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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please note: Our offices will be closed on July 16 and 17 for Employee Appreciation Days.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please note: Our offices will be closed on July 16 and 17 for Employee Appreciation Days.
If you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS. It may be a hobby.
The hobby loss rules
Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure these pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.
If you have not earned a profit from your business in three out of five consecutive years, including the current year, you will bear the burden of proof to show that the enterprise is not merely a hobby. If the profit test can be met, the burden then falls on the IRS. In either case, the agency looks at factors such as the following to determine whether the activity is a business or a hobby:
Dangers of reclassification
If your enterprise is reclassified as a hobby, the loss from the activity may not be used to offset other income. You may write off certain expenses related to the hobby, but only to the extent of income the hobby generates.
Contact your business advisor for questions on treatment or reporting of any activities potentially subject to hobby loss rules.
When planning for the future, owner-employees face a variety of distinctive tax challenges and advantages, depending on whether their business is structured as a partnership, limited liability company (LLC) or corporation. It is important to be aware of how the divergent entity types may apply to your particular situation.
If you are a partner in a partnership or a member of an LLC that has elected to be disregarded or treated as a partnership, the entity’s income flows through to you (as does its deductions). This income will likely be subject to self-employment taxes — even if the income is not actually distributed to you. This means your employment tax liability typically doubles because you must pay both the employee and employer portions of these taxes.
Fortunately, the employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above-the-line, thus reducing adjusted gross income.
But flow-through income may not be subject to self-employment taxes if you are a limited partner or the LLC member equivalent. Flow-through income may be subject to the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT), depending on the situation.
For S corporations, even though the entity’s income flows through to you for income tax purposes, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Keeping your salary relatively, but not unreasonably, low and increasing your distributions of company income (which generally is not taxed at the corporate level or subject to employment taxes) can reduce these taxes. The 3.8% NIIT may also apply.
In the case of C corporations, the entity’s income is taxed at the corporate level and only income you receive as salary is subject to employment taxes, and, if applicable, the 0.9% Medicare tax. Nevertheless, if the overall tax paid by both the corporation and you would be less, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which are not deductible at the corporate level, are taxed at the shareholder level and may be subject to the 3.8% NIIT).
The entity type that best serves your company’s needs may change over time as you move through divergent business life-cycle stages. Consequently, a routine review of your entity type is advised. Please contact us for help identifying the ideal entity type, or other business strategies, appropriate for your situation.
If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. To secure tax-advantaged treatment for your business and your employees, it is critical to comply with IRS rules.
Reasons to Reimburse
While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees will not be able to benefit from the deduction. Why?
It is likely that some employees do not itemize. And those who do may not have enough miscellaneous itemized expenses to exceed two percent of adjusted gross income; a requirement for the excess to be deducted.
On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements — (also subject to a 50% limit for meals and entertainment), and they are excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.
Per Diem Method
The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)
The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.
You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.
Accountable Plan
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:
If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
Every business has some degree of ups and downs during the year; however, cash flow fluctuations are much more intense for seasonal businesses. If your company defines itself as such, it’s important to optimize your operating cycle to anticipate and minimize shortfalls.
A high-growth example
To illustrate: Consider a manufacturer and distributor of lawn-and-garden products such as topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.
The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. So the business begins amassing product in the fall, but curtails operations in the winter. In late February, product accumulation continues, with most shipments going out in April.
At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company until customers pay their bills around June. Then, the company counts inventory, pays remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.
The power of projections
Sound familiar? Ideally, a seasonal business such as this should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough — especially for high-growth companies.
So, like many seasonal businesses, you might want to apply for a line of credit to avert potential shortfalls. To increase the chances of loan approval, compile a comprehensive loan package, including historical financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).
More important, draft a formal business plan that includes financial projections for next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. You need to develop budgets, systems, processes and procedures ahead of the peak season to effectively manage your operating cycle.
Distinctive challenges
Seasonal businesses face many distinctive challenges. Please contact your business advisor about overcoming these obstacles and strengthening your bottom line.
The U.S. Citizenship and Immigration Services (USCIS) has released a revised version of the Form I-9 (Employment Eligibility Verification). Employees must begin using the new version to verify a new hire's identity and work authorization by September 18, 2017. In the meantime, employers have the option of using the outgoing version, which is dated 11/14/16.
What is different in the new version?
Revisions to the instructions: Relatively minor revisions, such as changing the name of the Office of Special Counsel for Immigration-Related Unfair Employment Practices to its new name, Immigrant and Employee Rights Section.
Revisions to the list of acceptable documents:
What is Form I-9?
Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens.
