It’s that time again and the holidays are fast approaching.  It’s a time of excitement, family, get togethers, and…finances!  For most, year-end is the time when we start thinking about taxes and our financial situation for the year.  December 31st is too late, but if you’re reading this now, you have a good chance to get things in order to make tax time and other year-end tasks less stressful.  Keep reading to see how to get ready!

Catch Up Your Bookkeeping

If you have some a back log of bookkeeping to do, now is the time to get caught up and ready for January.  Bookkeeping can be as simple as a spreadsheet if you’re a sole proprietor, or if you have LLC or Corporation, then you really should use software like Xero.  Don’t spend hours and hours on this.  Technology is come along away in the past 5 years so chances are “there’s an app for that”!

Having your books caught up will tell you how much income and expenses you have for the year.  Once you know that, then you’ll have a good idea of what your tax bill is going to look like.

Taxes

If you’re self-employed chanced are that you should be paying estimated tax payments–which are basically tax prepayments.  Reviewing how much you’ve paid in, and making any necessary catch up payments will help ensure you don’t have a large tax bill and will help you avoid any pre-payment penalties.

Additionally, you should review your net income to ensure you aren’t getting caught with a large unexpected tax bill.  Reviewing this will help you know what to expect when it’s time to file taxes.  And if you have extra cash, you can even pay some or all of your tax liability before you file your return.

 

Retirement Accounts

Saving for retirement has almost become a cliché term.  But did you know most business owners aren’t taking advantage of having their company pay themselves for retirement?  It’s one of the great tax planning tools that a business owner can use!  The company (which you own) pays into a retirement account for you.  So it’s like getting a double benefit!  Every business owner should be doing this.

There are many different options for retirement accounts.  Whether it’s a 401K, SEP, or SIMPLE IRA, find the one that works for you and get it started.

Re-evaluate Your Pricing & Costs

End of year is a great time to look at your pricing and costs.  It’s also a great time to review your Gross Profit % and make sure you’re charging enough for your products/services, or adjust your Cost of Goods Sold (COGS).  Keep in mind that generally speaking, your COGS should be no more than 30% of your revenue.  If it is, you could be bleeding cash and you may soon run out.  If you run out of cash, guess what?  The jig is up and you may be out of business.  In order to do this you’ll need to of course have your bookkeeping caught up so do that first, and then review these numbers.

 

…your COGS should be no more than 30% of your revenue

Review Your Systems and Processes

Finally, review your internal systems and processes.  Or, maybe this is the time where you commit to write them down.  Mapping out your systems and processes does a few things for you:

  1. You can discover inefficiencies that you may have never seen.  Writing something down  has the amazing effect of providing objectivity!  You can use paper or online tools like Google Docs or Evernote to do this.  That way, if you ever have staff taking over certain jobs, they’ll know what to do.
  2. It also prepares you to be able to hire staff and delegate tasks or jobs.  Doing this allows you to take on more of a managerial/strategy role and be less of a technician.  As business owners, we should all be moving away from the technical side of the business so we can work on the vision and growing the company.

 

As business owners we should all be moving away from the technical side of the business so we can work on the vision and growing the company

 

This isn’t meant to be an exhaustive list by any means, but it should get you started.  If you need help, just ask!  We’ve helped countless businesses do these things and we can offer down-to-earth advice that will make doing this, easy!

 

 

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More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements and attics are being transformed into the corporate headquarters of the newest entrepreneurs – home-based businesspeople.

And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for “service-oriented” businesses, the opportunities seem to be endless.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take time to learn as much about the market for any product or service as you can. Before you invest any time, effort, and money take a few moments to answer the following questions:

  • Can you describe in detail the business you plan on establishing?
  • What will be your product or service?
  • Is there a demand for your product or service?
  • Can you identify the target market for your product or service?
  • Do you have the talent and expertise needed to compete successfully?

