With the recent frequency of hurricanes, earthquakes, tornadoes, floods and wildfires, it’s worth reviewing ideas to ensure your business can survive if it faces its own disaster. Here are some steps you can take to create a disaster plan for your business:
Identify your exposure. The first step is to conduct an evaluation of your business to identify possible threats. Threats will vary by business depending on geography, industry, size and other factors. Once the threats are identified, create lists of risks your business would face under each type of threat.
Mitigate where possible. Once you understand your business risks, brainstorm steps you can take to mitigate your exposure. For example, if loss of data is a common risk, implementing an off-site backup system might be a good idea. The more you can minimize risks on the front end, the quicker you can get back to normal operations after a disaster strikes.
Create a disaster plan. Decide in advance what steps you and the business will take if a disaster happens. This will include things like communication, medical considerations, evacuation routes, stay-in-shelter plans, and equipment protection. The Federal Emergency Management Agency (FEMA) put together a business information booklet to help you consider all factors.
Test your plans. Once your plans are in place, test as many of them as you can. These tests will help you identify potential holes in your plans and serve as a great way to communicate the processes to your employees. Going through the motions in a test environment will increase your chance of success if you experience a real emergency.
Understand tax deductions. If you incur losses from a disaster, there are many factors that go into how the losses are deducted on your taxes. Some of the considerations are insurance proceeds, basis adjustments, disaster classifications and improvement capitalization. Set up a meeting to discuss what is best for your situation.
Disasters are often unavoidable, but having a plan in place before they hit can reduce the impact they have on your business and employees.
The more things change the more they stay the same. This is especially true when it comes to reviewing your tax situation. Mark your calendar to review these essential items each year to ensure you are not missing something that could cause tax trouble when you file your tax return:
Required minimum distributions
If you are 70½ or older, you may need to take required minimum distributions (RMDs) from your retirement accounts. RMDs need to be completed by Dec. 31 every year after you turn the required age. Don’t forget to make all RMDs because the fines are extremely hefty if you don’t – 50 percent of the amount you should have withdrawn.
Your IRS PIN
If you are a victim of IRS identity theft you will be mailed a one-time use personal identification number (PIN) as added security. You can expect to receive your PIN in the mail sometime in December. Save the PIN as it is required to file your Form 1040. If you would like to sign up for the PIN program, you can do so on the IRS website. Note that once you are enrolled in the program, there is no opt out. A PIN will be required for all future filings with the IRS.
Retirement Contributions
You may wish to make some last-minute contributions to qualified retirement accounts like an IRA. This can be $5,500 for traditional or Roth IRAs plus an additional $1,000 if you are 50 or older. Contributions to traditional IRAs need to happen by April 15, 2019 to be deducted on your 2018 tax return.
Harvest Gains and Losses
Profits and losses on investments have their own tax rates from 0 percent to as high as 37 percent. Knowing this, make plans to conduct an annual tax review of investment moves you wish to make. This includes:
Understanding investments held longer than one year have lower tax rates as long-term capital gains.
Trying to net ordinary income tax investment sales with long-term investment losses.
Making full use of the annual $3,000 loss limit on investment sales
Timing matters with investment sales and income taxes, so having a year-end strategy can help lower your tax bill.
Last-Minute Tax Moves
While your last-minute tax move opportunities may be limited, here are a few ideas worth considering:
Make donations to your favorite charities to maximize your itemized deductions.
Consider contributions of up to $100,000 from retirement accounts to qualified charities if you are older than 70½.
Make tax efficient withdrawals from retirement accounts if you are over 59½.
Delay receipt of income or accelerate expenses if you are a small business.
Take advantage of the annual $15,000 gift-giving limit.
Understanding your current situation and having a plan will make for a smooth tax filing process and maximize your tax savings.
If you are like millions of taxpayers trying to make a living running a small business, you know it is tough out there. Here are six ideas to help your business survive and thrive.
Understand your cash flow. One of the biggest causes of business failure is lack of positive cash flow. At the end of the day, you need enough cash to pay your vendors and your employees. If you run a seasonal business you understand this challenge. The high season sales harvest needs to be ample enough to support you during the slow non-seasonal periods.Recommendation: Create a 12-month rolling forecast of revenue and expenses to help understand your cash needs each month.
Know your pressure points. When looking at your business, there are a few categories that drive your business success. Do you know the top four drivers of your financial success or failure? By focusing on the key financial drivers of your business, success will be easier to accomplish.Recommendation: Look at last year’s tax return and identify the key financial drivers of your business. Do the same thing with your day-to-day operations and staffing.
