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Important Tax Changes for Individuals and Businesses
Every year, it's a sure bet that there will be changes to current tax law and this year is no different. From standard deductions to health savings accounts and tax rate schedules, here's a checklist of tax changes to help you plan the year ahead.
In 2021, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion. The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2020; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025.
Alternative Minimum Tax (AMT)
Health Savings Accounts (HSAs)
A qualified individual 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.
For calendar year 2021, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $7,000 for self-only coverage and $14,000 for family coverage.
Medical Savings Accounts (MSAs)
Self-only coverage. For taxable years beginning in 2021, the term "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,400 ($2,350 in 2020) and not more than $3,600 (up $50 from 2020), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,800 (up $50 from 2020).
AGI Limit for Deductible Medical Expenses
Eligible Long-Term Care Premiums
Foreign Earned Income Exclusion
Long-Term Capital Gains and Dividends
Estate and Gift Taxes
Individuals - Tax Credits
Earned Income Tax Credit
Child Tax Credit
Child and Dependent Care Tax Credit
Individuals - Education
American Opportunity Tax Credit and Lifetime Learning Credit
While the phaseout limits for Lifetime Learning Credit increased, taxpayers should note that the qualified tuition and expenses deduction has been repealed starting in 2021.
Interest on Educational Loans
Individuals - Retirement
Income Phase-out Ranges
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $105,000 to $125,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple's modified AGI is between $198,000 and $208,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $13999,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Standard Mileage Rates
Section 179 Expensing
Qualified Business Income Deduction
Research & Development Tax Credit
Work Opportunity Tax Credit (WOTC)
Employee Health Insurance Expenses
Business Meals and Entertainment Expenses
Employer-provided Transportation Fringe Benefits
While this checklist outlines important tax changes for 2021, additional changes in tax law are likely to arise during the year ahead. Don't hesitate to call if you have any questions or want to get a head start on tax planning for the year ahead.
Identity Protection PIN Available To All Taxpayers
Starting in January 2021, the IRS Identity Protection PIN Opt-In Program will be expanded to all taxpayers who can properly verify their identity. Previously, IP PINs were only available to identity theft victims.
What is an Identity Protection PIN?
An identity protection personal identification number (IP PIN) is a six-digit number assigned to eligible taxpayers to help prevent their Social Security number from being used to file fraudulent federal income tax returns. This number helps the IRS verify a taxpayer's identity and accept their tax return. Taxpayers with either a Social Security Number or Individual Tax Identification Number who can verify their identity are eligible for the program and the number is valid for one year. Each January, the taxpayer must get a new one.
How to get an IP PIN
The preferred method of obtaining an IP PIN - and the only one that immediately reveals the PIN to the taxpayer - is the Get an IP PIN tool located on the IRS website. The tool is available starting mid-January 2021 and uses Secure Access authentication to verify a person's identity. If someone is unable to pass the Secure Access authentication, there are two alternate ways to get an IP PIN.
Taxpayers with income of $72,000 or less should complete Form 15227,Application for an Identity Protection Personal Identification Number, and mail or fax it to the IRS. An IRS employee will call the taxpayer to verify their identity using a series of questions. Those who pass authentication will receive an IP PIN the following tax year.
Taxpayers who cannot verify their identities remotely or who are ineligible to file Form 15277 should make an appointment for in-person identity verification at an IRS Taxpayer Assistance Center and bring two forms of picture identification. After the taxpayer passes authentication, an IP PIN will be mailed to them within three weeks.
What else taxpayers need to know before applying:
Confirmed victims of tax-related identity theft
For confirmed victims of tax-related identity theft, there is no change in the IP PIN Program. These taxpayers should still file a Form 14039,Identity Theft Affidavit if their e-filed tax return is rejected because of a duplicate SSN filing. The IRS will investigate their case and once the fraudulent tax return is removed from their account, they will automatically receive an IP PIN by mail at the start of the next calendar year.
