On May 4th, the House of Representatives passed the proposed American Health Care Act (AHCA). This would repeal and replace several arrangements of the Affordable Care Act (ACA).
Exact details are not available, but, we have found some details from the original draft legislation published on March 6 to give you an idea of the how this will function (please keep in mind that some provisions were modified with respect to existing conditions in order to obtain enough Republican votes to pass the bill).
GOP’s March Version of the AHCA
The American Health Care Act would repeal and replace the Affordable Care Act (ACA). In general, the GOP’s plan would continue the ACA’s premium tax credit through 2019 and then replace it in 2020 with a new credit for individuals without government insurance and for those who are not offered insurance by their employer. However, most of the ACA’s insurance mandates and penalties would be repealed retroactive to 2015. Other provisions will be overturned periodically through 2019.
- Repeal of the Individual Mandate
Background: Under the ACA, individuals are generally required to have ACA- compliant health insurance or face a “shared responsibility payment” (a penalty for not being insured). For 2016, the annual penalty was $695 per uninsured individual ($347.50 per child), with a maximum penalty of $2,085 per family.
AHCA Legislation: Under the new legislation, this penalty would be repealed after 2015.
- Repeal of the Employer Mandate
Background: Under the ACA, large employers, generally those with 50 or more equivalent full-time employees, were subject to penalties that could reach thousands of dollars per employee for not offering their full-time employees affordable health insurance. These employers were also subject to some very complicated reporting requirements.
AHCA Legislation: Under the new legislation, this penalty would be repealed after 2015.
- Recapture and Repeal of the Premium Tax Credit
Background: The premium tax credit (PTC) is a health insurance subsidy for lower-income individuals, and it is based on their household income for the year. Since the household income can only be estimated at the beginning of the year, the insurance subsidy, known as the advance premium tax credit (APTC), must also be estimated at the beginning of the year. Then, when the tax return for the year is prepared, the difference between the estimated amount of the subsidy (APTC) and the actual subsidy allowed (PTC) is determined based on the actual household income for the year. If the subsidy paid was less than what the individual was entitled to, the excess is credited to the individual’s tax return. If the subsidy paid was more than what the individual was entitled to, the difference is repaid on the tax return. However, for lower-income taxpayers there is a cap on the amount that needs to repaid, and this is also based on household income.
AHCA Legislation: For tax years 2018 and 2019, the GOP legislation would require the repayment of the entire difference regardless of income. In addition, the PTC would be repealed after 2019.
- Catastrophic Insurance
Background: The current law does not allow the PTC to be used for the purchase of catastrophic health insurance.
AHCA Legislation: The new legislation would allow premium tax credits to be used for the purchase of qualified “catastrophic-only” health plans and certain qualified plans not offered through an Exchange.
- Refundable Tax Credit for Health Insurance
Beginning in 2020, as a replacement for the current ACA insurance subsidies (PTC), the AHCA legislation would create a universal refundable tax credit for the purchase of state-approved major medical health insurance and unsubsidized COBRA coverage. Generally eligible individuals are those who do not have access to government health insurance programs or an offer of insurance from any employer.
The credit is determined monthly and ranges from $2,000 a year for those under age 30 to $4,000 for those over 60. The credit is additive for a family and capped at $14,000. The credit phases out for individuals who make more than $75,000 and for couples who file jointly and make more than $150,000.
- Health Savings Accounts
Background: Individuals covered by high-deductible health plans can generally make tax-deductible contributions to a health savings account (HSA). Currently (2017), the maximum that can be contributed is $3,400 for self-only coverage and $6,750 for family coverage. Distributions from an HSA to pay qualified medical expenses are tax-free. However, nonqualified distributions are taxable and generally subject to a 20% penalty.
AHCA Legislation: Beginning in 2018, the HSA contribution limit would be increased to at least $6,550 for those with self-only coverage and to $13,100 for those with family coverage. In addition, the new legislation would do the following:
- Allow both spouses to make catch-up contributions (applies to those age55 through 64) beginning in 2018.
