Starting your own business can be equal parts thrilling and intimidating. Complying with regulations and tax requirements definitely falls into the latter category. But, with some professional help, it doesn’t have to be that way. You can get started with this checklist of things you’ll need to consider.
Are you a hobby or a business? This may seem basic to some people, but the first thing you’ll have to consider when starting out is whether you really are operating a business, or pursuing a hobby. A hobby can look like a business, but essentially it’s something you do for its own sake that may or may not turn a profit. A true business is generally run for the purpose of making money and has a reasonable expectation of turning a profit. The benefit of operating as a business is that you have more tax tools available to you, such as being able to deduct your losses.
Pick your business structure. If you operate as a business, you’ll have to choose whether it will be taxed as a sole proprietorship, partnership, S corporation or C corporation. All entities except C corporations “pass through” their business income onto your personal tax return. The decision gets more complicated if you legally organize your business as a limited liability corporation (LLC). In this case you will need to choose your tax status as either a partnership or an S corporation. Each tax structure has its benefits and downsides – it’s best to discuss what is best for you.
Apply for tax identification numbers. In most cases, your business will have to apply for an employer identification number (EIN) from both the federal and state governments.
Select an accounting method. You’ll have to choose whether to use an accrual or cash accounting method. Generally speaking, the accrual method means your business revenue and expenses are recorded when they are billed. In the cash method, revenue and expenses are instead recorded when you are paid. There are federal rules regarding which option you may use. You will also have to choose whether to operate on a calendar year or fiscal year.
Create a plan to track financials. Operating a business successfully requires continuous monitoring of your financial condition. This includes forecasting your financials and tracking actual performance against your projections. Too many businesses fail in the first couple of years because they fail to understand the importance of cash flow for startup operations. Don’t let this be you.
Prepare for your tax requirements. Business owners generally will have to make quarterly estimated tax payments to the IRS. If you have employees, you’ll have to pay your share of their Social Security and Medicare taxes. You also have the obligation to withhold your employees’ share of taxes, Social Security and Medicare from their wages. Your personal income tax return can also get more complicated if you operate as one of the “pass-through” business structures.
This is just a short list of some of the things you should be ready to discuss as you start your business. Knowing your way around these rules can make the difference between success and failure, but don’t be intimidated. Help is available so don’t hesitate to call if you have any questions.
With all of the headlines about the changes to tax law, you probably have lots of questions. Here are answers to some of the most commonly asked tax questions taxpayers have this year.
Q. I’m hearing about a lot of changes to 2018 taxes. What should I do?
A. You’re right, there are a lot of changes in 2018 due to the passage of the Tax Cuts and Jobs Act (TCJA), including to the income tax brackets. The simple answer to the question, “What should I do?” is to not make any major changes until you finish filing your 2017 taxes. Once you understand your 2017 tax obligation, you are in a better position to plan for 2018.
However, there are a few things you can start thinking about now. Depending on where you fall in the new income tax brackets, you may want to consider ways to lower your taxable income. This could include increasing your contributions to 401(k) retirement accounts or health savings accounts (HSAs). You’ll also want to make sure your employer has adjusted your federal tax withholding so that you don’t have to wait to receive a large refund (or tax bill) next year. You can review the IRS withholding calculator using your latest pay stub data to make sure the changes are accurate.
Q. What is the penalty amount if I didn’t have health insurance in 2017?
A. The penalty per adult is calculated as the greater of either $695 or 2.5 percent of your yearly household income, up to a maximum of $3,264 for individuals or $16,320 for a family of five or more. Note that the penalty is still in place for tax years 2017 and 2018. The TCJA eliminates the penalty for 2019 through 2025.
Q. Is Social Security taxed?
A. It depends. You won’t pay tax on more than 85 percent of your Social Security income, but how much gets taxed depends on your income bracket. If your combined income is less than $25,000 for the year, you won’t pay tax on Social Security income.
Q. When is the last day to do my taxes?
A. Technically, Tuesday, April 17. But don’t wait until the last minute. Ask for help to get started now, or to file an extension so you have time to complete your tax return later. The sooner you file, the sooner you can get your refund. It usually takes about three weeks to arrive from the date you file. Also, remember you need to keep most tax related documents for at least three years, so don’t toss your paperwork after you file.
Q. The IRS contacted me, what should I do?
A. Ask for help. There are numerous scammers who impersonate the IRS during tax season. The real IRS will never contact you via social media, email or text message. In addition, an IRS agent will not contact you over the phone unless you first receive official correspondence in the mail. If you have received a notice in the mail, immediately ask for help to determine how to proceed.