IP PINs will be mailed annually to confirmed victims and participants enrolled before 2019. For security reasons, confirmed identity theft victims can't opt-out of the IP PIN program. Confirmed victims also can use the IRS Get an IP PIN tool to retrieve lost IP PINs assigned to them.
As a reminder, taxpayers should never share their IP PIN with anyone but their tax provider. The IRS will never call to request the taxpayer's IP PIN, and taxpayers must be alert to potential IP PIN scams. If you have any questions about the IP PIN, don't hesitate to call.
Credit Reports: What You Should Know
Creditors keep their evaluation standards secret, making it difficult to know just how to improve your credit rating. Nonetheless, it is still important to understand the factors that determine creditworthiness. Periodically reviewing your credit report can also help you protect your credit rating from fraud - and you from identity theft.
Credit Evaluation Factors
Many factors are used in determining credit decisions. Here are some of them:
Obtaining Your Credit Reports
Credit reports are records of consumers' bill-paying habits but do not include FICO credit scores. Also referred to as credit records, credit files, and credit histories, they are collected, stored, and sold by three credit bureaus, Experian, Equifax, and TransUnion.
The Fair Credit Reporting Act (FCRA) requires that each of the three credit bureaus provides you with a free copy of your credit report, at your request, every 12 months. If you have been denied credit or believe you've been denied employment or insurance because of your credit report, you can request that the credit bureau involved provide you with a free copy of your credit report - but you must request it within 60 days of receiving the notification.
You can check your credit report three times a year for free by requesting a credit report from a different agency every four months.
Fair Credit Reporting Act (FCRA)
This federal law was passed in 1970 to give consumers easier access to, and more information about, their credit files. The FCRA gives you the right to find out the information in your credit file, to dispute information you believe inaccurate or incomplete, and to find out who has seen your credit report in the past six months.
Understanding Your Credit Report
Credit reports contain symbols and codes that are abstract to the average consumer. Every credit bureau report also includes a key that explains each code. Some of these keys decipher the information, but others just cause more confusion.
Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor.
If the report includes accounts that you do not believe are yours, it is extremely important to find out why they are listed on your report. It is possible they are the accounts of a relative or someone with a name similar to yours. Less likely, but more importantly, someone may have used your credit information to apply for credit in your name. This type of fraud can cause a great deal of damage to your credit report, so investigate the unknown account as thoroughly as possible.
In light of numerous credit card and other breaches, it is recommended that you conduct an annual review of your credit report. You must understand every piece of information on your credit report so that you can identify possible errors or omissions.
The Fair Credit Reporting Act (FCRA) protects consumers in the case of inaccurate or incomplete information in credit files. The FCRA requires credit bureaus to investigate and correct any errors in your file.
Be aware that credit bureaus are not obligated to include all of your credit accounts in your report. If, for example, the credit union that holds your credit card account is not a paying subscriber of the credit bureau, the bureau is not obligated to add that reference to your file. Some may do so, however, for a small fee.
If you need help obtaining your credit reports or need assistance in understanding what your credit report means, don't hesitate to call.
The COVID-related Tax Relief Act of 2020
The Consolidated Appropriations Act, 2021, H.R. 133 included funding for the government, extensions for expiring tax extenders, tax relief under the COVID-related Tax Relief Act of 2020, and many more items. Passed by both the House and Senate, it was signed into law by President Trump on December 27, 2020.
Let's take a look at a few of the highlights related to pandemic taxpayer relief under the COVID-Related Tax Relief Act of 2020:
Economic impact payments. $600 per taxpayer ($1,200 for married taxpayers filing jointly) and an additional $600 per qualifying child (under age 17). The recovery rebate payment begins to phase out starting at $75,000 of modified adjusted gross income for single filers, $112,500 for heads of household, and $150,000 for married taxpayers filing jointly. These payments are similar to the ones many taxpayers received earlier this year under the CARES Act.
Unemployment benefits. Additional unemployment insurance in the amount of $300 has been extended for an 11-week period beginning from December 26, 2020.