Prioritize your inventory. If your business sells physical product, you need a good inventory management system. This system does not have to be complex, it just needs to help you keep control of your inventory. Cash turned into inventory that becomes stuck as inventory can create a cash flow problem.Recommendation: Develop an inventory system with periodic counts (cycle counting) to help identify when you need to take action to liquidate old inventory or research any discrepancies.
Know your customers. Who are your current customers? Are there enough of them? Where can you get more of them? How loyal are they? Are they happy? A few large customers can drive a business or create tremendous risk should they go to a competitor.Recommendation: Know who your target audience is and then cater your business toward them and what they are looking for in your offerings.
Learn your point of difference. Once you know who your customer is (your target audience), understand why they buy your product or service. What makes you different from others selling a similar item?Recommendation: If you don’t know what makes your business better than others, ask your key customers. They will tell you. Then take advantage of this information to generate new customers.
Create a great support team. Successful small business owners know they cannot do it all themselves. Do you have a good group of support professionals helping you? You will need accounting, tax, legal, insurance, and employment help along with your traditional suppliers.Recommendation: Conduct an annual review of your resources, be prepared to review your suppliers and make improvements where necessary.
While libraries are filled with small business advisory books, sometimes focusing on a few basic ideas can help improve your business’ outlook. Please call if you wish to discuss your situation.
You’ve done your retirement homework. Your assets are reviewed, you know your financial needs, and your retirement tax plan is in place. Are you ready to enjoy retirement? Probably, but not without a plan to address what happens to many after they retire – boredom. Here are some ideas.
Go to school. Many colleges and communities offer classes for retired students. Pick topics of interest and take advantage of this cost-effective way to stay alert through learning. Examples could be local history classes with field trips, photography classes, writing and gardening. As an added benefit, you will meet others with your shared interest while you continue learning.
Pick up part-time work. Consider picking up a few hours at a local retail establishment. The work can be rewarding and provide some additional spending money.
Many retirees volunteer at libraries, museums and parks. Others volunteer at their local church, deliver meals and help young people with literacy. The possibilities are endless.
Schedule physical activity. Staying physically active will keep your body and mind in shape. Create a weekly routine that keeps you moving. Volunteer to take the grandkids to swimming lessons while the parents are working. Bike or walk to do everyday chores.
Look for combinations. With a little creativity, you can combine some of these ideas. For example, if you coached your kids in soccer, why not consider refereeing kids games? You might earn a little pay while staying connected with kids, and getting some physical activity.
Stay Connected. When you retire, many of your social connections will change. This is especially true for work connections and availability of friends that are still working. Look for other ways to make new connections. Participate in community events. Reach out through volunteer efforts to meet new people.
Test out your dreams. If you’ve always dreamed of moving to a new place in retirement, you may want to test-drive it first. A dream move may turn out to be different than you anticipated. You may miss your kids and friends. Services and connections you take for granted may become a problem. By renting a place and staying in the new location prior to committing, you will be prepared with a fallback plan if it does not work.
These are but a few ideas to help transition into a satisfying retirement. There are many resources to provide additional ideas.
The Social Security Administration (SSA) announced that the maximum amount of wages subject to the old age, survivors, and disability insurance (OASDI) tax will increase to $132,900 for 2019. The OASDI tax rate is 6.2%, so an employee with wages up to or above the maximum in 2019 would pay $8,239.80 in tax and the employer would pay an equal amount. Self-employed individuals pay tax at a 12.4% rate up to the limit. The 2018 wage base is $128,400, for a $7,960.80 maximum amount of OASDI tax.
The Medicare hospital insurance tax of 1.45% each for employees and employers, or 2.9% for the self-employed, has no wage limit.
The SSA also announced that recipients of Social Security benefits would get a 2.8% cost-of-living adjustment and that the earnings test for the amount of income that benefit recipients can receive without their benefits being reduced each year is $17,640 before full retirement age, and the limit taxpayers can earn in the year they reach full retirement age is $46,920.
Consider conducting a final tax planning review now to see if you can still take actions to minimize your taxes this year. Here are some ideas to get you started.
Assess your income. Begin by determining how your income this year will compare to last year. Then apply any tax implications this income change may cause. Be sure to account for the lower tax rates and the elimination of exemptions. Remember, if your income is rising, more of your income could be subject to a higher tax rate. Your higher income could also trigger a phase out that will prevent you from taking advantage of a deduction or tax credit formerly available to you.