- Allow medical expenses to be reimbursed if they were incurred 60 days prior to the establishment of the HSA (whereas currently, expenses qualify only if they are incurred after the HSA is established).
- Lower the penalty for nonqualified distributions from the current 20% to 10% (the amount of the penalty prior to 2011).
- Medical Deduction Income Limitation
Background: As part of the ACA, the income threshold for itemizing and deducting medical expenses was increased from 7.5% to 10% of the taxpayer’s AGI.
AHCA Legislation: Under the new legislation, the threshold would be returned to 7.5% beginning in 2018 (2017 for taxpayers age 65 or older).
- Repeal of Net Investment Income Tax
Background: The ACA imposed a 3.8% surtax on net investment income for higher-income taxpayers, generally single individuals with incomes above $200,000 ($250,000 for married taxpayers filing jointly).
AHCA Legislation: The new legislation would repeal this tax after 2017.
- Repeal on FSA Contribution Limits
Background: Flexible spending accounts (FSAs) generally allow employees to designate pre-tax funds that can be deposited in the employer’s FSA, which the employee can then use to pay for medical and other qualified expenses. Effective beginning in 2013, annual contributions to health FSAs (also referred to as cafeteria plans) were limited to an inflation-adjusted $2,500. For 2017, the inflation limitation is $2,550.
AHCA Legislation: The new legislation would remove the health FSA contribution limit, effective starting in 2017.
- Repeal of Increased Medicare Tax
Background: Beginning in 2013, the ACA imposed an additional Medicare Hospital Insurance (HI) surtax of 0.9% on individuals with wage or self-employed income in excess of $200,000 ($250,000 for married couples filing jointly).
AHCA Legislation: The new legislation would repeal this surtax beginning in 2018.
- Other Provisions
- Preexisting Conditions – Prohibits health insurers from denying coverage or charging more for preexisting conditions. However, to discourage people from waiting to buy health insurance until they are sick, the legislation as introduced would require individuals to maintain “continuous” coverage. Those who go uninsured for longer than a set period will be subject to 30% higher premiums as a penalty.
Children Under Age 26 – Allows children under age 26 to remain on their parents’ health plan until they are 26.
- Small Business Health Insurance Tax Credit– Repealed after 2019
- Medical Device Tax– Repealed after 2017
- Tanning Tax– Repealed after 2018
- Over-the-Counter Medication Tax– Repealed after 2017
Questions? Contact Dagley & Co.
Often times, small business owners find difficulties in obtaining financing for their businesses without putting their personal assets up as collateral. With this, tapping into your home equity is a tempting alternative but should be carefully considered.
In general, interest on debt used to acquire and operate your business is deductible against that business. However, debt secured by your home may be nondeductible, only partially deductible or fully deductible against your business.
Home mortgage interest is limited to the interest on $1 million of acquisition debt and $100,000 of equity debt secured by a taxpayer’s primary residence and designated second home. The interest on the debts within these limits can only be treated as home mortgage interest and must be deducted as part of your itemized deductions. Only the excess can be deducted for your business, provided that the use of the funds can be traced to your business use. This creates a number of problems:
- Using the Standard Deduction – If you do not itemize your deductions, you will be unable to deduct the interest on the first $100,000 of the equity debt, which cannot be allocated to your business.
- Subject to the AMT – Even if you do itemize your deductions, if you happen to be subject to the alternative minimum tax (AMT), you still would not be able to deduct the first $100,000 of equity debt interest, since it is not allowed as a deduction for AMT purposes.
- Subject to Self-Employment (SE) Tax – Your self-employment tax (Social Security and Medicare) is based on the net profits from your business. If the net profit is higher, because not all of the interest is deductible by the business, your SE tax may also be higher.
