File a 2017 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 ½ months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.
October 15 – Corporations
File a 2017 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.
October 15 – Taxpayers with Foreign Financial Interests
If you received an automatic 6-month extension of time to report your 2017 foreign financial accounts to the Department of the Treasury, this is the due date for Form FinCEN 114.
October 15 – Social Security, Medicare and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in September.
October 15 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in September.
October 31 – Social Security, Medicare and Withheld Income Tax
File Form 941 for the third quarter of 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until November 13 to file the return.
October 31 – Certain Small Employers
Deposit any undeposited tax if your tax liability is $2,500 or more for 2018 but less than $2,500 for the third quarter.
October 31 – Federal Unemployment Tax
Deposit the tax owed through September if more than $500.
If you are an employee who works for tips and received more than $20 in tips during September, you are required to report them to your employer on IRS Form 4070 no later than October 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
October 15 – Individuals
If you have an automatic 6-month extension to file your income tax return for 2017, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.
October 15 – SEP IRA & Keogh Contributions
Last day to contribute to a SEP or Keogh retirement plan for calendar year 2017 if tax return is on extension through October 15.
It’s not as much fun as creating invoices, but the bills must be paid. Here’s how QuickBooks helps.
We’re in a bit of a transitional period with business bill-paying. Some paper bills still come via the U.S. Mail, however you may also be getting some through email. Others don’t come at all: You might get a reminder email, but you have to go to the vendor’s site to make a payment.
How do you keep track of it all so you don’t miss any due dates? You could record them on a calendar, but you’d still have to go back to the actual bill to retrieve the amount. But where is it? Is it online, in your email inbox, in a file folder, or hanging on the wall?
QuickBooks can organize this unpleasant process, saving time and helping you avoid confusion. Here’s how it works.
A 2-Step Process
QuickBooks divides your accounts payable tasks into two separate processes: entering bills and paying them. It requires some extra time upfront as you complete the first step, but streamlines the second so that the actual bill-paying only takes a few seconds.
To get started, click Enter Bills on QuickBooks’ home page to open a window like this:
Before you can pay a bill in QuickBooks, you need to create a record for it.
The toolbar for the Enter Bills window is not pictured in the image above, but you don’t need it yet. Rather, you start by clicking the down arrow in the field next to VENDOR and selecting the biller’s name from your list (or clicking if you haven’t yet created a record for that entity). The ADDRESS should fill in automatically, as should the date.
If you set up default payment TERMS in that vendor’s record, your preference should show in that field and the BILL DUE date should be correct. Enter the AMOUNT DUE and complete any of the optional fields that the transaction requires (REF. NO., DISCOUNT DATE, and MEMO).
Since this is a utility bill, the Expenses tab should be highlighted, and the amount you entered above should appear in it. Below that is the ACCOUNT field; open that list and choose the right one. Don’t worry about the CUSTOMER:JOB and BILLABLE fields. These will only be completed when you’re charging a customer for an expense or item.
Warning: If you’re not familiar with the concept of assigning accounts to transactions, please schedule some time with us. This is a critical designation that affects so many other areas of QuickBooks.
Saving Your Work
The toolbar from the Enter Bills window
Once you save your bill, you’ll be able to access it when it’s time to apply payment. How will you remember when it’s due, though? QuickBooks can remind you – or even pay it automatically. So, before you leave the Enter Bills window, click Memorize in the toolbar pictured above.
The Memorize Transaction window will open with your vendor already entered in the Name field. You’ll have three options here:
Add to my Reminders list. QuickBooks can add this bill to its list of Reminders. To ensure that you’ll see this every time you open the software and can make any changes necessary, open the Edit menu and click Preferences | Reminders | My Preferences. Click in the box in front of Show Reminders List when opening a Company file. Then click the Company Preferences tab (if you’re the administrator) and find the Bills to Pay row. Click the appropriate button to indicate whether you want QuickBooks to Show Summary or Show List, and enter the number of days before due date.
Do Not Remind Me. Just what it sounds like.
Automate Transaction Entry. You can only select this if the transaction will be exactly the same every time (except for the date). If the number of transactions will be limited, enter the Number Remaining. And tell QuickBooks how many Days in Advance To Enter.
If you choose the third option here, be very careful when you define the automation. You should really only do this if you’re an advanced user.
When you’re done, click OK to close the box, and save the bill.
Let us know if you want to schedule a session to go over any aspect of your accounts payable – or anything else in QuickBooks.
When you are attempting to save money for your children’s future education or your retirement, you may do so in a number of ways, including investing in the stock market, buying real estate for income and appreciation, or simply putting money away in education savings accounts or retirement plans.
Knowing how these various savings vehicles are taxed is important for choosing the ones best suited to your particular circumstances. Let’s begin by examining the tax nuances of IRA accounts.
Individual Retirement Account (IRA) – There are two types of IRA accounts—the traditional and the Roth—and even though they are both IRAs, there is a huge difference in their tax treatment.