Both employees and employers (or authorized representatives of the employer) must complete the form. On the form, an employee must attest to his or her employment authorization. The employee must also present his or her employer with acceptable documents evidencing identity and employment authorization. The employer must examine the employment eligibility and identity document(s) an employee presents to determine whether the document(s) reasonably appear to be genuine and to relate to the employee and record the document information on the Form I-9. The list of acceptable documents can be found on the last page of the form. Employers must retain Form I-9 for a designated period and make it available for inspection by authorized government officers.
NOTE: State agencies may use Form I-9. Also, some agricultural recruiters and referrers for a fee may be required to use Form I-9.
The dog days of summer may be nearing an end, but the popularity of vacation rentals remains strong.
While homeowners across the Pikes Peak region happily offer their private residences as short-term rentals through online booking sites like Airbnb, HomeAway or VRBO, some may be unaware of the associated tax liability such as sales and lodging tax.
For example, the city of Colorado Springs states that “owners or property managers must collect both sales and lodging or LART tax for each stay of less than 30 days” and also requires a sales tax license to operate short-term rentals.
If you operate short-term rentals and have questions about local requirements or how to be compliant, please contact your tax advisor today!
The Colorado General Assembly has reinstated funding for the Senior Property Tax Exemption, also known as the Senior Homestead Exemption, for tax year 2017, payable in 2018.
Consequently, some senior citizens may qualify to have 50 percent of the first $200,000 of the actual value of their primary residence exempted from property taxation.
1) The qualifying senior must be at least 65 years old on January 1 of the year he or she applies;
2) The qualifying senior must be the property owner of record for at least 10 consecutive years prior to January 1; and
3) The qualifying senior must occupy the property as his or her primary residence and have done so for at least 10 consecutive years prior to January 1.
Applications for the Senior Property Tax Exemption are due no later than July 17.
Contact your financial adviser to see if you qualify.
“When should I apply for Social Security benefits?” is one of the most common questions baby boomers ask as they approach age 62, the age they become eligible to apply for early Social Security benefits. The answer is, “It depends.” Should you apply at age 62 and receive a reduced monthly benefit for a longer period of time? Should you wait until age 66, or even 70, and receive an increased monthly benefit for a shorter period of time?
The Social Security claiming decision is one of the most important financial decisions you will make in your lifetime. There are many variables to consider including health, life expectancy, current accumulated savings, anticipated inflation rates and lifestyle choices. Moreover, the monthly benefit amount is determined when a retiree begins claiming social security; the sooner you claim, the less you receive on a monthly basis.
On the flip side, there is a significant benefit to delay claiming as a retiree’s monthly benefit increases eight percent per year, until age 70. A chart posted by the Social Security Administration illustrates the positive month-by-month financial impact waiting has on a retiree’s benefit amount. However, no one can state with 100% accuracy that delaying the start of benefits until age 70 is the perfect choice. If a retiree holds off on claiming benefits until age 70 and then passes away at age 69, the retiree would have missed out on seven years of monthly benefit checks. If the retiree had claimed early benefits at age 62 then lived to age 95, he may have cost himself a tidy sum by receiving a reduced monthly benefit over 33 years of retirement.
What Happens if I Apply Early?
Under current law, baby boomers born between 1943 and 1954 are considered to be at full retirement age when they reach 66. A person who applies at age 62 will receive approximately 48 more checks than someone who waits until their full retirement age. Since the early filers will receive 48 extra monthly checks, actuaries prorate their benefit amount so that people who live to average life expectancy will receive the same dollar amount. The reduction in benefits caused by this early claiming decision is called the actuarial reduction. Under current law, actuarial reduction is set at 25%.
For example, Joe was born on October 1, 1954 and decides to claim his Social Security benefits on his 62nd birthday. Assuming he was entitled to a monthly benefit of $2,000 at age 66 (his full retirement age), Joe will receive a prorated monthly benefit of $1,500. This is the baseline amount that may be increased annually to account for inflation.
What Happens if I Apply After Retirement Age?
On the flip side of the early claiming decision, some retirees wait to apply for benefits until after attaining full retirement age. Those who reach full retirement age and continue to delay claiming their benefits will receive fewer checks than those who claim at full retirement age. To compensate for delaying the onset of their benefits, the retiree will receive delayed retirement credits. For baby boomers born between 1943 and 1954, this delayed credit equals 8% per year for each year benefits are delayed up to age 70. That equals a 32% return over a four-year time period. If you consider how difficult it is to get an 8% annual return on your investments in today’s financial world, you can see one of the possible compelling factors to delay the start of your Social Security benefits.
Let’s assume Joe decides to delay filing for his benefits until he reaches age 70, his decision to delay increases his monthly check to $2,640. Joe’s decision to wait eight years enhances his monthly retirement income by $1,140 ($2,640 at 70 vs. $1,500 at age 62).