Educator expenses. Clarification that Personal Protective Equipment (PPE) used for the prevention and spread of COVID-19 will be treated as a deductible expense, retroactive to March 12, 2020.
Charitable contributions - Nonitemizers. The $300 above-the-line deduction for cash contributions given to a qualified charitable organization is extended through 2021 and increases to $600 for married taxpayers filing joint returns. In 2020, the maximum amount was $300.
Charitable contributions - Itemizers. The increased contribution limit to qualified charities that was specified in the CARES Act is extended through 2021 and applies to individuals and corporations. Amounts of up to 100 percent of adjusted gross income (AGI) are allowed as deductions (same as 2020). In 2019, the limit for the deduction for cash contributions was 60% of AGI.
Earned Income. For the 2020 tax year, taxpayers may use earned income amounts from the immediately preceding tax year when figuring the Earned Income Tax Credit and the Additional Child Tax Credit.
Flexible spending arrangements. Taxpayers can rollover unused amounts from 2020 to 2021 and from 2021 to 2022 and employers may allow employees to make a contribution change mid-year in 2021.
Money purchase pension plans. The COVID-related Tax Relief Act of 2020 also allows money purchase pension plans to be included as a qualified retirement plan, retroactive to the CARES Act. The CARES Act allowed taxpayers to make penalty-free withdrawals of up to $100,000 from certain retirement plans for coronavirus-related expenses, with the option to pay tax on that income over a three-year period or recontribute withdrawn funds.
Paycheck Protection Program (PPP) Loans. Retroactive to the effective date of the CARES Act, PPP loans that are forgiven will be treated as tax-exempt income. Gross income does not include loan forgiveness for Economic Injury Recovery Loans (EIDLs) and certain other loans or loan repayment assistance. Under the CARES Act, taxpayers receiving an EIDL were required to reduce any PPP loan forgiveness by the amount of the EIDL.
In addition, businesses with 300 or fewer employees with a gross revenue loss of 25 percent in any quarter of 2020 compared to the same quarter in 2019 are eligible for a second round of PPP loans.
Payroll tax credits. Refundable payroll tax credits for paid sick and family (Families First Coronavirus Response Act) leave are extended through March 2021. Employers are not required to provide paid leave after December 31, 2020; however, employers may still claim the credit if the employee would have qualified for paid leave if the mandate had been extended beyond December 31, 2020, and the employer provides paid leave.
Employee retention tax credits. Implemented as a refundable credit under the CARES Act, the employee retention tax credit (ERTC) is extended through June 30, 2021. The following also applies for calendar quarters beginning after December 31, 2020:
Furthermore and retroactive to the date of the CARES Act, the ERTC is expanded to allow employers who receive PPP loans to qualify for the credit with respect to wages that are not paid with forgiven PPP proceeds. It also clarifies that group health plan expenses can be considered qualified wages even if no other wages are paid to an employee.
Employee portion of payroll tax deferral. The repayment period for deferral of payroll tax is extended through December 31, 2021.
Standard Mileage Rates for 2021
Starting January 1, 2021, the standard mileage rates for the use of a car, van, pickup, or panel truck are as follows:
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.
Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.
Before tax reform, these optional standard mileage rates were used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. However, it is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.
Taxpayers can use the standard mileage rate but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses.
Leased vehicles. Typically, if the standard mileage rate is chosen, then leased vehicles must use the standard mileage rate method for the entire lease period (including renewals). Due to the COVID-19 pandemic, however, the IRS is allowing employers to switch from the vehicle lease valuation method to the cents-per-mile method (56 cents for 2021 and 57.5 cents for 2020) when determining the value of an employee's personal use of a vehicle during the pandemic, and is effective as of March 13, 2020.
If you have any questions about standard mileage rates or which driving activities you should keep track of as the new tax year begins, do not hesitate to contact the office.