Traditional IRA – Contributions to a traditional IRA are generally tax-deductible unless you have a retirement plan at work, and then the IRA contribution may not be deductible if you are a higher-income taxpayer. All of the earnings from a traditional IRA are tax-deferred, meaning they are not taxable currently but will be when funds from the account are withdrawn; since the contributions were tax-deductible, everything you withdraw from the traditional IRA will be taxable. An exception to that last statement is when you didn’t claim a deduction for money that you contributed to the IRA, either by choice or when the law didn’t allow a deduction. In this case, withdrawals from a traditional IRA would be prorated as partly taxable and partly tax-free.
Roth IRA – Roth IRA contributions are never tax-deductible, but the earnings are never taxable if the account meets a 5-year aging rule and the distributions begin after you reach age 59.5.
So, which is best? Well, that depends upon your particular circumstances. If you need the tax deduction to fund the IRA, then by all means use the traditional IRA. However, if you can afford to the make a contribution without the deduction, then the Roth IRA will be the best because everything is tax-free when withdrawn, usually at retirement.
Retirement Plans – The tax code provides for a variety of retirement plans, both for employees and for self-employed individuals. These include: 401(k) deferred compensation plans, Keogh self-employed retirement plans, simplified employee plans (SEP), tax-sheltered annuity (403(b)) plans – most commonly for teachers and employees of nonprofits), and government employee plans (457) plans. For the most part, the consequences of these arrangements are the same as for a traditional IRA, allowing the amount contributed to be excluded from income (deferred), and then the distributions are fully taxable when they are taken. However, 401(k) and 457 plans may have a Roth option, under which there is no income exclusion for the contributions but the distributions at retirement are tax-free. If individuals have used both methods, the non-Roth contributions are deferred, and the earnings are fully taxable.
Bank Savings – When money is put away into a bank savings account or CD, the earnings are fully taxable in the year earned. However, after the tax on the annual earnings is paid, the full balance in the account is available, without any further tax.
Short- and Long-Term Capital Gains – Capital gains refers to the gain from the sale of capital assets – typically stocks, bonds, and real estate. Short-term capital gains are taxed at ordinary tax rates, while long-term capital gains enjoy special lower rates. For lower-income taxpayers, there is actually no tax on capital gains; for very high-income taxpayers, the capital gains rate maxes out at 20%, whereas the top regular tax rate for high-income taxpayers is 37%. However, for the average taxpayer, the capital gains rate is 15%, which provides a significant savings over the regular tax rates. To qualify for long-term treatment, the capital asset must be held for a year and a day.
Education Savings Accounts – The tax code provides two tax-advantaged plans that allow taxpayers to save for the cost of college for each eligible student: the Coverdell Education Savings Account and the Qualified Tuition Plan (frequently referred to as a Sec. 529 Plan). Neither provides tax-deductible contributions, but both plans’ earnings are tax-deferred and are tax-free if used for allowable expenses, such as tuition. Therefore, with either plan, the greatest benefit is derived by making contributions to the plan as soon as possible—even the day after a child is born—to accumulate years of investment earnings and maximize the benefits.
However, there are different limitations for the two plans, in that only $2,000 per year per student can be contributed to a Coverdell account, while huge amounts can be contributed to Sec. 529 plans, limited only by the estate-planning issues of each contributor and each state’s cap on account contributions, which goes into six figures.
Health Savings Accounts – A health savings account (HSA) can generally be established by taxpayers only if they have high-deductible health plans. The contributions are tax-deductible, the earnings accumulate tax-free, and the distributions are tax-free if used for qualified medical expenses. When part of an employer-sponsored plan, HSA contributions are excluded from the employee’s wages. Once the account owner reaches age 65, taxable but penalty-free distributions can be taken, even if they are not used to pay for medical expenses or to reimburse the taxpayer for medical expenses previously paid for out-of-pocket. Thus, these plans can serve as a combination tax-free medical reimbursement plan and taxable retirement savings arrangement. The maximum annual contribution is inflation adjusted; for 2018, it is $3,450 for self-only coverage and $6,900 for family coverage. Like other tax-advantaged plans, the key is to allow the account to grow through tax-deductible contributions and the accumulated earnings.
Unqualified Withdrawals – Be careful about making unqualified withdrawals – those that are taken before reaching retirement age, in the case of retirement plans, and those taken for unqualified expenses, in the case of education savings accounts and health savings accounts. Doing so can result in costly tax ramifications and potential penalties.
Like all things tax, nothing is simple, and a myriad of rules apply to the foregoing arrangements, so please contact this office for more information or a planning appointment.
Unlike a C corporation, which itself pays the tax on its taxable income, an S corporation does not directly pay taxes on its income; instead, its income, losses, deductions, and credits are distributed across its shareholders’ individual tax returns on a pro rata basis. These distributions are not subject to self-employment (Social Security and Medicare) taxes. As a result, many S corporations ignore the requirement that each shareholder-employee must take reasonable compensation in the form of W-2 wages in exchange for services performed for the corporation. These wages are subject to Social Security and Medicare taxes (which the corporation and the employee generally split equally); the corporation is also responsible for paying the Federal Unemployment Tax (as well as any state unemployment taxes).
The Internal Revenue Code establishes that an officer of an S corporation is an employee of that corporation for Federal Unemployment Tax purposes. S corporations should not attempt to avoid paying this tax by treating their officers’ compensation as distributions rather than as wages.