Before you dive head first into a home-based business, it’s essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead, and then make improvements and adjustments along the road. While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

  • Are you a self-starter?
  • Can you stick to business if you’re working at home?
  • Do you have the necessary self-discipline to maintain schedules?
  • Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has the space for a business, and whether you can successfully run the business from your home.

Compliance with Laws and Regulations

A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.

Zoning

Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

  • Work certificate or a license from the state (your business’s name may also need to be registered with the state)
  • Sales tax number
  • Separate business telephone
  • Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.

Business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses

Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs, but make sure it meets yours as well.

Projecting Income

It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points and cash-flow statements. Use your marketing research to estimate initial sales volume.

Determining Cash Flow

Working capital–not profits–pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.

If you think a home-based business is in your future, then don’t hesitate to give us a call. We’ll set up your business and make sure you have the proper documentation system in place to satisfy the IRS.

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Welcome 2013! As the new year rolls around, it’s always a sure bet that there will be changes to the current tax law and 2013 is no different. From health savings accounts to retirement contributions here’s a checklist of tax changes to help you plan the year ahead.

Individuals

For 2013, the big news is the signing of the American Taxpayer Relief Act of 2012 (ATRA), which modified, made permanent or extended a number of tax provisions that expired in 2012 and 2011, for both individuals and businesses. Standard mileage, health savings account contribution limits, and foreign earned income exclusion, as well as most retirement contribution limits have been adjusted upward to reflect inflation as well.

Alternative Minimum Tax (AMT)
Exemption amounts for the AMT are now permanent and indexed for inflation and allow the use of nonrefundable personal credits against the AMT. Retroactive to January 1, 2012, exemption amounts are $50,600 (individuals) and $78,750 (married filing jointly). These amounts are indexed for inflation in 2013.

“Kiddie Tax” 
For taxable years beginning in 2013, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,000 (up from $950 in 2012). The same $1,000 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”. For example, one of the requirements for the parental election is that a child’s gross income for 2013 must be more than $1,000 but less than $10,000.

For 2013, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,000.

Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2013, a qualifying HDHP must have a deductible of at least $1,250 (up $50 from 2012) for self-only coverage or $2,500 (up $100 from 2012) for family coverage (unchanged from 2011) and must limit annual out-of-pocket expenses of the beneficiary to $6,250 for self-only coverage (up $200 from 2012) and $12,500 for family coverage (up $400 from 2012).

Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high deductible health plan (HDHP).

 

Self-only coverage. For taxable years beginning in 2013, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,150 (up $50 from 2012) and not more than $3,200 (up $50 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,300 (up $100 from 2012). 

Family coverage. For taxable years beginning in 2013, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,300 (up $100 from 2012) and not more than $6,450 (up $150 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,850 (up $200 from 2012).

 

Increased AGI Limit for Deductible Medical Expenses
In 2013, the amount individuals can deduct for medical expenses increases to 10 percent of AGI. The 7.5 percent threshold continues through 2016 for taxpayers aged 65 and older, including those turning 65 by December 31, 2016.

Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2013, the limitation is $360. Persons over 40 but less than 50 can deduct $680. Those over age 50 but not more than 60 can deduct $1,360, while individuals over age 60 but younger than 70 can deduct $3,640. The maximum deduction $4,550 and applies to anyone over the age of 70.

Medicare Taxes 
Starting in 2013, there will be an additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly). Also starting in 2013, there is a new Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,00 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts and self-employed individuals are all liable for the new tax.

Foreign Earned Income Exclusion
For taxable years beginning in 2012, the foreign earned income exclusion amount is $97,600, up from $95,100 in 2012.

Long-Term Capital Gains and Dividends
In 2013 tax rates on capital gains and dividends for taxpayers whose income is at or below $400,000 ($450,000 married filing jointly) remain the same as 2012 rates. As such, for taxpayers in the lower tax brackets (10% and 15%), the rate remains 0%. For taxpayers in the middle tax brackets, the rate is 15%. An individual taxpayer whose income is at or above $400,000 ($450,000 married filing jointly), the rate for both capital gains and dividends is capped at 20% (up from 15% in 2012).