Understanding the Excise Tax
An excise tax is a tax that is generally imposed on the sale of specific goods or services, or on certain uses. Examples of things a federal excise tax is usually imposed on include the sale of fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, and tobacco, as well as other goods and services. Excise taxes are imposed on a wide variety of goods, services and activities and may be imposed at the time of:
Many excise taxes go into trust funds for projects related to the taxed product or service, such as highway and airport improvements. Excise taxes are independent of income taxes. Often, the retailer, manufacturer or importer must pay the excise tax to the IRS and file the Form 720. They may pass the cost of the excise tax on to the buyer.
Some excise taxes are collected by a third party. The third party then sends the tax to the IRS and files the Form 720. For example, the tax on an airline ticket generally is paid by the purchaser and collected by the airline.
When to File
Businesses must file the form for each quarter of the calendar year. Here are the due dates:
Quarter 2 – April, May, June: deadline, July 31
Quarter 3 – July, August, September: deadline, Oct. 31
Quarter 4 – October, November, December: deadline, Jan. 31
If the due date for filing a return falls on a Saturday, Sunday or legal holiday, the due date is the next business day.
How to File
Businesses that are subject to excise tax generally must file a Form 720, Quarterly Federal Excise Tax Return to report this tax to the IRS. The IRS does accept paper excise tax returns; however, electronic filing is strongly encouraged, when possible.
To make this process easier for taxpayers, the contact information for all approved e-file transmitters of excise forms is listed on IRS.gov. Businesses can submit forms online 24 hours a day. When businesses e-file, they get confirmation that the IRS received their form. Also, e-filing reduces processing time and errors. To electronically file, business taxpayers will have to pay the provider's fee for online submission.
Excise tax forms available for electronic filing are:
Please call the office if you have any questions or would like more information about federal or state excise taxes.
Protecting Business Taxpayers From Identity Theft
Starting December 13, 2020, the IRS began masking sensitive data on business tax transcripts. Previously, only sensitive data on individual tax transcripts was masked.
Here's what you need to know about this new initiative to protect business taxpayers from identity theft:
What is a tax transcript?
A tax transcript is a summary of a tax return and is often used by tax professionals to prepare prior year tax returns or when representing a client before the IRS. Lenders and others use tax transcripts for income verification purposes.
What is visible on the new tax transcript?
Customer File Number
For both the individual and business tax transcript, there is space for a Customer File Number. The Customer File Number is an optional 10-digit number that can be created usually by third parties that allow them to match a transcript to a taxpayer. The Customer File Number field will appear on the transcript when that number is entered on Line 5 of Form 4506-T, Request for Transcript of Tax Return, and Form 4506T-EZ.
What happens when a taxpayer seeks to verify income for a lender?
If you have any questions or need more information about this topic, please contact the office.
Employee Business Expense Deductions: Who Qualifies?
Prior to tax reform, an employee was able to deduct unreimbursed job expenses, along with certain other miscellaneous expenses, that was more than two percent of adjusted gross income (AGI) as long as they itemized instead of taking the standard deduction. Starting in 2018, however, most taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions unless they are a qualified employee or an eligible educator.
No other type of employee is eligible to claim a deduction for unreimbursed employee expenses. In other words, employee business expenses can be deducted as an adjustment to income only for eligible educators and specific employment categories such as:
A qualified expense is one that is:
Taxpayers should also know there are nondeductible expenses as well. Examples of nondeductible expenses include club dues, commuting expenses, fees and licenses, such as car licenses, lunches with co-workers, meals while working late, expenses to improve professional reputation, and capital expenses. A full list of nondeductible expenses can be found in Publication 529, Miscellaneous Deductions.
Please call if you have any questions.
Tax Due Dates for January 2021
All employers - Give your employees their copies of Form W-2 for 2020 by February 1, 2021. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting.
Employees - who work for tips. If you received $20 or more in tips during December 2020, report them to your employer. You can use Form 4070, Employee's Report of Tips to Employer.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2020.
Individuals - Make a payment of your estimated tax for 2020 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2020 estimated tax. However, you do not have to make this payment if you file your 2020 return (Form 1040 or Form 1040-SR) and pay any tax due by February 1, 2021.