This has been an issue for decades; in 1974, the IRS issued a ruling stating that, when a shareholder-employee fails to take a salary, or if that salary is unreasonable, an auditor should assert that the salary is unreasonable. The officer’s distributions will then be shifted to account for reasonable compensation, and he or she will be assessed the related employment taxes and penalties. At stake here are the employee’s 6.2% Social Security and 1.45% Medicare payroll taxes, the S corporation’s matching amounts, the Federal Unemployment Tax, and whatever state taxes happen to apply.
Who Is an Employee of the Corporation? – Generally, an officer of a corporation is considered an employee of that corporation. The fact that an officer is also a shareholder does not change the requirement that any payments made to that officer must be treated as wages. Courts have consistently held that S corporation shareholders who provide more than minor services to their corporation (and receive payment in return) are employees whose compensation is subject to federal taxes.
Tax regulations do provide an exception for officers who do not perform services or who perform only minor services. These officers are not considered employees.
What’s a Reasonable Salary? – The instructions for Form 1120S (“U.S. Income Tax Return for an S Corporation”) state: “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” There are no specific guidelines in the tax code regarding the definition of reasonable compensation. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of the individual cases. These are some factors that courts have considered when determining reasonable compensation:
The officer’s training and experience
The officer’s duties and responsibilities
The time and effort that the officer devotes to the business
The corporation’s dividend history
The corporation’s payments to non-shareholder employees
The timing and manner of the bonuses paid to key people at the corporation
The payments that comparable businesses have made for similar services
The corporation’s compensation agreements
The formulas that similar corporations have used to determine compensation
The problem here, of course, is that it is easy for the IRS to simply list contributing factors that courts have used when determining reasonable compensation and leave it to each corporation to quantify these factors and determine a reasonable salary—all while retaining the ability to challenge the selected amount later if an auditor decides that the compensation is not reasonable. The IRS has a long history of examining S corporations’ tax returns to ensure that reasonable compensation is being paid, particularly when a corporation pays no compensation to employee-stockholders.
New Issue For 2018 – The late-2017 tax reform added a new flow-through deduction (also referred to as the “199A deduction” after the section of the tax code that describes it). This deduction applies to S corporations (among many other business entities) and adds another level of complexity to the determination of reasonable compensation.
The wages of an S corporation’s employee-stockholder are NOT treated as qualified business income (QBI) that is eligible for the individual’s 199A deduction. However, the corporation deducts these wages as a business expense when it calculates the profit that passes through to the shareholder as QBI on Schedule K-1. Thus, larger wages mean less K-1 flow-through income (QBI) and thus a smaller 199A deduction (as that is equal to 20% of QBI). In this case, S corporations tend to minimize stockholders’ salaries in order to maximize flow-through income; this strategy increases the employee-stockholder’s 199A deduction and lowers the payroll taxes for both the corporation and the employee-stockholder.
If married taxpayers who are filing a joint return have 1040 taxable income that exceeds $315,000 (or $157,500 for those with other filing statuses), the 199A deduction begins to be subject to a wage limitation. Once the 1040 taxable income for married taxpayers filing jointly exceeds $415,000 (or $207,500 for those with other filing statuses), the wage limitation is fully phased in. In that event, the 199A deduction becomes the lesser of the wage limitation or 20% of the QBI; if the wage limitation is zero, there is no 199A deduction.The wage limitation comprises the wages that the corporation paid, including those paid to stockholders, plus the unadjusted cost of the qualified property that the corporation owned and used during the year. To be more specific, the wage limitation is the larger of
50% of the wages that the corporation paid or
25% of the corporation’s paid wages plus 2.5% of the unadjusted cost of its qualified property.
Thus, for those high-income shareholders for whom the wage limitation applies, if the corporation pays no wages and has no qualified property, the shareholder will not have a 199A deduction.
If an S corporation is a specified service trade or business, the 199A deduction phases out; for married taxpayers who are filing a joint return, it phases out at taxable incomes between $315,000 and $415,000 (for those with other filing statuses, it phases out between $157,500 and $207,500). The IRS describes specified service trades or businesses are those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, financial services, and brokerage services, as well as those for which reputation and/or skill are contributing factors (for more details on what constitutes an specified service trade or business, please give this office a call).
Thus, if married taxpayers who are filing jointly have taxable income in excess of $415,000 (or $207,500 for those with other filing statuses), they receive no benefit from the wage limitation; therefore, they also tend to minimize their reasonable compensation in order to minimize their FICA taxes.
Of course, taxpayers cannot pick and choose a particular level of reasonable compensation to minimize their taxes or maximize their deductions; therein lies a trap. Taxpayers instead should consider all the factors related to reasonable compensation. However, pulling all the data together to support such a determination can be difficult and time-consuming. Some commercial firms have the necessary data and resources to properly apply the various factors mentioned in this article so as to determine the proper level of reasonable compensation; this can provide backup in the case of an IRS challenge.
Please give this office a call if you have questions related to reasonable compensation for S corporation shareholders or how it impacts your specific tax situation.