Example: Suppose the mortgage you incurred to purchase your home (acquisition debt) has a current balance of $165,000 and your home is worth $400,000. You need $150,000 to acquire a new business. To obtain the needed cash at the best interest rates, you decide to refinance your home mortgage for $315,000. The interest on this new loan will be allocated as follows:
New Loan: $ 315,000
Part Representing Acquisition Debt <165,000> 52.38%
Balance $ 150,000
First $100,000 Treated as Home Equity Debt <100,000> 31.75%
Balance Traced to Business Use $ 50,000 15.87%
If the interest for the year on the refinanced debt was $10,000, then that interest would be deducted as follows:
Itemized Deduction Regular Tax $ 8,413 84.13%
Itemized Deduction Alternative Minimum Tax $ 5,238 52.38%
Business Expense $ 1,587 15.87%
There is a special tax election that allows you to treat any specified home loan as not secured by the home. If you file this election, then interest on the loan can no longer be deducted as home mortgage interest, since tax law requires that qualified home mortgage debt be secured by the home. However, this election would allow the normal interest tracing rules to apply to that unsecured debt. This might be a smart move if the entire proceeds were used for business and all of the interest expense could be treated as a business expense. However, if the loan were a mixed-use loan and part of it actually represented home debt (such as a refinanced home loan), then the part that represented the home debt could not be allocated back to the home, and the interest on that portion of the debt would become nondeductible and would provide no tax benefit.
As you can see, using equity from your home can create some complex tax situations. Please contact Dagley & Co. for assistance in determining the best solution for your particular tax situation.
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Are you a small business owner, or work within a small business’s accounting department? We have your rundown of some changes that need to be considered when preparing your 2016 and 2017 returns. As of December 2015, legislation passed the “Protecting Americans from Tax Hikes” Act which extended a number of business provisions and made some permanent changes. As you start to file 2016’s taxes, please be aware of these provisions, as they can have a significant impact on you business’s taxes:
Section 179 Expensing – The Internal Revenue Code, Sec. 179, allows businesses to expense, rather than depreciate, personal tangible property other than buildings or their structural components used in a trade or business in the year the property is placed into business service. The annual limit is inflation-adjusted, and for 2017, that limit is $510,000, which is unchanged from 2016. The limit is reduced by one dollar for each dollar when the total cost of the qualifying property placed in service in any given year exceeds the investment limit, which is $2,030,000 for 2017, a $20,000 increase from the 2016 amount.
In addition to personal tangible property, the following are included in the definition of qualifying property for the purposes of Sec. 179 expensing:
- Off-the-Shelf Computer Software
- Qualified Real Property – The term “qualified real property” means property acquired by purchase for use in the active conduct of a trade or business, which is normally depreciated and is generally not property used for lodging except for hotels or motels. Qualified retail property includes:
- Qualified leasehold improvement property,
- Qualified restaurant property, and
- Qualified retail improvement property.
Bonus Depreciation – Bonus depreciation is extended through 2019 and allows first-year depreciation of 50% of the cost of qualifying business assets placed in service through 2017. After 2017, the bonus depreciation will be phased out, with the bonus rate 40% in 2018 and 30% in 2019. After 2019, the bonus depreciation will no longer apply. Qualifying business assets generally include personal tangible property other than real property with a depreciable life of 20 years or fewer, although there are some special exceptions that include qualified leasehold property. Generally, qualified leasehold improvements include interior improvements to non-residential property made after the building was originally placed in service, but expenditures attributable to the enlargement of the building, any elevator or escalator, and the internal structural framework of the building do not qualify.
In addition, the bonus depreciation will apply to certain trees, vines and plants bearing fruits and nuts that are planted or grafted before January 1, 2020.