Employers - Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2020.
Farmers and Fisherman - Pay your estimated tax for 2020 using Form 1040-ES. You have until April 15 to file your 2020 income tax return (Form 1040 or Form 1040-SR). If you do not pay your estimated tax by January 15, you must file your 2020 return and pay any tax due by March 1, 2021, to avoid an estimated tax penalty.
Employers - Give your employees their copies of Form W-2 for 2020. If an employee agreed to receive Form W-2 electronically, have it posted on a website and notify the employee of the posting. File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2020.
Employers - Federal unemployment tax. File Form 940 for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 10 to file the return.
Farm Employers - File Form 943 to report social security and Medicare taxes and withheld income tax for 2020. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2020. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2020 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2020. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2020 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.
Payers of nonemployee compensation - File Form 1099-NEC for nonemployee compensation paid in 2020.
Businesses - Give annual information statements to recipients of certain payments made during 2020. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date only applies to certain types of payments.
Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040 or Form 1040-SR) for 2020 by February 1. Filing your return and paying any tax due by February 1, 2021, prevents any penalty for late payment of the last installment. If you cannot file and pay your tax by February 1, file and pay your tax by April 15.
9 Components of a Successful Business Plan
A business plan is a document that outlines your objectives, targets, and how you intend to achieve them. It plays an essential role in your company’s formation and long-term success. It contains details about your marketing, operational, and financial intentions.
A professional plan shows your business’s viability to investors, allows you to track progress, and helps you prepare adequately for risks. Your venture into new markets is more likely to succeed if you have a detailed business plan with specific, critical components.
1) Executive Summary
This first part of your business plan is also the most crucial. You could refer to it as your elevator pitch because it gives an overview of the entire document. Other than the table of contents, it should contain your company background, mission statement, product offerings, and financial highlights. If your business is a startup, include the motivation and reasons for launching it. It makes sense to craft the executive summary last after reviewing your entire business plan.
2) Company Description
This component helps everyone understand your business by providing an extensive description of its goals, services, and targeted audience. It contains information about your industry, including prevailing trends and your main competitors. Other details include strategic relationships with stakeholders, as well as its legal structure. Is it a partnership, LLC, S Corp, or sole proprietorship? Remember to mention your valuable experience in the industry, including what makes you unique from your competitors.
3) Market Analysis
This section analyzes the field in which you’ll operate. It includes thorough market research concerning your strengths and weaknesses. It addresses these key questions:
This data helps you build an accurate buyer persona and focus your resources on those who fit it. It gives you an estimation of how your product is likely to perform.
4) Operations Strategy
This part of the business plan outlines your organizational setup. It identifies when you will hire essential employees, such as managers, and describe the progression of responsibilities. You may want to include a diagram because it’s better at explaining your company’s chain of command.
This section describes how you’ll move your organization from an idea to reality. It explains the primary business functions, your milestones, and how you intend to implement quality control.
5) Financial Projection & Needs
The financial segment addresses your company’s revenue streams and profitability models. It describes in detail your income generation activities and analysis of cost variables. The objective is to arrive at a fair valuation by comparing it with active companies that use a similar business model.
A business plan is useful for determining the amount of capital you need. It helps you evaluate how you’ll use available funds for equipment purchases, insurance premiums, and wages. Your financial plan also consists of essential documents that help you calculate these outflows against expected future earnings. They include balance sheets, cash flow statements, and projected income statements.
6) Description of Products and Services
This section describes in detail the products and services mentioned in your executive summary. Include useful information such as the manufacturing procedure, expected shelf life, production costs, and the market needs they will address. You should also state any intellectual property concerns and projected earnings, among other financial goals.
7) Marketing Plan
This component covers advertising campaigns and other activities that will increase sales and brand awareness. It contains:
In this part, you’ll introduce the company leadership and outline their qualifications. They are the board of directors, HR, management personnel, and key advisors. It’s a good idea to describe their contributions toward company objectives, as well as their bios. This information is necessary for investors to evaluate growth potential and reliability, as a team with extensive experience can lower perceived risk.