Articles about the taxability and deductibility of surrogacy fees are rare because there are far fewer surrogacies than with conventional births. Surrogacy is a legal arrangement in which a surrogate mother, new parents and (often) a surrogacy agency enter into a binding contract. In the event of a breach of that contract, any party can be held to the terms of the agreement.
Tax Treatment for the Surrogate – The Internet contains a wide variety of opinions related to the taxability of the surrogacy fee to the surrogate mother. Some authors classify this fee as a gift; however, a U.S. Supreme Court decision (Commissioner vs. LoBue, Philip (1956, S Ct)) stated that, for tax purposes, gifts must be made out of detached or disinterested generosity. Any payment that parents make to a surrogate mother cannot reasonably be considered detached or disinterested, so surrogate fees are not gifts.
On the other hand, many surrogacy agencies advise their clients that surrogacy payments are for pain and suffering and thus are exempt under Sec 104 of the Internal Revenue Code (IRC). This section is about “compensation for injury or sickness”; however, the term “pain and suffering” does not appear anywhere in that section. Surrogacy does not meet the definition of an excludable physical injury under IRC Sec 104 such as an injury associated with a car accident, bungled surgery or other accident. Thus surrogacy fees do not fall under the compensation exclusion for injury or sickness.
IRC Sec 61 states, “Except as otherwise provided, gross income means all income from whatever source derived.” There is no exception in the code for surrogacy fees, so such fees are considered taxable income for the surrogate mother. To complicate matters, the surrogate mother is providing a personal service and thus may be subject to the self-employment (Social Security and Medicare) taxes in addition to income tax if such a fee is received in the course of business.
To be subject to Social Security taxes, the surrogacy arrangement would have to rise to the level of a trade or business. The determination of whether that is the case is dependent on the facts and circumstances of the individual surrogacy. For instance, if a surrogate has entered into such an arrangement previously or intends to do so again, the fee will likely be considered self-employment income. However, if the surrogacy is a one-time activity, an argument could be made that this act is not a business—in which case the surrogacy fee would not be subject to Social Security taxes.
If the fee is considered self-employment income, it may be offset with benefits that are available to any self-employed taxpayer, including the ability to deduct health insurance above the line rather than as an itemized deduction and the ability to make deductible contributions to a self-employed retirement plan or IRA. Although there are not many deductible business expenses in such a situation, the legal or other costs associated with drafting and executing the surrogacy contract are deductible.
A self-employment surrogacy activity would fall into the category of a specified service business for the purposes of the new, self-employed and pass-through business deduction that will be available in 2018 through 2025. Thus, provided that the surrogate mother’s return has taxable income that does not exceed $157,500 (or $315,000 if she is married and files a joint return with her spouse), she would be eligible for the new IRC Sec 199A pass-through deduction, which is equal to 20% of the net self-employment income. However, this deduction phases out at taxable incomes between $157,500 and $207,500 (or $315,000 and $415,000 if filing jointly). The income from self-employment surrogacy can be used to determine the earned income tax credit if a surrogate mother is otherwise qualified.
Unfortunately, tax novices on the Internet are creating their own interpretations of the tax code, and many of them are attempting to justify their preferences instead of instead of describing the actual rules.
As a result, many – dare we say, most – surrogate mothers are not reporting their surrogacy income. The IRS is not catching up with them because neither the parents nor the agencies are issuing 1099-MISC forms to surrogate mothers. The parents are under no obligation to issue a 1099-MISC because, for them, the payment is not related to a business. The agency, on the other hand, is a business, so if the surrogacy fee passes through it, the agency is obligated to issue a 1099-MISC.
Tax Treatment for the Parents
Surrogate mothers’ expenses are not specifically addressed in the IRC or in other regulations. Under current tax law, the only place that a surrogate fee could be deducted is as a medical expense. However, consider the following:
Medical deductions are allowed only for the medical care of the taxpayer and his or her spouse and dependents (IRC Sec 213(a)).
These expenses must be for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body (IRC Sec 213(a)(1)(A)).
A surrogate mother is, by definition, neither the taxpayer nor the taxpayer’s spouse, and she is typically not a dependent, either. An unborn child is also not a dependent (Cassman v. United States, 31 Fed. Cl. 121 (1994)). Thus, medical expenses paid to a surrogate mother and her unborn child do not qualify for a medical deduction.
This fee also cannot be construed as a treatment for a female taxpayer’s inability to conceive.
Thus, the new parents cannot deduct the surrogacy fee or any agency fees, legal fees, and medical expenses for the surrogate mother and unborn fetus.
The most recent data from the IRS on individual tax returns indicates that of 131 million returns filed, about 5 million were expected to be amended. This comes to less than 4 percent, but that projection still affects a significant number of taxpayers. Filing an amended tax return can be a hassle that you definitely want to avoid if possible. But there are some situations where you’ll have to do so, and it’s prudent to seek out the help of a tax advisor who can guide you through the process. Here’s why you may need to file an amended tax return.
1. You made a math or data entry mistake and didn’t realize it until after you submitted your tax return.
For example, you added up your charitable deductions, and after filing your return, you realize you added them up incorrectly, and the difference was sizeable. Filing an amended return can correct that math error and get a refund.