Examine life changes. Review any key events over the past year that may have potential tax implications. Here are some examples:
Purchasing or selling a new home
Refinancing or adding a new mortgage
Getting married or divorced
Incurring large medical expenses
Changing jobs
Having a baby
Identify what tax changes may impact you. Tax changes for the current year are expected to be more impactful than we’ve seen in 30 years. Determine which of these changes will affect you. With these changes in mind, review your past income tax return to estimate what the impact may be on your upcoming tax bill. Please keep in mind that Congress has a habit of making last-minute changes, so you will want to plan accordingly.
Manage your retirement. One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. Now is a good time to review your retirement account funding. Are you taking full advantage of your employer’s retirement plans? Are you saving money to invest in your future through various retirement savings options?
Look into credits. There are a variety of tax credits available to most taxpayers. Spend some time reviewing the most common ones to ensure your tax plan takes advantage of them. Here are some worth reviewing:
Child Tax Credit
Earned Income Tax Credit
Premium Tax Credit
Adoption Credit
Elderly and Disabled Credit
Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)
Avoid surprises. Conducting a final tax planning review now allows you time to try to reduce your tax obligation. This is especially true if you are unsure of the specific changes made to the tax code. Remember some tax-saving ideas may require funding on your part. It is best to identify them now so you can save cash to take advantage of them prior to the end of the year.
Your credit score is one of the most important aspects of your financial health. It is used by potential lenders, landlords and even employers to analyze your financial situation in one way or another. Here are some tips that might help you improve your score:
Review your credit report and, if necessary, fix errors. You are entitled to one free credit report from each credit reporting company per year at Annual Credit Report. It is important to check for reporting errors that could be negatively affecting your score. If you find an error, contact the company reporting the information and the credit reporting company to challenge the report. Common errors include closed accounts showing as open, incorrect balances or limits and accounts opened by someone else due to identity fraud.
Pay off your credit card each month. By making purchases on a credit card and paying the entire balance each period, you are developing a positive credit history and displaying sound financial management skills. This will increase your credit score. To meet this goal you will need to keep your spending under control. If you are unable to pay off the card, you will start to accumulate revolving debt that will hurt your credit score.
Make your payments on time. Late payments, even by one day, can be one of the most damaging hits to your score. If possible, set up automatic payments for as many bills as possible to lower the risk of forgetting to make a payment. The longer your history of paying on time, the more your score will improve.
Pay down your debt. Another large chunk of your credit score is calculated based on the amount of debt outstanding. Mortgage lenders specifically use a debt-to-income ratio to determine loan eligibility. In addition to the amount of debt you have, you also need to pay attention to the debt limits you have on your accounts. The closer your debt is to the limit, the worse your score will be.
Don’t allow an account to go to collection. Collections will stay on your credit report for seven years! Avoid having any of your accounts go to collections if at all possible. Medical bills and other one-time expenses are often the types of accounts that find themselves in collections. If you are unable to pay a bill in full by the due date, call the company and see if they have payment plans or other programs to get the bill paid without going to a collection company.
Regardless of where you are on the credit score spectrum, you should actively monitor your credit. Implementing these ideas will improve your credit score as well as your long-term financial well-being.
As students gear up to head back to school, there are some changes to education deductions that could save or cost you more in taxes and even raise college tuition costs. Here is what you need to know to get up to speed:
What is gone
Continuing Education as an itemized deduction: In previous years, you could deduct expenses paid for job-related continuing education as a miscellaneous itemized deduction. This deduction has been eliminated. However, if your employer will pay for the education, they can cover up to $5,250 tax-free.
Home equity line of credit (HELOC) interest for education expenses: A popular method of generating cash to pay for school expenses is taking out a HELOC. Beginning in 2018, you can only deduct HELOC interest if you use the loan proceeds to buy, build or substantially improve your home. This means that if you plan to obtain HELOC for purposes of paying for education expenses, the interest will not be deductible.
What’s new
529 plans cover K-12 tuition: Funds from Section 529 savings plans can now be used tax-free to pay for up to $10,000 in K-12 private school tuition per year. Books, supplies or other K-12 expenses are not included in this change, but they are still eligible as legitimate college expenses. Be careful – not all states have adopted the K-12 inclusion, so they might still be taxable at the state level.
Endowment tax of 1.4 percent on certain private colleges: Congress added an investment income tax on private colleges that have large endowments. The tax is expected to impact roughly 30 schools, including Stanford, Harvard and Notre Dame. The effects of the new tax are yet to be determined. However, tuition may increase or reduced financial aid award amounts may be implemented to offset the cost.
What stays the same
Student loan interest deduction: You may deduct up to $2,500 in student loan interest in 2018 as an adjustment to income. To qualify, your adjusted gross income must be below $80,000 ($165,000 for married couples). Phaseouts start to apply at $65,000 ($135,000 for married couples).