Vehicle Depreciation – The first-year depreciation for cars and light trucks used in business is limited by the so-called luxury-auto rules that apply to highway vehicles with an unloaded gross weight of 6,000 pounds or less. The first-year depreciation amounts for cars and small trucks change slightly from time to time; they are currently set at $3,160 for cars and $3,560 for light trucks. However, a taxpayer can elect to apply the bonus depreciation amounts to these amounts. The bonus-depreciation addition to the luxury-auto limits is $8,000 through 2017, after which it will be phased out by dropping it to $6,400 in 2018 and $4,800 in 2019. After 2019, the bonus depreciation will no longer apply.
New Filing Due Dates – There are some big changes with regard to filing due dates for a variety of returns. Many of these changes have been made to combat tax-filing fraud. The new due dates are effective for tax years beginning after December 31, 2015. That means the returns coming due in 2017.
- Calendar Year: The due date for 1065 returns for the 2016 calendar year will be March 15, 2017 (the previous due date was April 15).
- Fiscal Year: Due the 15th day of the 3rd month after the close of the year.
- Extension: 6 months (September 15 for calendar-year partnerships).
- Calendar Year: 2016 calendar year 1120-S returns will be due March 15, 2017 (unchanged).
- Fiscal Year: Due the 15th day of the 3rd month after the close of the year.
- Extension: 6 months (September 15 for calendar-year S Corps).
- Calendar Year: The due date for Form 1120 returns for the 2016 calendar year will be April 18, 2017 (the previous due date was March 15). Normally, calendar-year returns will be due on April 15, but because of the Emancipation Day holiday that is observed in Washington, D.C., the 2017 due date is the 18th.
- Fiscal Year: Due the 15th day of the 4th month after the close of the year, a month later than in the past (exception: if fiscal year-end is June 30, the change in due date does not apply until returns for tax years beginning after December 31, 2025).
- Extension: 6 months. (Exceptions:  5 months for any calendar-year C corporation beginning before January 1, 2026, and  7 months for June 30 year-end C corps through 2025.) Thus, the extended due date for a 2016 Form 1120 for a calendar-year C Corp will be September 15, 2017.
W-2s, W-3s and 1099-MISC reporting non-employee compensation –
- Due Date: For 2016 W-2s, W-3s, and Forms 1099-MISC reporting non-employee compensation, the due date for filing the government’s copy is January 31, 2017 (the previous due date was February 28 or March 31 if filed electronically). The due date for providing a copy to the employee or independent contractor remains January 31.
- Extension – The 30-day automatic extension to file W-2s is no longer automatic. The IRS anticipates that it will grant the non-automatic extension of time to file only in limited cases in which the filer or transmitter’s explanation demonstrates that an extension of time to file is needed as a result of extraordinary circumstances
Work Opportunity Tax Credit (WOTC) – Employers may elect to claim a WOTC for a percentage of first-year wages, generally up to $6,000 of wages per employee, for hiring workers from a targeted group. First-year wages are wages paid during the tax year for work performed during the one-year period beginning on the date the target-group member begins work for the employer.
This credit originally sunset in 2014, but the PATH Act retroactively extended the credit for five years through 2019.
- Generally, the credit is 40% of first-year wages (not exceeding $6,000), for a maximum credit of $2,400 (0.4 x $6,000).
- The credit is reduced to 25% for employees who have completed at least 120 hours but fewer than 400 hours of service for the employer. No credit is allowed for an employee who has worked fewer than 120 hours.
- The legislation also added qualified long-term unemployment recipients to the list of targeted groups, effective for employees beginning work after December 31, 2015.
Research Credit – After 21 consecutive years of extending the research credit year by year, the PATH Act made it permanent and made the following modifications to the research credit:
- For years after December 31, 2015, small businesses (average of $50 million or less in gross receipts in the prior three years) can claim the credit against the alternative minimum tax.
- For years after December 31, 2015, small businesses (less than $5 million in gross receipts for the year the credit is being claimed and no gross receipts in the prior five years) can claim up to $250,000 per year of the credit against their employer FICA tax liability. Effectively, this provision is for start-ups.
What is in the future?
With the election of a Republican president and with a Republican majority in both the House and Senate, we can expect to see significant tax changes in the near future. President-elect Trump has indicated that he would like to see the Sec. 179 limit significantly increased and the top corporate rate dropped to 15%. Watch for future legislation once President-elect Trump takes office this Friday.
Contact us at Dagley & Co. if you have any questions or concerns regarding your 2016’s tax returns.
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Run your own business but things aren’t working out the way you pictured? Thankfully, many proven methods exist to help small businesses increase revenues, cut costs and improve overall. If you’re ready to take your company to a new level of success, consider implementing one or more of the following Dagley & Co. insane (but true) ways to grow small business profits:
Eliminate Low-Margin Clients, Products or Services
To boost your small business profits, ask yourself the following questions:
What clients, products or services generate the most money and offer the greatest growth potential right now?
What clients, products or services generate the least profit and provide the least growth potential currently?
After analyzing your findings, eliminate low-margin clients, products and services. With the saved time and money, focus on the higher-producing areas of your business. Purging clients, products or services from your company might be painful at first. However, this practice will likely slash stress and pay dividends in the long run.
Embrace technology, automate and go paperless. Besides helping the environment, you’ll probably save a ton of money. In addition to cutting costs on paper, you’ll also spend less money on printer maintenance and toner as well as file cabinets and binders.
Increase Conversion Rates Through A/B Testing
Regardless of what type of small business you have, turning more shoppers into buyers will improve your bottom line. To increase conversion rates, consider implementing A/B testing. Also referred to as split testing, A/B testing utilizes two distinct sales pages in order to ascertain which page converts more effectively. Depending on the nature of your business, converting might equate to a customer buying a product or a client purchasing a service.
Experiment With Pricing
Raising prices while adding value can perhaps be the simplest way to improve small business profits. However, you risk losing bargain-oriented customers. Fortunately, for many people, price isn’t the most important factor when purchasing products and services. Lowering prices with the express intent of selling more products or services can also be a winning strategy.
Increase Average Lifetime Value of Each Client
Repeat customers can help your small business survive during stagnant economic times. Besides searching for effective ways to attract new customers, focus on increasing the average lifetime value of each client. You can accomplish this important task by:
- Offering loyal customers a product or service upgrade
- Providing customers with something your competitors don’t offer them
- Being more convenient than your competitors
- Looking for ways to solve problems for your customers
- Providing stellar customer service
- Reduce Churn Rates
Churn refers to when a client ends his or her relationship with a business. A high churn rate will negatively impact your ability to grow your small business profits. To reduce churn rates:
- Establish customer expectations and strive to meet or exceed them
- Make your first impression a great one
- Listen to your clientele
- Closely monitor external environment changes
- Speed Up Product or Service Delivery
Speeding up the delivery of your products and services is another ingenious way to improve profits. Fast deliveries make customers happy and encourage repeat business. Decreasing the amount of time projects sit in limbo will also save money.
Bundle Products or Services
Do you offer products or services that naturally fit together? Providing customers with product or service bundles is a great way to increase both your revenues and your bottom line. For example, an accounting firm might bundle bookkeeping, tax preparation and consulting services.
Expand to a New Geographic Market
If you’ve saturated your current geographic market, consider expanding to a new one. Obviously, the costs of such an undertaking must be analyzed. But the long-term benefits of tapping into new geographic markets might make the venture worthwhile.
Provide Maintenance Contracts
Do you want to generate a steady income stream for an extended period of time? Think about charging customers an ongoing fee in exchange for maintenance contracts. You can even offer discounts to customers who sign longer contractual agreements. When developing maintenance contacts, clearly list the products or services customers can expect to receive.
Growing small business profits may seem impossible to most. Dealing with saturated markets and a sluggish economy can dampen your overall outlook. Struggling to improve the bottom line of your small business? consider adhering to one or more of these strategies above by Dagley & Co., or give us a call at 202-417-6640 for guidance.