Perhaps you were entering your gross income from your self-employed business into your software while it was late and you were tired, and you inadvertently transposed the numbers and entered the gross income as $78,000 when it was really $87,000. You will need an amended return to correct that error.
However, you would not usually amend a return if you incorrectly entered W-2 income since the IRS receives a copy of the W-2 and will compare it with what you reported and if there was an error, they will automatically make a correction and send you a bill or a refund as the case might be. The IRS website instructs taxpayers not to amend a return in such a situation.
The statute of limitations for refunds is three years for the due date the tax return and if the IRS has not automatically made the correction and you have a refund coming don’t let the statute of limitations expire before filing an amended return. That holds true for any situation were an amended return will result in a refund.
2. You used an incorrect filing status.
Single parents, caregivers of elderly parents, and recently married or divorced people often make the mistake of using “Single” status when it’s the wrong one. “Heads of Household” miss out on crucial tax benefits, while married people will generally need to use “Married Filing Separately” if they don’t wish to file a joint return with their spouse. Because filing status affects so many elements of your tax return, you need to file an amended return to pay additional taxes you owe or receive a refund once the correct one is used.
3. You didn’t realize that there was a tax benefit you qualified for, and you’d like to claim it now.
There are many frequently overlooked tax benefits a tax professional would be aware of that the average DIY person wouldn’t, such as the ability for most individuals and small business owners to make pension and profit-sharing contributions in a new year before the tax-filing deadline and still have it count for the current filing season.
This also works in reverse in that people accidentally claim benefits they weren’t actually entitled to. Often, the best way to know for sure is to consult a tax professional.
4. You had investing activities that affect your tax return.
Typically, you don’t realize a capital gain or loss until you actually sell an asset. But if securities become worthless, this results in a capital loss that needs to be reported the year it was deemed worthless, and not the year you discovered the fact. If this security was deemed worthless a long time ago, you may have to amend prior year returns to account for the capital loss.
This can be significant since you are limited to deducting $3,000 in capital losses from all of your other income and result in capital loss carryovers that last several years. If you have any other investment losses that were forgotten or miscalculated on your original tax return, filing an amended return is the next logical stop to ensure your carryovers are done correctly for future tax returns.
5. You received tax forms after filing your tax return.
If you were due a W-2 or 1099 form, you might not receive it when you’re initially preparing your taxes. It could be a surprise corrected form or the payer was just late sending it to you. But if you already filed your tax return, then got additional forms later on, amending your tax return becomes inevitable.
Amending your tax return can be a cumbersome process, especially if you’re self-employed and/or have a great deal of investing activity. Asking a tax professional to assist you with filing amended returns can eliminate the headaches that come with the process. Many even offer a free review of self-prepared returns and ask the right questions to determine if it’s worth it to amend this year’s return and any prior years’. You may also have to amend your state tax return(s), which can grow more complex if your residency is or was multistate.
Very few people think that starting a new business is easy. But at the same time, there are few first-time entrepreneurs who realize just how involved things are from the moment you start trying to bring that idea that previously only existed in your head into the real world.
There’s a massive amount of commitment required, even before your business technically exists at all. This is okay, because as the old saying goes, “anything worth doing is worth doing right.”
In fact, there are a number of key steps that you need to take BEFORE you’ve even started the business of your dreams that you’ll absolutely want to pay close attention to moving forward.
Identify the “Why” of It All
First thing’s first: Before you do anything else, you need to determine why you feel so compelled to start this particular business at this particular time.
Is it just because you think you have a great, sure-fire idea that is going to generate a lot of money? If so, you may want to take a step back… you’ll likely be disappointed. But if it’s because this will allow you to genuinely do something you love, and something that you think will make an impact on the lives of a lot of people, then, by all means, push ahead.
Identify the NEED
Next, you need to verify that this idea of yours is actually a viable one in the first place; essentially, you have to confirm that there is a genuine need in the marketplace for a product or service like the one you want to create.
DO NOT allow yourself to become “a solution in search of a problem.” Make sure that people are asking for a business like yours and that need is currently going unfulfilled.
DON’T Quit Your Day Job
Building a successful business is not something that happens overnight. This often takes years of planning and hard work, not to mention many mistakes along the way.
All of this is to say that if your ability to quit your day job and focus on your new business full time depends on an instant success… don’t quit your day job just yet.
DON’T Neglect Your Family
Yes, starting a business is something that requires a huge amount of your time. Yes, you need to devote every ounce of space in your brain and every free moment to this goal. But do not, under any circumstances, let that come at the expense of your loved ones and those around you.
You’re going to need quite a bit of support to get your new business up and running. If you neglect your family now, you’re not going to have that support later.
The Art of Writing a Business Plan
At this point, you can start working on making your vision a reality. This part of the journey always begins in the same basic way: writing a realistic, actionable business plan that will guide your every move in the future.
With a business plan, you really do need to be as specific as humanly possible. You know where you’re starting, and you know where you want to end up. The job of a business plan is to connect those dots by way of a series of smaller, logical and achievable steps. It’s essentially the roadmap you’ll use to shine a light through the darkness, guaranteeing that you’re always moving in the right direction (and that this direction is forward).