The appendix supports your overall business plan. It contains full financial projections for items that you mentioned in the financial plan and executive summary. You can also include technical drawings, customer correspondence, stakeholder information, and research on competitors.
Plan for Success
If you want to create the proposal yourself, there are several free and premium online templates that you can use as a guide. On the other hand, a professional can draw up a plan for you, saving time and ensuring accuracy.
It is advisable to update your business plan every year. That way, you can implement more of what works and discard or finetune the aspects that underperform. Besides helping you pick profitable opportunities, a successful business plan will help convince investors to fund your venture.The post 9 Components of a Successful Business Plan first appeared on www.financialhotspot.com.
Understanding the Two Methods of Accounting
Accounting is an essential aspect of running a business. It involves recording, interpreting, summarizing, classifying, and communicating financial information. As a business owner, there are two main accounting methods you can use.
The first is cash accounting, which records expenses and revenue as you pay or receive them in the form of cash inflow and outflow. The second is the accrual method, which recognizes transactions once they happen, regardless of when payments occur.
Cash Basis Accounting Method
There are essential guidelines you must follow for your business to successfully implement cash accounting. Where you have barter arrangements with other entities, you must perform a fair cash valuation of such transactions. Secondly, you must record all income promptly. That includes whenever you receive deposits in your bank account or payment through agents.
For example, you may receive a check towards the end of the month but cash it the next. Record that income under last month’s transactions on the day you received the check. If you bill a customer today, but they pay weeks later, you’ll record the amount on the day of payment. Similarly, you’ll record expenses on the day you pay them, even if you received the invoice weeks earlier.
One of the benefits of cash accounting is that it gives you an accurate assessment of your balances and cash flow strength. It’s suitable if you want to avoid unsustainable debt. This method also has tax implications. Since you record a particular year’s expenses immediately when they’re incurred, it will affect your net income. Cash accounting is generally attractive to individuals and small businesses like sole proprietorships because it’s simpler to implement.
Accrual Accounting Method
This accounting method works well for large or more established businesses. It allows your business to list anticipated cash inflows and outflows, along with current revenue and expenses. For example, you may bill a customer for a $100 item that they’ll pay later. No matter when you receive payment, you’ll record the sale immediately when you bill them.
An advantage of accrual accounting is that it provides a clear view of your overall cash flow situation. That’s because most business transactions are not instant. This method reflects the spread of income and expenses over several months or even more than one accounting period. Investors prefer a company that follows the accrual accounting method. It also shows that your company has robust internal structures.
Why the Method Matters
Various factors determine the kind of accounting method your business will use. They include:
1. Type of business: The accrual method works best for large organizations such as construction companies. That’s because they engage in long term projects that attract full payment on completion. If they pick cash accounting, the business will register more expenses than revenue for particular periods. Lenders wouldn’t consider them creditworthy.
2. Tax implications: The IRS expects you to use the accounting method that consistently captures your income. Although you can use a hybrid model, the tax agency takes a hardline stance against suspicious activity. Those include organizations that switch between accounting methods to manipulate revenue and ultimately pay low tax.
3. GAAP requirements: The Generally Accepted Accounting Principles prefer accrual accounting over the cash accounting method. The former shows your partners, financiers, suppliers, regulators, and other stakeholders that you have firm management structures in place.
If your average revenue for three years is $ 1 million or less, you can use the cash accounting method. If your company sells general merchandise, you’re required to use the accrual method to record sales and purchases.
Apart from farms, C Corporations with average annual receipts of above $5 million for the past three years must utilize accrual accounting. If you run more than one business, you can use different accounting methods for each.
Changing Your Accounting Method
There are various reasons for changing accounting methods. They include personal preference, the desire to conform to regulations, and the need to streamline operations.
