Archive for June, 2009
Do you have a child or other dependent that you claimed on last year’s tax return? Are you sure you reported and claimed them correctly?
Here are a few tax code changes this year relating to your dependents that you may have missed on your tax return. If you need to make adjustments, it’s not too late to file an amended tax return!
1) The definition of a “qualifying child” has changed! In order to be considered a “qualifying child,” the child:
- Must be younger than you
- Cannot have filed a joint return, unless the return was filed to claim a refund
- If the parent of the child can claim the child as a qualifying children but no parents claims the child, no one else can claim the child as a qualifying child unless that person’s AGI is higher than the highest AGI of any parent of the child
- The child is a qualifying child for purposes of the child tax credit only if you can and do claim an exemption on the child
2) According to the IRS, in 2009 the maximum adoption credit has increased for individuals with a modified AGI (Adjusted Gross Income) of less than $182,180. The credit is “phased out” if you make between $182,189 and $222,180. That means that you receive less of the credit amount as your AGI goes up. The current tax credit amount is $12,150.
3) The amount of earned income you must exceed to claim the addition child credit has been reduced to $3,000.
4) For those of you with investments in children’s names, the amount of taxable investment income a child can have without it being taxed at the parent’s rate has increased to $1,900.
All information via IRS.gov.
Did you know that as a small business owner, you’re more likely to be audited by the IRS? It’s true. 1.5% of all tax returns submitted with a Schedule C are audited, compared to just 1% of those filing with W-2’s only. This is largely due to the widespread misuse of the Schedule C to report losses on a “hobby” business while employed at a “regular” wage or salaried job.
So, how can you minimize your risk of being audited? You may already be at an increased risk, but following some of the steps below can reduce that risk and ease your audit experience if the tax man does decide to pay a visit.
1) Hire a professional. A professional tax preparer or personal accountant is an invaluable resource in helping you navigate your tax burden. They’re aware of common tax mistakes that the IRS looks for, like incomplete tax returns, unreported or suspiciously low income, round numbers, or disagreements between your state and Federal tax returns. They can work with you to correct these errors before your tax return is filed, reducing your risk of an audit.
2) Document all income sources. You should be reporting these sources of income on your Schedule C. All four quarterly employment tax returns should be kept and filed in case they’re needed to support deductions taken for salaries and wages paid to employees. For the same reason, be sure to keep copies of all form W-4 and W-2 for your employees.
3) Take only deductions you can substantiate. This goes with tip #2. If you keep accurate, meticulous records of your deductions, you have every right to take them. Just know where your paperwork is.
4) Know what the IRS is looking for. Are you writing off business entertainment expenses with clients? In addition to keeping your receipts, use a spreadsheet to record the date, place, amount spent, the name of your guest, and your business relationship with the guest. Do the same with any items you buy for your business. Keep your receipts, and record the date, place, amount spent, and how you are using the item for your business. Physical inventory sheets, canceled checks, receipts, and information or figures concerning the costs of the inventory will also be useful.
5) Be honest. Don’t try and fudge your numbers. Just don’t. It always comes back and bites you in the end. Report all income and seek the advice of a qualified tax professional if you’re feeling overwhelmed.
Every small business needs funding. Unless you’re independently wealthy or incredibly lucky, yours business is probably one of them.
One of the first questions you ask should be: how much should you budget in startup costs? Every business is different, but there are a couple of startup cost calculators here and here. These calculators give you a very simple, high-level look at what your business startup costs may be.
A good rule of thumb is to make sure you have enough financing to cover not only your startup costs, but your first year of expenses. There are a few lucky businesses that achieve profitability their first year, but most take 2-5 years to start generating real returns.
So how much do you have to make before you start making money? Remember that just because you generated $10,000 in sales this month, it doesn’t mean you made $10,000 in profit. If it costs you $8,000 to acquire, distribute, and sell those goods, you’re only actually making a $2,000 profit ($10,000 – $8,000 = $2,000).
You can calculate your breakeven costs by identifying your variable and fixed costs and applying a simple formula. Click here for a basic online breakeven analysis calculator.