These are just a few of the questions people have during tax season. If you have more, don’t forget to bring them to your 2017 filing appointment.
If you reached age 70½ last year, April 1 could be an important deadline. It’s the last day you can take your required minimum distribution (RMD) for 2017 from your traditional IRAs. If you miss that deadline, the penalty may be a 50 percent excise tax on the amount you should have withdrawn.
How the rules work
Once you reach age 70½, you must start taking annual distributions from your traditional IRAs. Normally these distributions must occur by Dec. 31 of each year. But a special rule lets you defer your very first RMD until April of the year after you reach age 70½. So if you turned 70½ last year, April 1 is the deadline for your 2017 distribution. Be aware that you’ll still need to take your 2018 RMD before the end of this year. Note that RMD rules don’t apply to Roth IRAs.
Generally, the amount of the RMD for any year is based on your age. You take the balance in all your traditional IRAs as of the last day of the previous year, and divide by a factor representing your life expectancy. The IRS has published a standard life expectancy table to use in the calculation. Special rules might apply if your spouse is more than 10 years younger than you are.
RMDs and tax planning
Because all or part of your distribution may be taxable income, it is important to include RMDs in your tax planning. Ideally you should start planning for RMDs several years before you reach age 70½. But whether you’re planning in advance or looking at a distribution on April 1, contact our office for more detailed advice.
If you’re still working, this deadline may also apply to your other retirement accounts.
Emotions make us human. They can also cause us to make rash decisions. Business owners and managers often let emotions dominate the decision-making process. This is especially true when choices are based on “sunk costs.”
Why sunk costs can lead to trouble
Broadly defined, sunk costs are past expenses that are irrelevant to current decisions. For example, many firms hire consultants who sell and install software. In some cases, a company is left waiting for years for a functional and error-free system. Meanwhile, costs continue to escalate. But are those costs relevant?
Managers, especially those who initially procured the software and contractor, may reason that pulling the plug on a failed contract would be wasting all the money spent. Not true. That money is “sunk.”
Other examples of sunk costs may be found in the areas of product research, advertising, inventory, equipment, investments and other types of business expenses. In each of these areas, companies spend money that can’t be recovered — dollars that become irrelevant for current decision-making.
Sunk costs are a waste of time — move on
Truth be told, the only relevant costs are those that influence the company’s current and future operations. Throwing good money after bad won’t salvage a poor business investment — or a poor business decision.
The tax law changes in the Tax Cuts and Jobs Act, passed at the end of December 2017, enacted some of the most sweeping changes taxpayers have seen in 30 years. Here are a few big changes to come out of the new act — and what you can do about it.
The medical expense deduction threshold was lowered to 7.5 percent.
The tax reform bill retroactively lowers the threshold to deduct medical expenses in 2017 to 7.5 percent of adjusted gross income. The previous threshold was 10 percent. This new 7.5 percent threshold remains in place for 2018, but reverts back to 10 percent in the following years.
What this means: You may want to consider using the medical expense deduction this year. If there are any qualified medical expenses you can make (drug purchases, medical equipment, etc.) to push you over the new, lower threshold, consider doing so in 2018.
The healthcare individual mandate penalty stays in place until 2019.
The shared responsibility penalty (also known as the individual mandate) in the Affordable Care Act is effectively repealed by the tax reform legislation, but not right away. The penalty is set to zero in 2019, but remains in place for 2018.
What this means:You still need to retain your Forms 1095 this year in order to provide evidence of your healthcare coverage. Without proof of coverage, you may have to pay the higher of $695 or 2.5 percent of your income. Unless there are further changes coming, 2018 may be the last year you’ll need to worry about the individual mandate penalty.
More changes to consider for 2018 tax planning
We’re experiencing some of most significant tax law changes since the 1980s. There will be a lot of things to consider for tax planning this year. Here are some of the most significant:
Reduced income tax rates
Doubled standard deductions
Suspension of personal exemptions
New limits on itemized deductions, including:
Combined state and local income, property and sales tax deduction limited to $10,000
Casualty losses limited to federally declared disaster areas
Elimination of miscellaneous deductions subject to the 2 percent of adjusted gross income threshold
Boosts to:
The child tax credit ($2,000 in 2018)
A new $500 family tax credit
529 education savings plan expansion for K-12 private school education
The estate tax exemption (doubled)
Stay tuned
There will surely be more details on the tax reform changes and how they are implemented by the IRS in the weeks to come. In the meantime, contact us if you have urgent questions regarding your situation.