The IRS relaxed most of the stringent rules it previously had on changing accounting methods. If you run a business entity, you can do so by filing Form 3115. The tax agency is generally cooperative if you apply for change before it scrutinizes your accounting method.
You can either request to change your accounting option for specific items or the overall organization. Modern accounting software such as QuickBooks offers the convenience of switching to an alternative method without losing your financial data.
Make an Informed Decision
Before settling on a suitable accounting method, it’s advisable to study business functions such as sales, purchases, and expenses. Other factors are the size of your organization and your industry. Both methods have their pros and cons, so it’s essential to understand them before picking the most beneficial. If you’re not sure which one will be ideal for you, a professional CPA can recommend the most effective method after performing a thorough analysis of your company.The post Understanding the Two Methods of Accounting first appeared on www.financialhotspot.com.
The Most Important Questions to Ask Your Tax Preparer
Although doing your taxes can save you money, it can also turn into a complicated and stressful process. As tax season approaches, it’s advisable to hire a professional tax preparer to help you. Their firm grasp of the complex tax code means you’ll fully comply with the IRS’s requirements.
They can also use their expertise to identify beneficial tax exemptions, credits, and deductions. Filing on time helps you avoid mistakes that some taxpayers make during the last-minute rush. Here are some of the most practical questions you should ask before hiring an expert tax preparer.
1. What is Your PTIN?
The IRS requires anyone who receives payment for preparing federal tax returns to have a Preparer Tax Identification Number (PTIN). All enrolled agents, CPAs, attorneys, and other qualified professionals must also renew their PTINs annually. The IRS has a public directory of tax preparers with professional credentials who also have a PTIN. You can search it by occupation, zip code, and last name.
This eight-digit number assures you that your taxes will be handled professionally and confidentially. Avoid potential tax preparers who don’t have one because that casts doubt on their credibility.
2. What Are Your Credentials?
The IRS has two categories of tax preparer qualifications, certified and noncertified. The first group has unlimited representation rights, and consists of enrolled agents, CPAs, and state-licensed attorneys.
Enrolled agents undergo regular suitability checks. They must pass a rigorous exam on tax planning, preparation, and representation. The program also requires them to complete continuing education every three years to stay conversant with the ever-evolving tax code. The three professions also have governing bodies that set ethical standards.
The second category covers limited representation rights. These are tax preparers who do not necessarily have professional credentials. They only help you file your taxes but can’t represent you before the IRS.
3. How Long Have You Been Preparing Returns?
Generally, the more experienced a tax preparer is, the higher the likelihood that they’ll do a good job. If they’ve been in the same location for years, that’s a sign of stability and trustworthiness. It’s advisable to hire one who understands your particular industry and its unique tax requirements. They know the exemptions you qualify for, as well as specific tax laws that affect your business.
Although individuals with little experience can also do an exceptional job, they should probably work under a more experienced colleague. Watch out for those who keep moving, withhold information, or have low ratings on BBB. They could either scam you or do a shoddy job that will get you in trouble with the IRS.
4. How Do You Determine Fees? Can I Get an Estimate?
The IRS advises you to avoid agents who calculate their fees as a percentage of your total refund. That’s because it encourages some to provide dishonest figures to increase their earnings. You’ll also remain clueless about the actual amount until you file the returns. A sincere professional should, at the very least, give you a range of how much you should pay.
Some may charge depending on the type of forms you’ll need during the filing process. Your past returns should also provide a reliable guide on how much you should pay this year.
5. What Information Do You Need from Me?
Your preparer should ask you for the following information:
Social security details: It’s essential for the system to accurately capture your identification numbers and names alongside those of your dependents. Providing them reduces or eliminates misspellings and other errors that could cause problems with the IRS. These documents include social security cards, passports, state identification cards, and driver’s licenses.
Income statements: Other than salaries and business earnings, additional income includes gambling winnings, insurance contracts, and annuity.
Proof of other forms of income: You’ll need to file a variation of Form 1099 for miscellaneous income such as broker’s fees, home sales, and dividends.
