We work with quite a few entrepreneurs at Dagley & Co., and many of them have start-ups. These business owners – especially those operating small businesses – may be helped by a tax law allowing them to deduct up to $5,000 of the start-up expenses in the first year of the business’s operation. This is in lieu of amortizing the expenses over 180 months (15 years).
Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.
As with most tax benefits, there is always a catch. Congress put a cap on the amount of start-up expenses that can be claimed as a deduction under this special election. Here’s how to determine the deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceed $50,000. For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)).
The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.
Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs. Examples of qualified start-up costs include:
- Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
- Wages paid to employees and their instructors while they are being trained;
- Advertisements related to opening the business;
- Fees and salaries paid to consultants or others for professional services; and
- Travel and other related costs to secure prospective customers, distributors, and suppliers.
For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.
If you have a question related to accounting for start-ups, please get in touch with us at Dagley & Co.
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Most Americans get a tax refund from the IRS each spring. So, what if – like some independent contractors, freelancers and entrepreneurs – you are one of those who end ends up owing?
The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. If you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements to obtain the funds for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider.
- Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
- Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
- Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
- Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.
Whatever you decide, don’t just ignore your tax liability because that is the worst thing you can do. However, we have worked with clients who have ignored their liabilities for years and are helping them pay back what they owe. No matter what your situation is, please get in touch with Dagley & Co. for assistance.
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One of the reasons you started using QuickBooks, among many others, was to save time. And it has complied. (Or maybe you use QuickBooks because Dan Dagley told you to.) Once you create a record for a customer, vendor, item, etc., you rarely – if ever – have to enter that information again; you simply choose it from a list.
You no longer waste time searching through endless piles of papers to find the one you need; you just do a search. And when you need a report on your monthly sales or inventory purchases or your payroll liabilities, you don’t have to wrestle with Excel or locate the right paper records; you just click a few times.
Memorized transactions can be another major time saver. You might use them when you, for example:
- Provide the same service for a customer on a regular basis,
- Charge a monthly fee for rentals, maintenance, membership, etc.,
- Pay a bill to the same company regularly, or
- Have a standing order with a vendor for a similar set of items.
It’s easy to create memorized transactions. QuickBooks provides an icon for them in the toolbar of every transaction form that’s supported, like invoices, bills, and purchase orders.
To get started, create a transaction that you know will be repeated – even if the amount will be different every time (you’ll still save time because you won’t have to fill in or select absolutely every detail). Let’s say you’re doing some social media consulting for a customer, and you’ve contracted for eight hours every month. Create the invoice for that billing. Then click the Memorize icon. This window opens:
Your customer will already appear in the Name field. You’ll have to choose from among three options so that QuickBooks knows how to handle this recurring form:
Add to my Reminders List. If you choose this by clicking on the button in front of the option, QuickBooks will add this transaction to your existing Reminders List.
Note: Confused about how you get QuickBooks to remind you about actions you have to take? We can walk you through the setup process.
Do Not Remind Me. We don’t recommend this option unless you have an exceptionally good memory, few memorized transactions, or a tickler file in another application. Even then, reminders are a good idea.
Automatic Transaction Entry. This absolutely saves the most time. It’s also the riskiest option. If you select this, QuickBooks will send the transaction through at the intervals you’ve defined. You’ll have to enter a number that indicates how many times you want the form sent and how many days in advance it should be entered. Please consult with us if you are planning to automate transactions. We don’t want you to have unhappy customers or vendors or an unpredictable cash flow.
Next, you’ll tell QuickBooks how often this transaction needs to be created by clicking on the down arrow to the right of How Often. Click on the calendar icon in the Next Date field to select the exact day this should occur next (you’ll have an opportunity when you work with the Reminders List to specify how much advance warning you want).
When you’re done, click OK.
Once you start memorizing transactions, QuickBooks will store them in a list. When you get a reminder that one is due soon, open the Lists menu and select Memorized Transaction List. You’ll see this screen, populated with your own work:
Highlight a transaction in the list and click the down arrow next to Memorized Transaction in the lower left corner to see your options here. You can also click Enter Transaction, and your original form will appear. If you’ve saved it with a permanent amount, you can just save and dispatch it. Otherwise, enter the correct amount before you proceed.
If you’re fairly new to QuickBooks and don’t feel like you’re well acquainted with its time-saving features, give us a call at Dagley & Co. and we’ll set up some training. Better to do that upbfront than to have to untangle a jumbled company file. We’re always happy to help.
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Your golden years come with new #tax rules. If you are turning 70½ this year, you may face a number of special tax issues. Not addressing these issues properly could result in significant penalties and filing hassles.
Traditional IRA Contributions – You cannot make a traditional IRA contribution in the year you reach the age of 70½. Contributions made in the year you turn 70½ (and from then on) are treated as excess contributions and are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned.
You can avoid the penalty by removing the excess and the interest earned on the excess from the IRA prior to April 15 of the subsequent year and including the interest earned on the excess in your taxable income.
Even though you can no longer make contributions to a traditional IRA in the year you reach age 70½, you can continue to make contributions to a Roth IRA, not to exceed the annual IRA contribution limits, provided you still have earned income, such as wages or self-employment income, at least equal to the amount of the contribution.
If you are married to a non-working or low-earning spouse who has not yet reached age 70½ and you have earned income, your earnings can still be used to qualify your spouse for a contribution to a spousal IRA, even if you are 70½ or older and can’t contribute to your traditional IRA.
Required Minimum Distributions (RMDs) – You must begin taking required minimum distributions from your qualified retirement plans and IRA accounts in the year you turn 70½. The distribution for the year in which you turned 70½ can be delayed to the subsequent year without penalty if the distribution is made by April 1 of the subsequent year. That means two distributions must be made in the subsequent year: the delayed distribution and the distribution for that year. In the following years, your annual RMD must be taken by December 31 of each year.
Still Working Exception – If you participate in a qualified employer plan, generally you need to start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 70½. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the “still working exception,” your RBD is postponed to April 1 of the year following the year you retire.
Example: You reached age 70½ in 2015, but chose to continue working and did not retire until June of 2017. Provided your employer’s plan includes the option, you can make the “still working election” and delay your RBD until no later than April 1, 2018.
Caution: This exception does not apply to an employee who owns more than 5% of the company. There is no “still working exception” for IRAs, Simple IRAs, or SEP IRAs.
Excess Accumulation Penalty – When you fail to take an RMD, you are subject to a draconian penalty called the excess accumulation penalty. This penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year.
Example: Your RMD for the year is $35,000, but you only take $10,000. Your excess accumulation penalty for failing to take the full amount of the distribution for the year would be $12,500 (50% of $25,000).
The IRS will generally waive the penalty for non-willful failures to take your RMD, provided you have a valid excuse and the under-distribution is corrected.
As you can see, turning 70½ can complicate your tax situation. If you need assistance with any of the issues discussed here, or need assistance computing your RMD for the year, please get in touch with us at Dagley & Co. You’ll find our information at the bottom of this page.
Where did the time go? Those who have not yet filed their 2014 tax return need to keep in mind that April 15, 2015 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due.
In addition, the April 15, 2015 deadline also applies to the following:
- Tax year 2014 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
- Tax year 2014 contributions to a Roth or traditional IRA – April 15 is the last day contributions for 2014 can be made to either a Roth or traditional IRA, even if an extension is filed.
- Individual estimated tax payments for the first quarter of 2015 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2015 estimated taxes are due on April 15. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. If the refund won’t be enough to fully cover the April 15 installment, you may need to make a payment with the April 15 voucher. Please call this office for any questions.
- Individual refund claims for tax year 2011 – The regular three-year statute of limitations expires on April 15 for the 2011 tax return. Thus, no refund will be granted for a 2011 original or amended return that is filed after April 15. Caution: The statute does not apply to balances due for unfiled 2011 returns.
If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 15 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 15 deadline, then let the office know right away so that an extension request, and 2015 estimated tax vouchers if needed, may be prepared.
If your returns have not yet been completed, please get in touch with us at Dagley & Co. rigt away so that we can schedule an appointment and/or file an extension if necessary.
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If you and/or your employees travel often, you know those costs add up quickly. The good news is: A business deduction is allowed for lodging when a taxpayer travels away from home (aka his or her “tax home”). A tax home is generally the location, such as a city or metropolitan area, of a taxpayer’s main place of business (not necessarily the place where he/she lives).
