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.
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.
New parents have their work cut out for them. Not only are they dealing with lost sleep, they also face the extra cost of raising a child. At least there are a lot of potential tax breaks available to them. Check out this list and share it with any new parents you know.
Child Tax Credit
Tax law changes this year not only double the size of the Child Tax Credit, they make it available to more parents than ever before. The credit increases to $2,000 from $1,000 (with $1,400 of it being refundable even if no tax is owed). Meanwhile, the eligibility phaseout threshold increases sharply to $400,000 from $110,000 for married joint filers (and to $200,000 for single taxpayers).
Child and Dependent Care Credit
If you pay a nanny, babysitter, daycare or a relative to take care of your child while you and your spouse are at work, you can claim the Child and Dependent Care Credit. It’s up to $1,050 on $3,000 in expenses for one child and twice that for two or more children. The key is that you and your spouse (if you are married) must both be working, and you can’t claim expenses for overnight care.
Below the kiddie tax threshold
If you have property that produces income, such as bonds, stocks, mutual funds, interest or realized capital gains, you can lower your tax by transferring a certain amount of that income to your children. Why? Your child has a lower tax rate than you do on unearned income. This works up to a certain dollar limit before “kiddie tax” rules come into play.
Adoption Credit
About 135,000 children are adopted in the U.S. each year. If you are welcoming an adopted child into your family, the Adoption Credit can be claimed on up to $13,840 in expenses, such as fees, legal counsel and court costs.
Educational benefits of a 529 plan
There are many provisions in the tax code to help cover the high cost of education. Consider establishing 529 college savings programs for your new addition. While contributions are made with after-tax dollars, any investment gains are tax-free as long as they’re used to pay qualified education expenses. The tax reform passed last year now also allows you to use these funds to pay private elementary and secondary school tuition as well as college.
Like a bundle of sticks, good business partners support each other and are less likely to crack under strain together than on their own. In fact, companies with multiple owners have a stronger chance of surviving their first five years than sole proprietorships, according to U.S. Small Business Administration data.
Yet sole proprietorships are more common than partnerships, making up more than 70 percent of all businesses. That’s because while good partnerships are strong, they can be hard to make. Here are some elements that good business partnerships require:
Compatible strengths
Different people bring different skills and personalities to a business. There is no stronger glue to hold a business partnership together than when partners need and rely on each other’s abilities. Suppose one person is great at accounting and inventory management, and another is a natural at sales and marketing. Each is free to focus on what they are good at and can appreciate that their partner will pick up the slack in the areas where they are weak.
Defined roles and limitations
Before going into business, outline who will have what responsibilities. Agree which things need consensus and which do not. Having this understanding upfront will help resolve future disagreements. Outlining the limits of each person’s role not only avoids conflict, it also identifies where you need to hire outside expertise to fulfill a skill gap in your partnership.
A conflict resolution strategy
Conflict is bound to arise even if the fundamentals of your partnership are strong. Set up a routine for resolving conflicts. Start with a schedule for frequent communication between partners. Allow each person to discuss issues without judgment. If compromise is still difficult after discussion, it helps to have someone who can be a neutral arbiter, such as a trusted employee or consultant.
A goal-setting system
Create a system to set individual goals as well as business goals. Regularly meet together and set your goals, the steps needed to achieve them, who needs to take the next action, and the expected date of completion.
An exit strategy
It’s often easier to get into business with a partner than to exit when it isn’t working out. Create a buy-sell agreement at the start of your business relationship. This should outline how you exit the business and create a fair valuation system to pay the exiting owner. Neither the selling partner nor the buying partner want to feel taken advantage of during an ownership transition.
There’s a new student loan repayment program that forgives some student loan debt if other payments are made. This new debt forgiveness is creating a tax surprise for the unsuspecting student. Here is what you need to know.
The debt forgiveness program dilemma
To combat the hardship of high student loan debt, a popular new repayment option is the income-based repayment plan. These plans limit monthly payment amounts to a percentage of discretionary income. They also limit the number of repayment years. If your loan is not paid by a predetermined future date and you’ve been making the payments as agreed, the balance of the loan is forgiven.
While the prospect of having a portion of the debt canceled is enticing, it can create an unexpected tax burden if you are not prepared. Here’s why it may be a problem:
Canceled debt is considered taxable income. When a portion of a loan is forgiven, that amount is considered taxable income in the year in which the debt is cancelled. While there are exceptions, this is the general tax rule.
A 1099-C is issued to you and the IRS. Upon the forgiveness of the student loan debt, the loan servicing company will issue a Form 1099-C titled “Cancellation of Debt”. A copy of the form will be delivered to both you and the IRS informing both parties of the amount of forgiven debt. This amount needs to be included on your Form 1040.
Taxes are due at filing. The entire amount will likely be taxed at the taxpayer’s highest marginal tax rate. This amount is due in its entirety at the annual tax-filing deadline. If a large amount is due, there may also be additional underpayment fees tacked on by the IRS.
Some exceptions apply
Before you begin to worry about a surprise tax bill, consider your other options:
Tax-exempt debt forgiveness programs: There are a few programs that consider the student loan canceled debt tax-exempt. The two most common are for students that become public service employees and teachers. So when you have canceled debt, conduct a review to see if your employment complies with the possible tax exclusion.
Insolvency exclusion: The IRS provides a way to exclude a forgiven debt from taxable income if you can prove you are financially insolvent. The IRS defines “insolvency” as when a taxpayer’s total liabilities exceed his or her total assets. To claim this exclusion, an additional form is filed with your tax return. Make sure you can back up any claims you make, because the IRS may request to see proof.
IRS repayment plan: If you have a balance due as a result of the canceled debt and cannot pay it in full by the deadline, the IRS has payment plans available. There will be additional penalties, interest and possibly setup fees that will be added to the amount due. This is not a great option, but it is better than not paying the balance at all.
Even with the additional tax liability that is realized, debt relief is generally a good deal for most. The hardship comes if you are not prepared for how to handle the tax payment that becomes due. Before signing an agreement that relieves debt, it makes sense to review your situation to avoid any surprises on your tax bill.