The Entrepreneur’s Bet
As you write your business plan, you’ll also have to make what is often referred to as “The Entrepreneur’s Bet.” Essentially, you need to figure out how much money a business like yours needs to make in order to become profitable.
You also need to acknowledge that, once again, your business is very unlikely to be successful enough right away to have this bet pay off in the short term. A lot of new businesses are operating at a loss at first — that’s okay. But this is yet another step that confirms the path you’re on is actually viable and it’s one that you absolutely do not want to skip.
The Myth of the “One Size Fits All” Approach
At this point, it’s also important to acknowledge that there really is no one “right way” to start a business. The choices you have to make will be influenced by a wide range of different factors, many of which are unique to your industry, your business plan and even the vision that you’re starting with.
Case in point: You need to review all local, state and federal regulations pertaining to what you’re trying to accomplish. Different places have different laws, and ignorance is not an excuse for breaking them. Factors like how to become compliant, what standards a product has to meet and more will all be influenced by these regulations, and they will impact a lot of the steps on your business plan as well.
It’s Time to Start Thinking About Technology
Once this foundation is all in place, it’s time to start thinking about the tools you’ll need to bring your new business into the world. These days, that involves a lot more technology than people often realize.
This is another one of those steps that will obviously be impacted by the type of business you’re starting. A local brick-and-mortar retail store will obviously have different technological needs (point of sale systems, inventory management equipment, etc.) than an online marketing agency (graphic design software, collaboration tools, etc.).
But when built properly, your technology strategy and your business strategy are essentially one and the same. They feed into one another, and your IT helps generate the momentum you need to continue to grow and expand while remaining agile as well. It’s far too important to neglect.
Choosing the Right Business Entity
This is another important step you don’t want to skip because it dictates things like taxes, paperwork, liability and other legal elements of your business.
One of the most common types of business entities is the limited liability structure, or LLC. This is because it provides you with the level of flexibility you need right now, coupled with the protection you’ll need from a personal liability standpoint.
But that isn’t a guarantee that this is right for you. Other structures like sole proprietorships, partnerships, S corporations and C corporations all have their fair share of advantages and disadvantages. You need to pick the right one today or you’ll open yourself up to a world of problems tomorrow.
Finding the Help You Need (and You WILL Need It)
Finally, as your journey toward true entrepreneurship is about to begin in earnest, you need to understand two of the core pillars of successful business ownership:
You do not know everything, even if you think you do.
You cannot do it all alone, even if you think you can.
The difference between failed and successful business owners often comes down to the acknowledgment of these two points.
Rather than do a poor job at a business task for which you don’t have the skills, don’t be afraid to hire someone who does have those skills. Rather than guess at answers to questions, find the right advisors and mentors to guide you. Reach out and find the people who are willing to assist you and don’t be afraid to share your vision with them.
You WILL need help and there are people who are absolutely willing to stand by your side. You just have to want to look for them.
In the End
It’s fair to say that starting a new business is harder than you probably thought it was going to be, especially when you consider the sheer amount of time you’ll need to devote to the steps outlined above. But provided that you have a realistic vision and a passion that cannot be extinguished, success is no longer a question of “if” but “when.”
The stakes are high and the risk is higher, but the rewards are even greater if you persevere. Never let anyone tell you otherwise.
Taxpayers with disabilities may qualify for a number of tax credits and other tax benefits. Parents of children with disabilities may also qualify. Listed below are several tax credits and other benefits that are available if you or someone else listed on your federal tax return is disabled.
Increased Standard Deduction – Tax reform substantially increased the standard deduction for 2018 to $12,000 for single filers, $18,000 for those filing as head of household and $24,000 for married filing joint returns. Tax reform also retained the standard deduction add-on for taxpayers who are legally blind. Thus, if a taxpayer is filing jointly with a blind spouse, they are able to add an additional $1,300 to their standard deduction; if both spouses are blind, the add-on doubles to $2,600. For other filing statuses, the additional amount is $1,600. While being age 65 or older isn’t a disability, it should be noted that the “elderly” add-on of $1,300 or $1,600, depending on filing status, has also been retained. These add-ons apply only to the taxpayer and spouse, and not to any dependents.
Exclusions from Gross Income – Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income (i.e., they are not taxable). Amounts received for Social Security disability are treated the same as regular Social Security benefits, which means that up to 85% of the benefits could be taxable, depending on the amount of the recipient’s (and spouse’s, if filing jointly) other income.• Impairment-Related Work Expenses – Individuals who have a physical or mental disability may deduct impairment-related expenses paid to allow them to work.
• Employee – Although the tax reform eliminated most miscellaneous itemized deductions, it retained the deduction for employees who have a physical or mental disability limiting their employment. As a result, they can still deduct, as an itemized deduction, the expenses that are necessary for them to work.
• Self-employed – For those who are self-employed, impairment-related expenses are deductible on Schedule C or F.
Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at the individual’s place of work as well as other expenses in at the place of work that are necessary for the individual to be able to work. An example is when a blind taxpayer pays someone to read work-related documents to the taxpayer.