The traveling away from his or her tax home condition creates problems for individuals attending conferences and training sessions within their tax homes that include extended-hour events that preclude traveling back home between the days of the events.
To alleviate this problem, IRS proposed regulations, upon which taxpayers may rely, permit certain non-away-from-home lodging expenses to be treated as deductible business expenses by employers and tax-free working condition fringe benefits or accountable-plan reimbursements to employees. Under the proposed regulations, local lodging expenses are treated as ordinary and necessary business expenses if all of these conditions are met:
(1) The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function.
(2) The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter.
(3) If the individual is an employee, his or her employer requires him or her to remain at the activity or function overnight.
(4) The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.
Example: A business conducts business-related sales training sessions at a hotel and conference center near its main office. The employer requires both its field and in-house sales force to attend the training and stay at the hotel overnight for the bona fide purpose of facilitating the training. If the company pays the lodging costs directly to the hotel, the stay is a working condition fringe benefit to all attendees (even to employees who live in the area who are not on travel status) and the company may deduct the cost as an ordinary and necessary business expense. If the employees pay for the lodging costs and are reimbursed by the company, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by the company as an ordinary and necessary business expense.
Example: If Warren, a locally based, self-employed consultant, were required by a company to attend the sessions and stay at the hotel, he could deduct the expense if he paid for it himself or exclude the expense if he were reimbursed by the company after accounting for it in full for his costs.
Substantiation requirements – Generally lodging expenses are deductible only if they are substantiated in full (record of time, place, amount, and business purpose, plus paid bills or receipts). The expenses can’t be substantiated using the lodging component of the federal per-diem rate.
If you have questions about the deduction and substantiation of business-related lodging expenses, please get in touch with us at Dagley & Co. You’ll find our contact information at the bottom of this page.
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Have you ever wondered whether the interest on your vehicle is tax deductible? Whether or not the interest you pay on a loan to acquire a vehicle is deductible for tax purposes depends how the vehicle is being used (for business or personal purposes), the tax form on which the expenses are being deducted, and the type of loan.
If the loan were a consumer loan secured by the vehicle, then the following rules would apply:
- If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule, then the business portion of the interest will be deductible as business interest, but the personal portion will not.
- If the vehicle is being used partially for business as an employee and the expenses are being deducted as an itemized deduction, then neither the business portion nor the personal portion of the interest will be deductible.
- If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.
As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will generally make the interest deductible.
Before borrowing against a home, you should consider the following:
- Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.
- When buying a car, you can sometimes get very favorable interest rates or a rebate. To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.
- It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.
- If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.
If you need assistance in deciding on a course of action, please get in touch with us at Dagley & Co.
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You’ve filed your taxes, and you’re ready for the best part: getting that refund. It’s pretty easy to check the status of your refund online.
Where’s My Refund? is an interactive tool on the IRS web site that’s updated about once every 24 hours. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where’s My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week.
If you e-file, you can get refund information 24 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available starting four weeks after mailing your return. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter:
- Your Social Security Number (or Individual Taxpayer Identification Number);
- Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
- The exact refund amount shown on your tax return.
Once your personal information has been entered, one of several personalized responses may come up, including the following:
- Acknowledgement that your return was received and is in processing.
- The mailing date or direct deposit date of your refund.
- Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where’s My Refund? feature.
Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.
Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.
IRS2Go is the IRS’ first smartphone application that lets taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Google Play Store to download the free IRS2Go app.
Where’s My Refund? provides the most up-to-date information the IRS has. There’s no need to call the IRS unless Where’s My Refund? tells you to do so. As we said earlier, Where’s My Refund? is updated every 24 hours (usually overnight) so you only need to check once a day. Please call this office if you encounter problems – or if you want to file your taxes so you can get your refund sooner!
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There are some important deadlines to be aware of ahead of the April 15th tax date. If you think you’ll have trouble hitting any of these, please get in touch with us at Dagley & Co. right away:
March 2 – Farmers and Fishermen
File your 2014 income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2014 estimated tax by January 15, 2015.
March 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 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.
March 16 – Time to Call For Your Tax Appointment
It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late. You can find our contact information at the bottom of this website.
Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.
Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.
We look forward to hearing from you and making this tax season stress-free for you and your company.
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