Pease and PEP (Personal Exemption Phaseout) 
Pease (limitations on itemized deductions) is permanently extended for taxable years beginning after December 31, 2012 for taxpayers with income at or below $250,000 for single filers) and $300,000 for married filing jointly. The PEP (personal exemption phase-out) limitations was also reinstated, but with higher thresholds of $250,000 for single filers and $300,000 for married taxpayers filing joint tax returns.

Estate and Gift Taxes 
For an estate of any decedent during calendar year 2013, the basic exclusion amount is $5,120,000 (indexed for inflation–same as 2012). The maximum tax rate rises to 40% (up from 35% in 2012). The annual exclusion for gifts increases to $14,000 (up from $13,000 in 2012).

Individuals – Tax Credits

Adoption Credit
In 2013, a non-refundable (only those individuals with tax liability will benefit) credit of up to $10,000 is available for qualified adoption expenses for each eligible child.

Earned Income Tax Credit
For tax year 2013, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,981, up from $5,891 in 2012. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credit
For tax year 2013, the child tax credit is $1,000 per child.

Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years beginning in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Individuals – Education

American Opportunity Tax Credit and Lifetime Learning Credits
The American Opportunity Tax Credit (formerly Hope Scholarship Credit) is extended to the end of 2017. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000.

Interest on Educational Loans
Starting in 2013, the $2,500 maximum deduction for interest paid on student loans is repealed and no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers.

Tuition and Related Expenses Deduction
In 2013, there is once again an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don’t have to itemize to claim this deduction. However, this option can’t be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals – Retirement

Contribution Limits 
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500. Contribution limits for SIMPLE plans increase from $11,500 to $12,000. The maximum compensation used to determine contributions increases to $255,000 (up $5,000 from 2012 levels).

Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified adjusted gross income (AGI) between $59,000 and $69,000, up from $58,000 and $68,000 in 2012.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $178,000 and $188,000, up from $173,000 and $183,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, up from $173,000 to $183,000 in 2012. For singles and heads of household, the income phase-out range is $112,000 to $127,000, up from $110,000 to $125,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000.

Saver’s Credit
The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $59,000 for married couples filing jointly, up from $57,500 in 2012; $44,250 for heads of household, up from $43,125; and $29,500 for married individuals filing separately and for singles, up from $28,750.

Businesses

Standard Mileage Rates
The rate for business miles driven is 56.5 cents per mile for 2013, up from 55.5 cents per mile in 2012.

Section 179 Expensing 
For 2013 the maximum Section 179 expense deduction for equipment purchases increases to $500,000 of the first $2,000,000 of business property placed in service during 2013. The bonus depreciation of 50% is also extended through 2013.

Work Opportunity Tax Credit (WOTC) 
The WOTC is extended through 2013 (retroactive to 2012) and includes a one-year extension of the enhanced credit for hiring certain veterans. When a business hires a person from one of several specific economically disadvantaged groups it may claim a Work Opportunity Tax Credit, generally equal to 40 percent of the first $6,000 in wages paid to a new hire.

Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, for tax years beginning in 2013 (through 2017) the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $240. The monthly limitation for qualified parking is also $240.

While this checklist outlines important tax changes for 2013, additional changes in tax law are more than likely to arise during the year ahead.

Don’t hesitate to call us if you want to get an early start on tax planning for 2013. We’re here to help!

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Figure 1: Clearly-defined items result in precise reports. 

Obviously, you’re using QuickBooks because you buy and/or sell products and/or services. You want to know at least weekly — if not daily — what’s selling and what’s not, so you can make informed plans about your company’s future.

You get that information from the reports that you so painstakingly customize and create. But their accuracy depends in large part on how carefully you define each item. This can be a laborious process, but it’s a critical part of QuickBooks’ foundation.