It is important to keep in mind that Social Security benefits are reviewed each year to keep up with inflation through an annual cost of living adjustment. By delaying the claiming decision, the cost of living adjustment (COLA) will be computed on the larger benefit amount. In Joe’s case, instead of this inflation adjustment being added to the lower benefit amount of $1,500 (if he started claiming at 62), it will be added to the larger $2,640 benefit amount (if he started claiming at 70). The cost of living adjustments are assessed annually for the remainder of Joe’s retirement. If Joe is survived by his spouse, she will generally continue to receive Joe’s enhanced $2,640 monthly benefit, plus annual cost of living adjustments, until her death.
The financial reasons for delaying Social Security benefits can be compelling. Unless mitigating circumstances exist (e.g., poor health, short life expectancy, no spouse, high performing investment portfolios), most of us can benefit from receiving a higher monthly amount by waiting to claim benefits until age 70. Delaying benefits and drawing down other retirement income sources – or working longer – can position retirees to start collecting a larger monthly Social Security benefit and to receive better cost of living increases each subsequent year.
Interestingly, recent studies show a pronounced decline in claiming early benefits. Even so, more than a third of all workers claim Social Security benefits at age 62, which may not be in a baby boomer’s best interest with longer life expectancies and in the case of marginally funded retirement savings. Some would say that with recent advances in health care and emphasis on making healthy lifestyle choices, it is not unreasonable for boomers to outlive the average life expectancy and realize more financial benefit by waiting until age 70 to apply for Social Security.
What is Right for Me?
Uncertainty around the Social Security system as a whole, or fear of passing away prematurely, may drive retirees to claim benefits early. All of us have the right to file when we become eligible, but carefully calculating the options is highly recommended. Instead of being driven by the fear of the unknown, we may need to consider our health and life expectancy, finances, inflation rates and desired lifestyle to help us make a prudent choice.
The difference between a hurried claiming decision and a more thoughtful claiming decision could amount to hundreds of thousands of dollars over a lifetime. At Stockman Kast Ryan + Co., we invest in continuous education and specialized training in Social Security nuances. To further guide clients through the complex claiming decision, we also equip our tax advisors with the latest Social Security planning technology. We look forward to assisting when you are ready to plan this significant retirement step.
Mortgage interest rates are still at low levels, but they likely will increase as the Fed continues to raise rates. If you have been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that may help:
0% capital gains rate
If the child is in the 10% or 15% income tax bracket, instead of giving cash to help fund a down payment, consider giving long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets without incurring any federal income taxes on the gain, and you can save the taxes you would owe if you sold the assets yourself. State taxes may still apply.
As long as the assets are worth $14,000 or less (when combined with any other 2017 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion. Married couples can give twice that amount tax-free if they split the gift. And if you don’t mind using up some of your lifetime exemption ($5.49 million for 2017), you can give even more.
Low federal interest rates
Another tax-friendly option is lending funds. Currently, Applicable Federal Rates — the rates that can be charged on intrafamily loans without causing unwanted tax consequences — are still quite low by historical standards. But these rates have begun to rise and are also expected to continue to increase this year. Accordingly, lending money to a loved one for a home purchase sooner rather than later might be a good idea.
If you choose the loan option, it’s important to put a loan agreement in writing and actually collect payment (including interest) on the loan. Otherwise the IRS could deem the loan to be a taxable gift. Keep in mind that you will have to report the interest as income and that the loan recipient may be required to report the loan as debt on the mortgage application. However if the interest rate is low, the tax impact should be minimal.
If you have questions about these or other tax-efficient ways to help your child or grandchild buy a home, please contact your tax advisor.
Many companies use payroll software or a payroll service to issue checks based on a set pay period. Occasionally, the need to write a manual check arises – like paying an employee a special bonus or as a gift for a job well done. These off-cycle manual checks may trigger time-sensitive tasks for your accountant or payroll provider; notifying them prior to, or immediately after, is recommended.
Your accountant or payroll person will be able to clarify:
Paying company taxes on time avoids potential penalties and late fees that range from 2% to 15%.
Deadlines vary based on the receiving agency and amount of taxes you report. For an example, see “Federal Payroll Tax Deadlines” below.
Since each company is different, your accountant or payroll person may have more questions. Accordingly, keeping them in the loop will permit you to confidently issue an occasional manual paycheck; knowing you are better positioned to avoid potential pitfalls. If you have questions about your company’s tax deadlines or have other financial needs, please contact us at your convenience.
Federal Payroll Tax Deadlines
There are two types of Federal deposits made to the IRS: monthly schedule deposits and semiweekly schedule deposits. The schedule appropriate for your company depends on how many taxes you report, therefore determining when you schedule your deposits. If you report taxes of $50,000.00 or less, your monthly deposit is due on or before the 15th of the following month. If the 15th of a calendar month falls on a Saturday, Sunday, or legal holiday, the deposit is due by the next business day. If you report taxes of more than $50,000.00, you make semiweekly schedule deposits based on the following schedule: