Taxpayer Identification number
• Tax filing status
• The exact amount of the refund claimed on their tax return

The tool displays progress in three phases: when the return was received, when the refund was approved, and when the refund was sent. When the status changes to approved, this means the IRS is preparing to send the refund as a direct deposit to the taxpayer's bank account or directly to the taxpayer in the mail, by check, to the address used on their tax return.

The IRS updates the Where's My Refund? Tool once a day, usually overnight, so taxpayers don't need to check the status more often than that. Calling the IRS won't speed up a tax refund. The information available on Where's My Refund? is the same information available to IRS telephone assistors.

Taxpayers should keep in mind that they need to allow time for their financial institution to post the refund to their account or for it to be delivered by mail. As always, please contact the office if you have any questions about tax refunds, tax returns, or any other tax matters. Help is just a phone call away.

Payment for Refundable Child Tax Credit Starts July 15

The first monthly payment of the expanded and newly-advanceable Child Tax Credit (CTC) from the American Rescue Plan will be made on July 15. Roughly 39 million households - nearly 90 percent of children in the United States - are slated to begin receiving monthly payments without any further action required.

The increased CTC payments will be made on the 15th of each month unless the 15th falls on a weekend or holiday. Families who receive the credit by direct deposit can plan their budgets around receipt of the benefit. Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above.

The American Rescue Plan increased the maximum Child Tax Credit in 2021 to $3,600 for children under the age of 6 and to $3,000 per child for children between ages 6 and 17. The American Rescue Plan is projected to lift more than five million children out of poverty this year, cutting child poverty by more than half.

Households covering more than 65 million children will receive the monthly CTC payments through direct deposit, paper check, or debit cards, and IRS and Treasury are committed to maximizing the use of direct deposit to ensure fast and secure delivery. While most taxpayers will not be required to take any action to receive their payments, Treasury and the IRS will continue outreach efforts with partner organizations over the coming months to make more families aware of their eligibility.

Today’s announcement represents the latest collaboration between the IRS and Bureau of the Fiscal Service—and between Treasury and the White House American Rescue Plan Implementation Team—to ensure help quickly reaches Americans in need as they recover from the COVID-19 pandemic. Since March 12, the IRS has also distributed approximately 165 million Economic Impact Payments with a value of approximately $388 billion as a part of the American Rescue Plan.

Don’t hesitate to call if you need more information about this important benefit for families with children.

HSA Limits Increase for 2022

Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent and are adjusted annually for inflation. For 2022, the annual inflation-adjusted contribution limit for a Health Savings Account (HSA) increases to $$3,650 for individuals with self-only coverage (up $50 from 2021) and $7,300 for family coverage (up $100 from 2021).

To take advantage of an HSA, individuals must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care. Medical expenses such as deductibles, copayments, and other amounts (but excluding premiums) must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

For the calendar year 2022, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage (same as 2021) and must limit annual out-of-pocket expenses of the beneficiary to $7,050 for self-only coverage and $14,100 for family coverage, an increase of $50 and $100, respectively, from 2021. As with contribution limits, deductibles and out-of-pocket expenses are adjusted for inflation annually.

Please call if you have any questions about Health Savings Accounts.

What is an Economic Impact Notice?

After a taxpayer has been issued an Economic Impact Payment, the IRS is required to mail an Economic Impact Notice to the recipient at their last known address. This notice provides information about the amount of the Economic Impact Payment, how it was made, and how to report any payment that wasn't received.

If you've received some mail recently from the Department of Treasury, it may be an Economic Impact Notice. You may even have received multiple notices. Let's take a look at the different types of notices you may have received:

• Notice 1444, Your Economic Impact Payment. The IRS mailed this notice within 15 days after the first payment was issued in 2020. Some people received another Notice 1444 if the IRS corrected or issued more than one payment in the first round. Taxpayers who received a Notice 1444 but did not receive their first payment should review the frequently asked questions (FAQs) for instructions on what to do if their first payment is lost, stolen, destroyed, or has not been received. People should keep this letter with tax year 2020 records.
• Notice 1444-A, You May Need to Act to Claim Your Payment. The IRS mailed this letter last year to people who typically aren't required to file federal income tax returns but may have been eligible for the first Economic Impact Payment. People who didn't get a first and second Economic Impact Payment or got less than the full amounts may be eligible to claim the 2020 Recovery Rebate Credit and must file a 2020 tax return even if they don't usually file a tax return.
• Notice 1444-B, Your Second Economic Impact Payment. The law that authorized the second payment gave the IRS more time to mail Notice 1444-B after the second payments were issued. This means people likely received their second payment several weeks before Notice 1444-B arrived. Taxpayers who received Notice 1444-B but didn't receive the second payment should read the FAQs about what to do if their second payment is lost, stolen, destroyed, or has not been received. People should keep this letter with tax year 2020 records.
• Notice 1444-C, Your 2021 Economic Impact Payment. The IRS is mailing this letter to people who received a third Economic Impact Payment. People should keep this letter with tax year 2021 records.

What to do When You Receive an Economic Impact Notice

Most people will not need to contact the IRS or take any further action and should simply file the notice with their tax records. The IRS cannot issue replacement copies of these notices, so it is important to keep any IRS notices that you receive regarding Economic Impact Payments with your other tax records. Taxpayers who don't have their notices can view the amounts of their Economic Impact Payments through their online account.

Questions or Concerns?

If you have any questions or concerns about Economic Impact Notices, do not hesitate to call the office.

Tips for Students with a Summer Job

If your child is a student with a summer job, your child's income over the summer is considered taxable income. Here's what they should know:

Form W-4. When anyone gets a new job, they need to fill out a Form W-4, Employee's Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the new employee's pay. The Withholding Calculator on IRS.gov helps taxpayers fill out this form.

Wages. While students may earn too little from their summer job to owe income tax, employers usually must still withhold Social Security and Medicare taxes from their pay. Generally, they will receive that money back as a refund if they file a federal and state tax return next spring.

Tips. If your child is working as a waiter or a camp counselor, they may receive tips as part of their summer income. Tip income is taxable and is, therefore, subject to federal income tax as well. They should keep a daily log to report tips accurately and must report cash tips to their employer for any month that totals $20 or more.

Income from Odd Jobs. Many students take on odd jobs such as babysitting or mowing lawns over the summer to make extra cash. If this is your child's situation, you should keep in mind that earnings are considered income from self-employment. If a student is self-employed, Social Security and Medicare taxes may still be due and are generally paid by the student.

Self-employment Tax. If your child has net earnings of $400 or more from self-employment (see above), they also have to pay self-employment tax. Anyone with church employee income of $108.28 or more must also pay self-employment tax. This tax pays for benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages.

Reserve Officers' Training Corps (ROTC) Pay: If your child participates in advanced training as an ROTC student and receives a subsistence allowance for food and lodging, it is generally not taxable. For example, active duty pay, pay received during a summer advanced camp, is taxable, however.

Tax Due Dates for June 2021

June 10

Employees - who work for tips. If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.

June 15

Individuals - If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 or Form 1040-SR and pay any tax, interest, and penalties due. If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 or Form 1040-SR by October 15.

However, if you are a participant in a combat zone you may be able to further extend the filing deadline.

Individuals - Make a payment of your 2021 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2021.

Corporations - Deposit the second installment of estimated income tax for 2021. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.

Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.

Financial Statements Your Business Needs

Financial statements highlight the status of your business at any given time. Monitoring the financial health of your company can make the difference between success and failure. By properly scrutinizing your financial statements, you can avoid spending money that you don’t have and know when to deploy funds to drive your business to the next level.

Your investors and creditors will want to look at your financial statements, including balance sheet, income statement, cash flow statement, and statement of owner’s equity, to help you reach your financing goals. As a small business owner, it’s essential to understand these four types of financial statements and the wealth of information they reveal to you and potential investors and creditors.

1. Balance Sheet

Also referred to as a statement of net worth or a statement of financial position, the balance sheet is one of the essential financial statements. It is based on the basic accounting equation that states (Assets = Liabilities + Equity), providing a snapshot of your business’s equity, assets, and liabilities.

The balance sheet also highlights your business’s financial position at any specific point in time. Financial statement analysts can use the information contained in the balance sheet to calculate several critical financial ratios.

2. Income Statement

The income statement provides users with a picture of your business’s financial performance over a specified period. Sometimes known as a profit and loss statement (P&L) or statement of revenue and expense, it shows the operating and non-operating income and expenses of a business.

The information contained in an income statement can be used to calculate financial ratios that provide insights into your business’s performance. A professional accountant can consult with you and advise on using the information to your advantage.

3. Cash Flow Statement

The cash flow statement (or a statement of changes in financial position) gives you an understanding of how well your business manages its cash flow. Financial analysts can use the information in a cash flow statement to evaluate whether your business is generating sufficient cash to meet its debt obligations as well as operating expenses.

A typical cash flow statement provides information about your business’s cash from operating activities, revenue from financing activities, and investing.

4. Statement of Retained Earnings

The owner’s equity or retained earnings statement details your business’ included earnings at the end of a financial period. It shows the profit maintained within the company rather than distributed to shareholders and owners at the beginning and the end of a specified reporting period.

Typically, retained earnings are used to either reinvest in the business or to pay off debt obligations. It provides information regarding the financial health of your business, as it indicates whether your business can meet ongoing financial and operating obligations without requiring its shareholders or owners to contribute extra capital.

Preparing for Business Success with Financial Statements

By preparing these four financial statements, you will be able to provide prospective investors or creditors with the critical information they need to assess your business and make an informed decision. They also help you identify trends in your company’s performance to help position your business for continued success. Always work with an experienced accounting professional to help ensure that your company is compliant with financial reporting and obligations throughout the year.

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Frequently Asked Questions About Credit Cards

A credit card can either be a helpful financial tool or a liability. While credit cards can make emergency purchases easier to manage, failing to make payments on time can harm your credit score. With that said, using a credit card responsibly can open up new opportunities with lenders for financing a car or home. Credit cards can provide additional financial flexibility, but it’s essential to understand how they work to avoid debt and the burden of compounding interest. Here are some of the most frequently asked questions about credit cards.

How Is the Limit Determined?

Banks evaluate various factors when processing credit card applications. Individuals with a more extensive credit history will have access to higher credit limits. Some of the things lenders review when determining credit limits may include:

• Credit score
• Debt to income ratio
• Previous work history
• Payments on other credit cards, student loans, and existing debt

How Do I Choose a Credit Card?

Various financial institutions offer credit cards with different introductory interest rates and credit limits. If you lack credit history, the types of credit cards initially available to you will be limited. Check with your bank or other lenders to compare rates, terms, and conditions. 

What Should I Do if I Lose My Credit Card?

If you lose track of your credit card, don’t panic. Contact the issuer of your card and let them know what happened. They will put a freeze on the card to prevent fraud or identity theft. Most credit card providers will issue a replacement card within a few business days.

What Happens if I Miss a Payment?

Forgetting to make a credit card payment isn’t uncommon, but missing multiple payments can add up to a considerable sum in fines and accumulated interest in the long term. It’s best to keep up with the minimum monthly payments to avoid these extra costs.

Can Using a Credit Card Help Me Build Credit?

Yes, using a credit card is one of the best ways to begin building a credit history. Making payments on time and remaining within your credit limit will increase your credit score with time, allowing you to qualify for other credit cards or loans.

Can I Have More Than One Credit Card at a Time?

Yes, but it’s important to note that the interest rates and credit limits on different cards will vary. Before you apply for a new card, considering paying off any other credit card debt you may have.

What Are the Advantages of Having a Credit Card?

Both businesses and individuals use credit cards to support their immediate financial needs. Credit cards offer a range of benefits, such as:

• Increasing your credit score
• Breaking up large purchases into smaller payments
• Providing additional financial flexibility
• Offer reward points for qualifying purchases

More Questions? Ask a Professional

When used correctly, a credit card can make money management a much easier task. To learn more about how credit cards can help support your financial goals, consider speaking with a professional. CPAs, accountants, and financial advisors offer a wellspring of knowledge that will guide you in the right direction. 

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Ways to Minimize Your Business Taxes

Careful tax management is critical to the long-term success of any business. Without oversight, the cost of taxes can become staggering. If you’re looking to save money, here are a few tactics to minimize your business tax obligations.

Employee Benefits Plans

Several fringe employee benefits qualify as tax-deductible expenses. The IRS has limitations on the total amount of savings a business can claim from fringe benefits, and most incentives must be available to everyone to qualify for a deduction. Not all fringe benefits are deductible. For instance, you cannot deduct fringe benefits paid out in cash. 

By offering fringe benefits, you can potentially reduce your business taxes by a substantial amount. Some of the benefits you can provide to reduce business taxes include:

• Employer-paid health insurance
• Financial support for dependent care
• Employee discounts
• Paying for employee parking
• Employee gym memberships
• Assistance with retirement planning

Restructure Your Business

It may be worth exploring a business restructure to reduce your taxes. For example, a limited liability corporation (LLC) is a pass-through tax entity, meaning individual members are taxed instead of the company itself. Each state has rules regarding how each entity is taxed, so you’ll want to do some research before restructuring. Several other business structures could be more appropriate for you. The most popular business structures are:

• Nonprofit: Most nonprofits are not required to pay taxes on their income. However, a nonprofit entity must pay taxes on any amount paid to an employee.
• Limited Liability Partnership: An LLP is simply a type of partnership involving more than two people. Similar to an LLC, members of an LLP are taxed instead of the LLP itself.
• Sole Proprietorship: Also known as individual entrepreneurship, a sole proprietorship is a business structure that is owned and operated by one person. Individuals with this structure often pay more in taxes since there is no clear distinction between business income and personal income.
• Corporation: Businesses may structure themselves as an S or C corporation depending on their tax situation. With an S corporation, taxes are passed through to members similar to an LLC or LLP. A C corporation files a separate tax return.

Independent Contractors & Sole Proprietors Should Monitor Adjusted Gross Income

Your adjusted gross income or AGI represents the amount of income you earned minus any deductions. Accurately tracking your adjusted gross income throughout the year can make it easier to estimate the amount of taxes you will likely owe. Finding ways to lower your AGI by qualifying for more adjustments will reduce your taxable income, and in effect, lower your tax bill. There are various ways to reduce your AGI for tax reasons, including:

• Donate to IRS-approved charities
• Maximize contributions to your retirement account
• Find more itemized deductions
• Defer revenue and accelerate expenses
• Contribute to a health savings account

Final Thoughts

Whenever possible, businesses should seek to take advantage of any tax breaks or opportunities that are available. Talk with your CPA or other financial professionals to ensure you’re receiving all possible deductions. Tax advisors and experienced accountants are always up to date with the latest changes to tax codes, so you’ll never miss out on a chance to save money. 

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Is It Better To Be a W2 Employee or 1099?

If you participate in the workforce, you are either a W2 employee or a 1099 contractor. At the end of the year, permanent employees receive a W2 tax form, while 1099 contractors are responsible for paying quarterly taxes on their income. There are several pros and cons to working for an employer in either capacity. Take a few moments to learn more about the difference between working as a W2 employee or a 1099 contractor.

Advantages of Being a 1099 Worker

As a 1099 independent contractor, you agree to perform a service for your client for a preset period or a predetermined amount of money. Since you are your own boss, you can pick and choose the clients and jobs you want. Here are a few of the advantages to being a 1099 worker:

• More Control Over Schedule and Workload: How much you work and when is all up to you. Working as a contractor offers much more flexibility to strike the right work/life balance for you.  
• Greater Independence: Being self-employed, you can take time off, wake up late, or put in overtime whenever you want. As a freelancer, you have more flexibility to do things your way.
• Opportunities for Growth: Getting promoted as a W2 employee is entirely up to your boss or direct supervisors. When you work as an independent contractor, the trajectory of your career is for you to decide.