Now that you have an idea of the costs involved in starting your business, how do you plan to fund it? There are lots of options. Young entrepreneurs just getting started might rely on friends, family… and credit cards. For most – especially if you’re looking at a business with high startup costs – this isn’t going to be enough to get your business off the ground.
There are two basic types of outside funding you can get: debt financing and equity financing. Debt financing means you’re taking on debt that you’ll have to pay back. This is financing from traditional outlets like banks. Equity financing, on the other hand, means gathering investments from venture capitalists. Venture capitalists are people who will invest money in your business in the hopes of seeing a profitable return.
The big drawback to equity financing is that you may lose some control over your business – many venture capitalists seek to have some sort control of your company, especially if your business is underperforming. You will also be sharing a portion of your profits with a venture capitalist. Of course, when debt financing, you may also offer up your business, house, or other collateral to the bank if you are unable to pay back the loan (depending on the terms of the loan). So either way, you’re beholden to someone else until your business starts to cash out.
If you decide to open a franchised business, you may also have the ability to tap into the franchisor’s funding resources. This could range from simply getting the franchisor’s backing when applying for a loan to taking out a loan from the franchisor itself. At Instant Tax Service, we offer a variety of funding options to qualified candidates.
At the end of the day, funding your small business requires a lot of research and sweat equity on your part. Be sure to pursue all the options open to you before deciding what kind of funding options are right for you. Many entrepreneurs find success by mixing and matching debt financing and equity financing paired with generous contributions from family and friends. There’s no “right” formula – just whatever works for you and your business.
For more small business funding tips, visit SBA.gov.
These days, you can find a podcast covering just about anything – from politics to religion to the ups and downs of motherhood – even finance! There are all sorts of ways to get great tax and finance advice. Visit a blog (like this one), read the paper, checked out a book from the library, ask friends, family, or a local tax expert.
Podcasts are just another way to improve your financial chops. Below are some of our top financial podcast picks.
NPR’s Planet Money.
Learn all you ever wanted to know (and more!) about the global economy.
Kiplinger’s Personal Finance Podcast.
Get audio versions of Kiplinger’s top finance stories every Tuesday.
Money Girl Quick and Dirty Tips for a Richer Life.
The title says it all. Fun, quirky commentary about managing your personal finances.
Tax Talk Today.
Tax talk with national tax experts – brought to you by the IRS!
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If you’re reading a blog post titled, “How to choose a successful business model,” it’s a good bet that you’re an entrepreneur without a startup, or you already have a business model… but it’s just not performing as well as you’d like in this economy.
There’s no sure thing when it comes to business models, but a good place to start is to see what’s working now. What are the top businesses selling? Who are they selling to? What are they selling? When are they selling it? Every industry is different, so pick one you’re drawn to and start to drill down. What makes that company different?
You’ll also want to decide what kind of startup costs you’re willing to pay. Looking for a retail business on the cheap? Try starting a “virtual” store on Ebay or Etsy.com. Thousands of retail entrepreneurs on a shoestring budget use the web as their primary selling platform. Just don’t forget your shipping, distributing, and acquisition costs.
The downside to virtual ownership is that you’re building your brand from scratch. You have 0 customer recognition, and you’ll be doing just as much legwork promoting your store online as you will a storefront – often for less return.
Starting a brick-and-mortar retail business can get you immediate attention if you find a great location with lots of visibility. Try forming partnerships with complimentary businesses in your area. If you give out discount coupons for their service, will they stuff their customer’s bags with your flyers?
Promotion is all very well and good, but what about your actual business model? Well, there are a lot of choices. Here are a few existing business models you may want to learn more about:
All of these business models are based on proven businesses, but only one offers you the ability to truly take someone else’s successful business and make it your own. The franchise model gives many uncertain entrepreneurs the ability to cut their teeth in a proven business before going on to start their own ventures. It’s also a good option for those looking for a less risky investment.
In today’s rocky business world, many entrepreneurs are looking for a safe bet. At Instant Tax Service, we offer franchising opportunities in the retail tax preparation industry. Call 888.870.1040 for more information.