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Are you a high-income taxpayer? Would like to contribute to a Roth IRA but cannot because of income limitations? There is a work-around that will allow you to fund a Roth IRA.
High-income taxpayers are limited in the annual amount they can contribute to a Roth IRA. In 2016, the allowable contribution phases out for joint-filing taxpayers with an AGI between $184,000 and $194,000 (or an AGI between $0 and $9,999 for married taxpayers filing separately). For unmarried taxpayers, the phase-out is between $117,000 and $132,000. Once the upper end of the range is reached, no contribution is allowed for the year.
However, those AGI limitations can be circumvented by what is frequently referred to as a back-door Roth IRA. Here is how a back-door Roth IRA works:
- First, you contribute to a traditional IRA. For higher-income taxpayers who participate in an employer-sponsored retirement plan, a traditional IRA is allowed but is not deductible. Even if all or some portion is deductible, the contribution can be designated as not deductible.
- Then, since the law allows an individual to convert a traditional IRA to a Roth IRA without any income limitations, you now convert the non-deductible Traditional IRA to a Roth IRA. Since the Traditional IRA was non-deductible, the only tax related to the conversion would be on any appreciation in value of the Traditional IRA before the conversion is completed.
Potential Pitfall – There is a potential pitfall to the back-door Roth IRA that is often overlooked by investment counselors and taxpayers alike that could result in an unexpected taxable event upon conversion. For distribution or conversion purposes, all of your IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable.
This may or not may affect your decision to use the back-door Roth IRA method but does need to be considered prior to making the conversion.
There is a possible, although complicated, solution. Taxpayers are allowed to roll over or make a trustee-to-trustee transfer of IRA funds into employer qualified plans if the employer’s plan permits. If the rollover or transfer to the qualified plan is permitted, such rollovers or transfers are limited to the taxable portion of the IRA account, thus leaving behind the non-taxable contributions, which can then be converted to a Roth IRA without any taxability.
Please call Dagley & Co. if you need assistance with your Roth IRA strategies or need assistance in planning traditional-to-Roth IRA conversions.
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When you decided to open for business, you have a vision. You identified a need and came up with a solution you could provide and sell, and you invested your time, your money, your knowledge, and your drive to make it into a reality. The only problem is, if you’re like a lot of small business owners, you did not anticipate having to handle your business’s accounting needs. Many highly intelligent, responsible business operators get caught making common small-business accounting mistakes that can trip them up and cost them in the long run. If you are afraid this might happen to you — or if it already has — the best way to avoid these costly errors, before time starts ticking and the money starts to pile up, is to learn the top four small-business accounting mistakes and how to prevent them.
The Top 4 Accounting Mistakes Made by Small Businesses
The truth is that these four mistakes are relatively easy to address. The best way to avoid them is to set aside time every week for the specific purpose of taking care of basic accounting tasks. Once you get into the habit of doing them regularly and the right way, you’ll be able to avoid the hassle of having to go back and correct these mistakes in the future.
Reporting Employees as Independent Contractors
If you hire people to work for you, it’s important for you to understand the difference between employees and contractors, and to classify them correctly. There are very specific ways that you must account for each type of worker, and if you don’t get it right you will likely have to make corrections — and possibly pay penalties — in the future. If somebody is your employee, then you have control over when they work, how they get paid, and how they do their job. You are also responsible for withholding payroll tax on their behalf. By contrast, when you bring somebody in to do work for you as an independent contractor, they have more control over their own schedule, the work that they do, and how they get paid by you. They are responsible for their own taxes.