Disadvantages of Being a 1099 Employee

W2 employees are eligible to receive insurance benefits or paid time off, but employers are under no obligation to provide these benefits to 1099 workers. Another disadvantage is that freelancers or 1099 contractors are considered self-employed, making them responsible for paying more taxes. It’s also important to note that 1099 workers must calculate and pay their taxes on their own. If there are any inaccuracies in tax reporting, this can result in an audit from the IRS.

Advantages of Being a W2 Employee

Being a W2 employee involves signing a formal employment agreement that makes you a permanent staff member of a business. W2 employees are often guaranteed a certain number of hours a week and enjoy certain protections against unlawful termination of employment. There are several advantages to being a W2 employee, including:

• Eligible for Company Benefits
• Stable Employment
• Lower Tax Obligations

Disadvantages of Being a W2 Employee

Working as a traditional employee usually means working a rigid schedule that is subject to change at any time. You will also have less say in the work you do on a day-to-day basis. If you’re a W2 employee, your employer can also require you to follow specific compliance standards and regulations that may not apply to 1099 contractors.

Final Thoughts

Whether you are a W2 worker or an independent 1099 contractor, it’s essential to be aware of your rights. So first, talk with your CPA or another financial professional to decide which choice is right for you. Then, with the help of a certified public accountant or tax advisor, you can maximize the benefits of both options.

The post Is It Better To Be a W2 Employee or 1099? first appeared on www.financialhotspot.com.

Does Your Small Business Need Project Management?

Effective project management for a small business entails accomplishing the project’s goals on time and within the budget. You need to consider several project management practices and decide which ones best suit your business and help you achieve your goals.

What is Project Management?

Project management involves planning and managing resources, protocols, and procedures to achieve specific goals. A business project could be anything systematic, controlled, or result-oriented. That’s why project management is essential for businesses of all kinds and sizes. As the field has expanded over the 20^th century, it has evolved into a distinct profession.

The PMBOK® (Project Management Body of Knowledge) is a collection of standardization protocols from the Project Management Institute, a global organization network. This methodology of project management enables organizations to regulate project management across departments and organizations. It’s a framework of processes, terminologies, and guidelines accepted as industry standards. PMBOK revolves around five process steps: initiating, planning, executing, controlling, and closing.

Benefits of Project Management

The best approach to project management is implementing agile practices to help you respond to issues as and when they occur. Detecting challenges and making timely adjustments can save resources and deliver a successful project on schedule and within budget. Effective project management can benefit your small enterprise in the following ways:

• Stay on Schedule: Every project has a limited timeline. Proper project management ensures tasks are completed on time and the project stays on schedule. You can use various software/charts to help you keep tabs on the project’s progress. These solutions make it easier to break down each activity into individual tasks and track them effectively.
• Track Expenses: Since small businesses have limited financial resources, it’s crucial to keep an eye on expenses. With the help of the different project management methodologies, you can keep tabs on essential costs, payments, and purchases. If you notice discrepancies, you can quickly tell whether it’s time to renegotiate purchase orders.
• Better Control: To run a successful project, you need to have restrictions in place that help stop inconsistencies. You can use milestones to set such rules, such as permitting and licensing. Failure to meet such milestones would imply that corrective action is needed to get your project back on track.

Implementing Project Management

The first step in implementing a new project is to assess your business’s needs appropriately. Implementing an effective system takes time, capital, and resources. It’s essential to work with a professional to evaluate your options and ensure better ROI for your investment. A project management expert can help you procure and implement new software systems while ensuring the costs are justified. Alternatively, you can consider hiring a project manager to oversee everything.

Project Management in Small Business

Although the concept of project management has existed for a few decades now, recent technological advancements have pushed growth and effectiveness in this field. With the correct project management tools and techniques, your project can achieve its goals.

As technology improves, keeping up with changes can improve your business efficiency. Many CPAs and financial professionals can provide this service for you, customizing your projects to fit your needs. With their help, your small company can accomplish its objectives on time and within budget by following sound project management practices.

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