QuickBooks’ Item Lineup

You may not be aware of all of your options here. So let’s take a look at what you see when you go to Lists | Item List | Item | New:

Service. Simple enough. Do you or your employees do something for clients? Training? Construction labor? Web design? This is usually tracked by the hour.

Inventory Part. If you want to maintain detailed records about inventory that contain up-to-date information about value, quantities on hand and cost of goods sold, you must define these items as inventory parts. Before you start creating individual records, make sure that QuickBooks is set up for this purpose. Go to Edit | Preferences | Items & Inventory | Company Preferences and select the desired options there, like this:


Figure 2: QuickBooks needs to know that you’re planning to track at least some items as inventory parts. 

Inventory Assembly. Just what it sounds like; it’s sometimes referred to as a Bill of Materials. Do you sell items that actually consist of multiple individual products, services and/or other charges (though you may also sell the parts separately)? If you’re planning to track the compilations as individual units, then you must define them as assemblies.

Non-Inventory Parts. If you don’t track inventory, you can set up items as non-inventory parts. Even if you do track inventory, there may be times when you’ll want to use this designation. For instance, you might sell something to a customer that they asked you to obtain, but you don’t plan to stock it. In that case, QuickBooks only records the incoming and outgoing funds.


Figure 3: The New Item window looks a bit intimidating, but it’s critical that you complete it thoroughly and correctly. We can help you get started. 

Other Charges. This is a catch-all category for items like delivery charges or setup fees. You can’t designate a unit or measure here; they’re just standard costs.

Groups. Unlike assemblies, these are not recorded as individual inventory units. Use this designation when you sell a combination of items together frequently but you don’t want them tracked as one entity.

Discount. This is a fixed amount or a percentage that you subtract from a subtotal or total.

Payment. Normally, you would use the Receive Payments window to record a payment made. But if your customer has made a partial or advance payment upfront, use this item to subtract it from the total when you create the invoice or statement.


Figure 4: Use the Payment item to record an upfront remittance. 

Sales Tax Item. One sales tax, one rate, one agency.

Sales Tax Group. If a sale requires two or more sales tax items, QuickBooks calculates the total and displays it for the customer, but the items are tracked individually.

Additional Actions

The Item menu provides other options for working with items. You can:

      • Edit or delete
      • Duplicate
      • Make inactive
      • Find in transactions and
      • Customize the list’s columns.

Let us know if you’re not confident about items you’ve already created or if you’re just getting started with this important QuickBooks feature. Some extra work and attention upfront can save you from hours of back-tracking and frustration–and from reports that don’t tell the truth.

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Here’s what individuals and families need to know about tax changes for 2012.

From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.

Personal Exemptions 
The personal and dependent exemption for tax year 2012 is $3,800, up $100 from 2011.

Standard Deductions
In 2012 the standard deduction for married couples filing a joint return is $11,900, up $300 from 2011 and for singles and married individuals filing separately it’s $5,950, up $150. For heads of household the deduction is $8,700, up $200 from 2011.

The additional standard deduction for blind people and senior citizens in 2012 is unchanged from 2011, remaining at $1,150 for married individuals and $1,450 for singles and heads of household.

Income Tax Rates 
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700 for a married couple filing a joint return, up from $69,000 in 2011.

Estate and Gift Taxes 
The recent overhaul of estate and gift taxes means that there is an exemption of $5.12 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. The annual exclusion for gifts remains at $13,000.

Alternative Minimum Tax (AMT) 
AMT exemption amounts for 2012 have reverted to 2000 levels and will remain significantly lower than in 2011 unless Congress takes action before year-end: $33,750 for single and head of household fliers, $45,000 for married people filing jointly and for qualifying widows or widowers, and $22,500 for married people filing separately.

Marriage Penalty Relief 
For 2012, the basic standard deduction for a married couple filing jointly is $11,900, up $300 from 2011.

Pease and PEP (Personal Exemption Phaseout) 
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2012, but like many other tax provisions, are set to expire at the end of the year.