American Opportunity Tax Credit and Lifetime Learning Credit: All three of these educational tax benefits are available once again. Here’s a chart with basic information on these options:
American Opportunity
Tax Credit
(AOPC)
Lifetime
Learning Credit
(LLC)
Max Amount
$2,500 credit
$2,000 credit
Refundable?
Yes – $1,000
No
Max Years
4
Unlimited
Eligible Education
Undergraduate
Undergraduate
& graduate
As a reminder, when you make payments for any education expenses, make sure to keep your receipts and retain any Forms 1098T sent to you from qualifying schools.
Often lost in the excitement of large-scale tax change is how they can negatively impact some individual situations. Check out the questions below to see if you might be in for a tax surprise this year.
Will you pay more than $10,000 in state and local taxes?
Previously, you could take a full deduction for all state income, sales and property taxes as an itemized deduction. That deduction is now capped at $10,000 per year. Take a look at your 2017 itemized deductions to see if your state and local taxes were greater than the new cap. If so, you will now lose any excess amount over $10,000 as a deduction.
Do you pay for work expenses?
Before this year, employees were able to deduct work expenses (business mileage, uniforms, continuing education and other non-reimbursed expenses) as an itemized deduction. These deductions are now gone. If you typically pay for job related expenses, you might be on the hook for more taxes. Employees who deduct business use of their homes may be impacted even more.
Do you own a small business?
There are many business tax changes for 2018. Bonus depreciation and Section 179 expensing are expanded, the domestic production activities deduction (DPAD) is eliminated, and there is a new qualified business income deduction for pass-through entities. It is a near certainty that one or more of these changes will affect your business taxes.
Did you adjust your withholding allowances?
When the tax cuts were finalized, the IRS adjusted the withholding tables as best they could to fit with your current allowances. As a result, your take-home pay likely increased earlier this year. However, based on a recent report by the U.S. Government Accountability Office (GAO), as many as 21 percent of taxpayers will unknowingly under withhold their taxes throughout the year. If you are one of these people, you will have a tax bill and maybe some penalties to pay next April. It would be time well spent to double-check your withholding for 2018.
Do you have children?
Some good news! The Child Tax Credit is now double to $2,000 per child versus $1,000 last year. The income limits for the credit are also raised significantly to $200,000 Adjusted Gross Income (AGI) for single status and $400,000 AGI for married couples. In many cases, the additional credit will actually offset the loss of the personal exemption that you could take for yourself, your spouse and children in the past.
Now is a great time to do an assessment of your situation in light of the new tax changes.
Meals continue to be deductible under new IRS guidance. Guidance issued by the IRS on Wednesday clarified that taxpayers may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.
This is, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law, Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (Notice 2018-76).
The IRS stated that the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but does not address the deductibility of expenses for business meals.
This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.
Sec. 274(k), which was not amended by the TCJA, does not allow a deduction for the expense of any food or beverages unless (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished. Sec. 274(n)(1), which was amended by the TCJA, generally provides that the amount allowable as a deduction for any expense for food or beverages cannot exceed 50% of the amount of the expense that otherwise would be allowable.
Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
The expense is not lavish or extravagant under the circumstances;
The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
The IRS will not allow the entertainment disallowance rule to be circumvented through inflating the amount charged for food and beverages.
The notice contains three examples illustrating how the IRS intends to interpret these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the game. The examples follow the AICPA’s recommendation that meal expenses be deductible when their costs are separately stated from the cost of the entertainment.
The IRS has plans to issue proposed regulations and is requesting comments by Dec. 2 on the notice. It is also asking for comments on:
Whether further guidance is needed to clarify the interaction of Sec. 274(a)(1)(A) entertainment expenses and business meal expenses.
Whether the definition of entertainment in Regs. Sec. 1.274-2(b)(1)(i) should be retained and, if so, whether it should be revised.
Whether the objective test in Regs. Sec. 1.274-2(b)(1)(ii) should be retained and, if so, whether it should be revised.
Whether the IRS should provide more examples in the regulations.
The AICPA has written to the IRS ( letter to the IRS ) dated April 2, 2018, where the AICPA has requested that the IRS provide immediate guidance on the TCJA change to Sec. 274. The AICPA recommended that the IRS confirm that business meals (1) that take place between a business owner or employee and a current or prospective client; (2) that are not lavish or extravagant under the circumstances; and (3) where the taxpayer has a reasonable expectation of deriving income or other specific trade or business benefit from the encounter are deductible.