Not Reconciling Bank Accounts Regularly
Just as there are certain tasks that need to be done to keep your business running smoothly, there are certain accounting tasks that need to be addressed on a regular basis. Reconciling your bank accounts is one of those things. You need to make sure that every expense and every deposit is recorded in your books, and the best way to do that is to compare what you’ve written down to the statement that the bank provides. When you do this regularly, you are able to more immediately identify and address items that don’t match up so that you can correct any mistakes and take full advantage of available deductions. Far too often small business owners assume that this task is a waste of time and wait until the end of the year to do it. Not only is this much more time consuming, but it is harder to catch all mistakes and figure out what is missing when you have a full year’s worth of information to go through.
Forgetting to Record Payments Against Open Invoices
You receive a check in the mail or make a deposit into your bank account for an open invoice. If you don’t go back and check off the box showing that receivable as paid, your accounting data will be incorrect and incomplete. Get into the habit of immediately linking payments to their open invoices in order to avoid problems in the future.
Not Understanding the Differences Between Cash Flow and Profit
The money that comes in from your customers and the money that goes out as you make expenditures to operate your business represents cash flow. It’s important to have a positive cash flow, as that is a good indication that your company is healthy. It also means that you can pay your bills. But cash flow is not the same thing as profit. Profitability is a measure of whether you are making more from the sale of your service or product than you spend in bringing it to market. You may be profitable, but if the cash isn’t in hand then you can still have a negative cash flow. And people can pay you quickly so that you have cash on hand but you still may not be making a profit.
The single best and easiest way to avoid these mistakes it is by taking advantage of all of the tools and functions that your accounting software package offers. Most accounting programs include powerful tools and how-to guides, but in many cases small business owners just invest in the packages without taking the time to learn all that they can do — or to learn it well. By taking a little time on the front end to go through the available tutorials, you’ll find that you’ll save yourself both time and trouble on the back end. Our best advice is to set aside time one day of the week, first to learn the software and then, going forward, to go through that week’s records. Set aside the same time slot each week as if it is a meeting or appointment. It’s a good habit to get into.
If you are struggling to learn your software, don’t hesitate to give us a call at Dagley and Co. at (202) 417-6640 for tips and training. Once you learn what you’re doing, make sure that you include backing up your files!
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The Affordable Care Act (ACA) was set up by the Congress with two basic categories of businesses, those with 50 full-time employees and/or full-time equivalent employees (FTEEs) and those with fewer than 50 employees. Under the ACA, businesses in the first category have a requirement to offer affordable insurance to their full-time employees and their dependents. If you are an employer with fewer than 50 full-time employees or FTEEs, you are not subject to the insurance requirement, but there are still some ACA issues you need to be aware of.
First of all, you need to make sure you are in the under-50 category, because the penalties can be backbreaking if you aren’t and you didn’t offer affordable health coverage. Determining if your business meets or exceeds the 50-employee threshold requires maneuvering through lots of special rules, and not all of these intricacies can be covered in this article.
Generally, the 50-employee threshold is determined by adding together the number of full-time employees and the total number of full-time equivalent employees for each calendar month of the prior calendar year and dividing that total number by 12.
Full-time employees are generally those working 30 hours or more per week, and the number of FTEEs is determined by dividing all the hours worked by part-time employees for the month by 120. In addition, certain employees, such as seasonal employees, are excluded from the count. If you have any doubt whether you are under the 50-employee threshold, please call this office for assistance.
If you are under the 50-employee threshold, you are not subject to any ACA information reporting that is required of larger employers—with one exception. If you provide insurance and you are self-insured, then you are required to annually file a Form 1094-C along with a 1095-C for each employee.
If you wish to provide insurance to your employees, even though you are not required to since you are under the 50-employee threshold, you are allowed to purchase health insurance coverage through the Small Business Health Options Program, better known as the SHOP Marketplace. Even though purchased through the Marketplace, this type of group coverage does not qualify your employees for the premium tax credit subsidy they might otherwise be entitled to if they acquired coverage directly from the individual policy Marketplace.