Flexible Spending Accounts (FSA) 
FSA (Flexible Spending Arrangements) are limited to $2,500 per year starting in 2013 and indexed to inflation after that and applies only to salary reduction contributions under a health FSA. However, IRS guidance issued this year recognizes that the term “taxable year” refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Long Term Capital Gains 
In 2012, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

 

 

Individuals – Tax Credits

Adoption Credit 
In 2012 a refundable credit of up to $12,650 is available for qualified adoption expenses for each eligible child. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

 

Child and Dependent Care Credit 
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit 
The $1,000 child tax credit has been extended through 2012 as well. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Earned Income Tax Credit (EITC)
For tax year 2012, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270 (up from $49,078 in 2011). The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

 

Individuals – Education Expenses

Coverdell Education Savings Account 
You can contribute up to $2,000 a year to Coverdell savings accounts in 2012. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit
For 2012, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance 
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit 
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2012, The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Student Loan Interest 
For 2012 (same as 2011), the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for married taxpayers filing joint returns at $125,000, and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Individuals – Retirement

Contribution Limits
For 2012, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000. For persons age 50 or older in 2012, the limit is $22,500 (up from $22,000 in 2011). Contribution limits for SIMPLE plans remain at $11,500 for persons under age 50 and $14,000 for persons age 50 or older in 2012. The maximum compensation used to determine contributions increases to $250,000.

Saver’s Credit 
In 2012, the AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, $43,125 for heads of household, and $28,750 for married individuals filing separately and for singles.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

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There are a number of end of year tax strategies businesses can use to reduce their tax burden for 2012. Here’s the lowdown on some of the best options.

Purchase New Business Equipment

Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2012 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $139,000 for property placed in service by December 31, 2012. The maximum threshold amount for capital purchases in 2012 is $560,000, but in 2013, that amount drops to $25,000. Also in 2012, businesses can take advantage of an accelerated first year bonus depreciation of 50% of the purchase price of new equipment and software placed in service by December 31, 2012 that exceeds the threshold amount of $560,000. This bonus depreciation is phased out in 2013.

Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.

Note: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.

Please contact our office if you have any questions regarding qualified property and bonus depreciation.

Timing. If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here’s a simplified explanation:

Conventions. The tax rules for depreciation include “conventions” or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.

    1. The half-year convention: This convention applies to all property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores (see mid-month convention below) unless the mid-quarter convention applies. All property that you begin using during the year is treated as “placed in service” (or “disposed of”) at the midpoint of the year. This means that no matter when you begin using (or dispose of) the property, you treat it as if you began using it in the middle of the year.

Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year of depreciation on that machine.

    1. The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40% of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule does not apply, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
    2. The mid-month convention: This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.

If you’re planning on buying equipment for your business, call us first. We’ll help you figure out the best time to buy it to take full advantage of these tax rules.

Other Year-End Moves To Take Advantage Of

Partnership or S Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2012 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity’s tax year.

Caution: Remember that by increasing basis, you’re putting more of your funds at risk. Consider whether the loss signals further troubles ahead.

Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2012. Call us today if you need help setting up a retirement plan.

Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders, which continue to be taxed at the 15 percent rate through 2012.

Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.

A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.

Tip: Year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.

For more on this topic, see the article below about common budgeting errors, but if you need help developing a budget for your business don’t hesitate to call us today.

Call Us First

These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2012. But the best advice we can give you is to give us a call. We’ll sit down with you, discuss your specific tax and financial needs, and develop a plan that works for your business.

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Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don’t want to spend a lot of time and pay high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners. Here’s why…

Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLE plans calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $11,500 in 2012, after which it can rise further with the cost of living.

Catch-up. Owner-employees age 50 or over can make an additional $2,500 deductible “catch-up” contribution (for a total of $14,000) as an employee in 2012.

2. Employer “matching” contribution
The employer match equals a maximum of 3% of employee’s earnings.

Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee, and an additional $2,500 employee catch-up contribution, plus $1,200 (3% of $40,000) employer match, for a total of $15,200.