Financially Disabled – Under normal circumstances, one must file a claim for a tax refund within 3 years of the unextended due date of the tax return. For example, for a 2015 tax return, the due date was April 15, 2016, which is the date when the 3-year clock started running. Thus, the IRS will not issue refunds for an amended 2015 or a late-filed original 2015 return submitted to the IRS after April 15, 2019. However, if a taxpayer is “financially disabled,” the time periods for claiming a refund are suspended for the period during which the individual is financially disabled.An individual is financially disabled if they are unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.
For a joint income tax return, only one spouse has to be financially disabled for the time period to be suspended. However, financial disability does not apply during any period when the individual’s spouse or any other person is authorized to act on the individual’s behalf in financial matters.
Earned Income Tax Credit – The EITC is available to disabled taxpayers and to the parents of a child with a disability. To be eligible for the credit, the taxpayer must receive earned income, which generally is wages or self-employment income. However, if an individual retired on disability, taxable benefits that were received under their employer’s disability retirement plan are considered earned income until the individual reaches a minimum retirement age. If the disability benefits being received are nontaxable, as would be the case if the disabled individual paid the premiums for the disability insurance policy from which the benefits come, then the benefits are not considered earned income. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children but are older than 24 and younger than 65 may qualify for the EITC. Additionally, if the taxpayer’s child is disabled, the qualifying child’s age limitation for the EITC is waived. The EITC has no effect on certain public benefits. Any refund that is received because of the EITC will not be considered income when determining whether a taxpayer is eligible for benefit programs such as Supplemental Security Income and Medicaid.
Child or Dependent Care Credit – Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse may be entitled to claim this credit. For children, this credit is usually limited to the care expenses paid only until age 13, but there is no age limit if the child is unable to care for himself or herself.Special Medical Deductions When Claiming Itemized Deductions – In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents. They include:
• Impairment-Related Expenses – Amounts paid for special equipment installed in the home, or for improvements, may be included as medical expenses deductible as part of itemized deductions, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may only be partly included as a medical expense.
• Learning Disability – Tuition paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses eligible for the medical deduction when itemizing deductions. A doctor must recommend that the child attend the school. Fees for the child’s tutoring recommended by a doctor and given by a teacher who is specially trained and qualified to work with children who have severe learning disabilities might also be included.
• Drug Addiction – Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts, including the cost of the dependent’s meals and lodging, are included as medical expenses for itemized deduction purposes.
Exclusion of Qualified Medicaid Waiver Payments – Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income. Qualified foster care payments are amounts paid under the foster care program of a state (or political subdivision of a state or a qualified foster care placement agency). For more information, please call.
ABLE Accounts – Qualified ABLE programs provide the means for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life.Federal law authorizes the states to establish and operate an ABLE program. Under these ABLE programs, an ABLE account may be set up for any eligible state resident – someone who became severely disabled before turning age 26 – who would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec. 529 plans. The main purpose of ABLE accounts is to shelter assets from the means testing required by government benefit programs. Individuals can contribute to ABLE accounts, subject to per-account gift tax limitations (maximum $15,000 for 2018). The 2017 tax reform added a provision allowing working individuals who are beneficiaries of ABLE accounts to contribute limited additional amounts to their ABLE accounts, beginning in 2018. Distributions to the disabled individual are tax-free if the funds are used for qualified expenses of the disabled individual. These accounts are established at the state level.
For more information on these benefits available to disabled taxpayers or dependents, please give this office a call.
As part of its recent tax reform, Congress included a new 20% deduction of pass-through income for trades or businesses other than C-corporations. This pass-through income is referred to as qualified business income (QBI); for trades or businesses, it generally includes bottom-line profits, and for S-corporations and partnerships, it includes K-1 flow-through income. This new law was added as tax code section 199A, so the deduction is often referred to as the 199A deduction.
Congress added this deduction to benefit sole proprietors, partners, and S-corporation shareholders (among others); the goal is to allow for benefits equivalent to the substantial tax-rate cut that the same reform provided to C-corporations. However, this new deduction is not applied uniformly to all types of trades and businesses, for which there are two categories:
qualified trades or businesses (QTBs) and
specified service trades or businesses (SSTBs).
This deduction is limited by the taxpayer’s filing status and 1040 taxable income, and it differs depending on whether the business is a QTB or a SSTB. Although the main purposes of this article are to define SSTBs and to describe how they are taxed differently from QTBs, if one is to understand why an SSTB may not qualify for the deduction, whereas a QTB might qualify, it is necessary to first understand the basic differences between the deductions for SSTBs and QTBs.
Apparently, Congress considered the income from service businesses to be akin to wages and didn’t want taxpayers who provide services to have the benefit of the 20% deduction instead of paying taxes on that income as ordinary wages. This change was primarily aimed at deterring high-income people from becoming independent contractors or setting up pass-through businesses so that they could turn their wages into business income and get the 20% deduction. The result is a phase-out of the deduction for high-income taxpayers who have income from SSTBs.
The table below provides an overview of the tax treatment for each type of business. As you will note, the SSTB deduction phases out for higher levels of 1040 taxable income, but the QTB deduction does not. This type of phase-out is called a wage limitation.