Tax deduction details: These deductions reduce your taxable income and, ultimately, your tax amount. The documents include your mortgage interest statement, donations, and interest on student loans.
Proof of expenses: Medical bills, IRA contributions, and some education spending are examples of personal tax-deductible expenditures. Business expenses include mileage, depreciation on property, and home office costs.
If you’re due for a refund, ensure you receive the check or bank deposit. Be wary of preparers who suggest or insist on routing it through their office.
Other Questions That You May Want to Ask
Due to unique tax needs, you might have more questions for your tax preparer, such as:
An ideal tax preparation expert is one who answers all your questions honestly, patiently, and comprehensively. Take the time to find a tax preparer with the expertise and credentials you need. This will prevent overpaying for services you don’t need or choosing someone who is not qualified to handle your situation.The post The Most Important Questions to Ask Your Tax Preparer first appeared on www.financialhotspot.com.
Tips on Managing Cash Flow for Your Business
Cash flow refers to the net amount of money or cash equivalents that your business receives or spends. Even seemingly well-run organizations are in danger of experiencing cash flow problems. Your business might have several assets on paper but still struggle to cover day-to-day transactions.
Cash flow is important because your company’s reserves should ideally keep rising to ensure long-term survival and growth. It’s crucial to regularly evaluate your current position and implement changes before it’s too late.
The Basics of Cash Flow
There are three essential types of cash flow. The first is operating cash flow, which refers to the money that your core business activities generate. The second is investing cash flow, which is the money you pay for investments and capital assets. Finally, the proceeds you receive from issuing debt, making payments, and selling equity are known as financing cash flow. A more general classification lists two broad types:
One way of tracking cash flow is through projections. Determine your cash on hand, add the payments you expect from customers, then deduct planned expenditures. The resulting figure should give you an accurate overview of your cash flow position.
There are seven essential drivers of cash flow. They are selling and expenses, accounts receivable, accounts payable, gross margin, revenue growth, inventory, and capital expenditure. We’ll discuss in detail how you can manage them to your company’s benefit.
Be Aware of Your Status
Calculating your current cash flow position is one of the best ways of evaluating your business health. There are three ways of achieving this objective: through free cash flow, operating cash flow, and cash flow forecast formulas. If you’re not conversant with these calculations, it’s advisable to hire an accountant or use accounting software.
A study of previous financial calendars helps you establish the high and low points that need your focus. You can accurately forecast which seasons are likely to have negative cash flow, then implement appropriate preventive measures.
Manage Variable Expenditures
Have a budget of all your expenses and their expected payment dates. You can easily plan for fixed costs such as rent, insurance, property taxes, wages, utilities, and interest. Variable expenses are harder to forecast. They include commissions, raw materials, credit card fees, advertising costs, billable wages, and shipping charges. These expenses won’t catch you by surprise if you have sizable cash reserves.
Put Your Cash to Work
Even as you build a cash reserve, ensure it works for you instead of lying idle. Uninvested funds tend to lose their purchasing power due to inflation. One way of avoiding this scenario is to put it in an interest-earning account.
You can also invest in money market mutual funds, certificates of deposit, Treasury Direct account, and bonds. These options provide attractive returns while allowing you to access your cash on short notice. Other uses for cash reserves are paying down debts, buying back shares, expanding operations, and buying strategic companies.
How to Survive Shortfalls
Even the most meticulously managed businesses have negative cash flow once in a while. You can do your best to forecast but still fall short. Avoid this scenario by arranging for lines of credit in advance to deal with unexpected cash crunches. Other options include:
Consider Assistance from a Professional
Your key focus as a business owner should be on your core functions. Outsourcing the accounting aspect takes a heavy burden off your back. A professional accountant’s objectives go beyond achieving profitability. They’ll ensure you have a positive cash flow that guarantees long-term stability and growth. You’ll also gain from experience-based insider knowledge since they handle bookkeeping for various other businesses in your industry.The post Tips on Managing Cash Flow for Your Business first appeared on www.financialhotspot.com.
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