SIMPLE plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.

If living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

A SIMPLE plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules – in investment options, spousal rights, creditors’ rights – don’t have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan’s custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit easier than with other plans.

What’s Not So Good About SIMPLE Plans

Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE retirement plan.

Example: If you are under 50 with $50,000 of self-employment earnings in 2012, you could contribute $11,500 as employee to your SIMPLE plus an additional 3% of $50,000 as an employer contribution, for a total of $13,000. In contrast, a 401(k) plan would allow a $29,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $42,000 with a 401(k).

Because investments are through an IRA, you’re not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will generally have fewer investment options than if you were your own trustee, as you would be in a 401(k).

It won’t work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

If the SIMPLE plan is set up for a sideline business and you’re already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE plan and the 401(k) combined (in 2012) can’t be more than $17,000 or $22,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.

So someone under age 50 who puts $9,000 in her 401(k) can’t put more than $8,000 in her SIMPLE 2012. The same limit applies if you have a SIMPLE plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started with a SIMPLE Plan

You can set up a SIMPLE account on your own, but most people turn to financial institutions. SIMPLE Plans are offered by the same financial institutions that offer IRAs and 401k master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an “effective date” – the beginning date for payments out of salary or business earnings. That date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

401k, SEPs, and SIMPLES Compared

 

401k SEP SIMPLE
Plan type: Can be defined benefit or defined contribution (profit sharing or money purchase) Defined contribution only Defined contribution only
Number you can own: Owner may have two or more plans of different types, including an SEP, currently or in the past Owner may have SEP and 401k Generally, SIMPLE is the only current plan
Due dates: Plan must be in existence by the end of the year for which contributions are made Plan can be set up later – if by the due date (with extensions) of the return for the year contributions are made Plan generally must be in existence by October 1 of the year for which contributions are made
Dollar contribution ceiling (for 2012): $50,000 for defined contribution plan; no specific ceiling for defined benefit plan $50,000 $23,000
Percentage limit on contributions:50% of earnings for defined contribution plans (100% of earnings after contribution). Elective deferrals in 401(k) not subject to this limit. No percentage limit for defined benefit plan. Lesser of $50,000 of 25% of eligible employee’s compensation ($250,000 in 2012). Elective deferrals in SEPs formed before 1997 not subject to this limit. 100% of earnings, up to $11,500 (for 2012) for contributions as employee; 3% of earnings, up to $11,500, for contributions as employer
Deduction ceiling: For defined contribution, lesser of $50,000 or 20% of earnings (25% of earnings after contribution). 401(k) elective deferrals not subject to this limit. For defined benefit, net earnings. Lesser of $50,000 or 25% of eligible employee’s compensation. Elective deferrals in SEPs formed before 1997 not subject to this limit. Same as percentage ceiling on SIMPLE contribution
Catch-up contribution age 50 or over: Up to $5,500 in 2012 for 401(k)s Same for SEPs formed before 1997 Half the limit for 401k and SEPs (up to $2,750 in 2012)
Prior years’ service can count in computing contribution No No
Investments: Wide investment opportunities. Owner may directly control investments. Somewhat narrower range of investments. Less direct control of investments. Same as SEP
Withdrawals: Some limits on withdrawal before retirement age No withdrawal limits No withdrawal limits
Permitted withdrawals before age 59 1/2 may still face 10% penalty Same as 401k rule Same as 401k rule except penalty is 25% in SIMPLE’s first two years
Spouse’s rights: Federal law grants spouse certain rights in owner’s plan No federal spousal rights No federal spousal rights
Rollover allowed to another plan (Keogh or corporate), SEP or IRA, but not a SIMPLE. Same as 401k rule Rollover after 2 years to another SIMPLE and to plans allowed under 401k rule
Some reporting duties are imposed, depending on plan type and amount of plan assets Few reporting duties Negligible reporting duties

Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE plans.

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