If franchising isn’t for you, you’ll need to ask yourself a few questions before deciding which business model is right for you. If you don’t have the money up front, you’ll need to pursue small business loans or venture capital (some people even get venture capital from their friends and family). You’ll need to figure out:
a. Your core capabilities. What you physically need to make your business work.
b. Your target customer. Who are you marketing to? When? Why?
c. Your distribution channel. How does stuff get to you, and from you to the customer?
d. Your cost structure. How much money do you need? When? Where are you getting it?
e. Your revenue. Where does it come from? Where’s it going?
Most of all, what do you want out of your business? What are your personal and professional goals? There’s a difference between wanting to own a coffee shop to keep food on the table and wanting to create the next Starbucks.
It’s up to you!
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Think it’s too early to start thinking about your taxes?
Think again.
Eligible deductions for this tax year must be taken… this tax year. Don’t wait until December 31st to start calculating your tax deductions. There are steps you can take right now to improve your tax situation come April 15th. Here are just a few of them:
Home buyer’s credit. Are you thinking about buying a home? With housing prices lower than they’ve been in decades, many experts think this is a great time to take the plunge. To add a little spice to the deal, the government is offering a home buyer’s tax credit of 10% of the purchase price of the house – up to $8,000 – for qualifying first-time home buyers.
Why act now? Because homes that qualify for this credit must be purchased on or after January 1, 2009 and before December 1, 2009. The purchase date is considered the date when the closing occurs and the title of the property is turned over to the new homeowner.
Energy Efficiency Credit. Have you been putting off getting energy efficient windows for your home? How about upgrading your central air conditioning unit or furnace to a more efficient model? Want to get a hybrid car? The government is offering a new tax credit for taxpayers looking to run their lives just a little more efficiently. There’s a $1,500 maximum amount that can be claimed on products placed in service in 2009 and 2010, with a few exceptions. For hybrid electric cars, the tax credit starts at $2,500 and goes up to $7,500.
Why act now? Because all those improvements must be “placed in service” (available and ready for use) between January 1, 2009 through December 31, 2010. If you’re looking for the most energy efficient products, now is a good time to start shopping to ensure that you get the items placed in time. This is especially important if you’re planning to do massive upgrades, like installing solar panels. For hybrid vehicles, the vehicles must be “placed in service” on or after January 1, 2006 (yep, that’s not a typo – all the way back to `06) and before December 31, 2010.
College Tax Credit. Ready to go back to school? The government is giving us all a little extra push this year with a tax credit of up to $2,500 for qualifying college expenses like books, tuition, and activity fees. Students must be studying at least half-time at an eligible educational institution. This is a major upgrade to the previous college tax credit (the Hope Credit), which only offered $1,800 for qualifying expenses.
Why act now? Because it’s already June! Apply now to get signed up for fall quarter.
For more information about these credits and many more, visit IRS.gov.
As a small business owner, you may be wondering how the new stimulus package is going to benefit you. Here are a few facts about stimulus package benefits to small business owners that you may have missed when you filled out last year’s tax return (or which you may find useful for your next quarterly return!).
There are two major ways that the stimulus package affects you as a business owner, and both of them have to do with tax breaks.
First of all, you can now expense up to $250,000 in property purchased in your 2008 tax year. This is almost double the previous year’s amount of $128,000. Remember, we’re talking about the tax year, not the calendar year, so if your tax year starts July 1, 2008 and goes to June 30, 2009 there are a lot of benefits you can still take advantage of!
What constitutes “property” for this tax benefit? Well, a lot more than land! Machinery, refrigerators, countertops, office equipment, computers, signs, passenger vehicles, livestock and much more all qualify as business “property” if they were purchased for the sole use of your business.
OK, the second big benefit is the way you can write off these expenses. You can do it a lot more quickly now with two deductions. The first deduction allows you to write off 50% of what you paid for property “acquired, placed and kept in service” in calendar year 2008. Note that this is a special depreciation allowance.
In addition to this 50% write-off, you can also write-off the regular first year depreciation on the remaining 50% of what you paid for that property during the tax year. Follow me? If you’re having trouble, just contact your accountant or local tax preparer. They should be able to teach you how depreciation works. It looks trickier than it is!
Remember that all property written off this way must have been purchased by the taxpayer after December 31, 2007. It must be “new” property acquired after that date.
You can download the IRS press release here. Or, download a copy of the SBA (Small Business Administration) fact sheet here.
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