Example of How to Use the Table: Two married people who are filing jointly have 1040 taxable income (before the 199A deduction) of $469,000; they also have a SSTB. They would first select the box with their filing status (“Married Filing a Joint Return”), then move to the right to the correct range of 1040 taxable income (which is the adjusted gross income after removing either the standard deduction or the itemized deductions; in this case, “Greater than $415,000”), and finally follow that column down to the cell aligned with the correct type of business (“SSTB”). In this case, the trade or business does not qualify for the 199A deduction.
Taxpayer’s Filing Status
Taxable Income (Before the 199A deduction)
Married Filing a Joint Return
Less Than $315,000
Between $315,000 and $415,000
Greater than $415,000
Other filing Statuses
Less Than $157,500
Between $157,500 and $207,500
Greater than $207,500
Type of Business
The 199A Deduction
20% of QBI
Deduction phased out
No deduction allowed
20% of QBI
Wage limitation phased in
Deduction equal to the lesser of 20% of QBI or the wage limitation
Specified Service Trades or Businesses (SSTBs)
The IRS describes SSTBs as being in the following fields:
Health – The health category includes the provision of services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and similar health care professionals who provide medical services directly to patients. However, this excludes the provision of services that are not directly related to a medical field, even when those services purportedly relate to the health of the service recipient. For example, this category excludes the operation of health clubs or spas that provide physical exercise or conditioning; health-related payment processing; or the research, testing, manufacture, and/or sales of pharmaceuticals or medical devices.
Law – The law category refers to the provision of services by lawyers, paralegals, legal arbitrators, mediators, and similar professionals in their capacities as such. The category excludes the provision of services that do not require skills unique to the field of law, such as the printing, delivery, and stenography services provided to lawyers.
Accounting – The accounting category includes the provision of services by accountants, enrolled agents, tax-return preparers, financial auditors, and similar professionals in their capacities as such. This category is not limited to services that require state licensure as a certified public accountant. This category also excludes payment processing and billing analysis.
Actuarial Science – The actuarial science category refers to the provision of services by actuaries and similar professionals in their capacities as such. This category only includes the services provided by analysts, economists, mathematicians, and statisticians if they are engaged in analyzing or assessing financial costs due to risk or uncertainty.
Performing Arts – The performing arts category includes the performance of services by individuals who participate in the creation of the performing arts, including actors, singers, musicians, entertainers, directors, and similar professionals in their capacities as such. It excludes services that do not require skills that are unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities. Similarly, the dissemination of video or audio of performing-arts events to the public is not considered to be a service in the performing arts.
Athletics – The athletics category refers to the performance of services by individuals who participate in athletic competitions, including athletes, coaches, and team managers in sports such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and field, billiards, and racing. This category excludes the provision of services that do not require skills that are unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events. It also excludes the provision of services by persons who disseminate video or audio of athletic events to the public.
Consulting – The consulting category refers to the provision of professional advice and counsel to clients to assist them in achieving goals and solving problems. Consulting professionals include lobbyists and similar professionals, but this category focuses on their capacities as such and excludes the minor consulting that accompanies the sale of a product. A trade or businesses cannot be an SSTP if less than 10% of its gross receipts are from consulting (or 5% if the company’s gross receipts are greater than $25 million).
Financial services – The category of financial services applies to services that are typically performed by financial advisors and investment bankers, including the following financial services: managing wealth; advising clients with respect to their finances; developing retirement and wealth-transition plans; providing advisory and other services regarding valuations, mergers, acquisitions, dispositions, and restructurings (including in title 11 bankruptcies and similar cases); and raising financial capital through underwriting or by acting as a client’s agent in the issuance of securities. This includes the services provided by financial advisors, investment bankers, wealth planners, retirement advisors, and similar professionals but excludes banking services such as deposit-taking or loan-making.
Brokerage Services – The brokerage services category includes services in which a person arranges transactions between a buyer and a seller with respect to securities and in exchange for a commission or fee. This includes services provided by stock brokers and similar professionals but excludes services provided by real estate or insurance agents and brokers.
Reputation or Skill – The original legislation’s list of SSTBs included trades or businesses for which the principal asset was the reputation or skill of one or more of employees or owners. However, it was unclear if this meant, for example, that a self-employed plumber who provided his skill to the business would be eligible for the 199A deduction. The taxpayer-friendly interpretation of these tax regulations has generally defined “reputation and skill” to mean:(1) The receipt of income in exchange for endorsing products or services for which the individual provides endorsement services;
(2) The receipt of licensing income in exchange for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbol associated with that individual’s identity; or
(3) The receipt of appearance fees or income (including fees or income paid to reality performers who appear as themselves on television, social media, or other forums; radio, television, and other media hosts; and video game players).
The amount of pass-through deduction that is ultimately available due to an SSTB is entirely dependent upon the taxpayer’s 1040 taxable income. Thus, in some cases, pension contributions and the expensing of business assets can lower a taxpayer’s taxable income enough that he or she benefits from an increase in the pass-through deduction. In this scenario, married couples who are not living in community-property states could benefit from filing separately rather than jointly.
If you have questions related to whether your business qualifies for this new deduction, whether it is classified as an SSTB, or how SSTB income fits into your overall tax picture, please give this office a call.