As an enticement for employers that have fewer than 25 FTEEs with average annual wages of less than $50,000 to provide health insurance to their employees, the ACA added a small business health care tax credit. To qualify, the business needs to purchase the health insurance through the SHOP Marketplace and cover at least 50 percent of their full-time employees’ premium costs. However, this credit applies for only 2 years, after which time the employer will receive no further financial assistance from Uncle Sam. A recent General Accounting Office report noted that far fewer small businesses were taking advantage of the credit than expected by Congress.
If you have questions, need assistance in determining whether you meet the 50-employee threshold, or would like to determine the benefit of the small business health care tax credit, please give Dagley & Co. a call.
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These days, it seems like almost everyone has a startup – and if you have a great business idea, why not join in on the fun? Every year, thousands of entrepreneurs across the nation launch their own business. The internet marketplace makes sales easier than ever. If you’re ready to start your own business, here’s a step-by-step overview of what you need to do to make your vision become a reality.
- Start with an Idea and Brainstorm
Perhaps you’ve already have zeroed in on a product or service for your new upstart. While having an idea is a good start, it’s important to get your mental muscles turning and brainstorm that idea. Is there a demand for the product or service? Who is your target market? Are there additional related services or products that can be tied into the primary offering? Keep in mind that adjunct services and products are an effective way to increase your bottom line. Thinking about potential problems and having solutions in place will also help your launch run more smoothly. The key takeaway with brainstorming is that it’s a powerful tool which will get you to think critically about your idea.
- Draft a Business Plan
A business plan is the road map of your new business. It defines and clarifies the direction of your business, products or services and a description of your customers. It’s also an effective way to plan for market changes and focuses on your future vision for company goals. When drafting your business plan, be sure to include facts, statistics and figures that support your idea. This will better help attract investors, partners, suppliers and executive level employees for your new venture. The typical business plan averages 15 to 20 pages and includes an overview of the plan, business description, development, competition analysis, management, market strategies and financial information. A business plan is required to secure funding at the start-up phase and your map to the future.
- Fund Your Business
To turn your dream idea into a viable business, it’s going to take money. There’s no magic bullet here, so you’ll have to explore your resources and determine which one is most attractive. You can opt for a credit line of credit or a bank loan. Just keep in mind that you’ll have to have a solid credit history or existing assets to put up for collateral. Another option is to join a startup incubator. Organizations like Y Combinator not only provide free resources to startups, but seed funding. Some startups find funding from local angel-investor groups. Most metropolitan areas have groups of angel investors who are interested in supporting startups and willing to fund up to millions of dollars for qualified startups. Once of the newest ways to get funding to launch a business is to start a crowdfunding campaign online. Online sites like Kickstarter gives you the opportunity to have folks make pledges for a startup. Other ways to garner monies for your new company include getting a small business grant and asking strategic partners, friends or family members.
- Select an Accountant and Attorney
Both an accountant and attorney should be on your startup team. Entrepreneurs must keep endless amounts of records for tax and legal purposes. An accountant – such as one from Dagley & Co. – can provide you with a wide range of services through the early stages, including business entity selection, expense tracking, business licenses, financial planning, month-end accounting, tax preparation, an accounting system, W2s and 1099s. Outsourcing with our accounting firm lets you focus on your core business instead of non-core business. Accountants are also essential when it comes to raising funds, structuring deals and financial reporting. An attorney adds value to a startup in a variety of ways. Not only does an attorney assist with entity formation, they help you work with the government, third parties and other company founders. You don’t want to violate any laws, and an attorney will keep you on the right side of the law. They help you draft the proper legal documents to control risk with suppliers, protect intellectual property rights, employees and customers. Plus, they can assist multiple founders of a startup in drafting up agreements that outline the rights and duties of each.
- Apply for Tax ID and State Sales Tax Permit
You’ll need to fill out a tax identification application to get your tax ID. This number identifies your business on all types of documents and registrations. As a matter of fact, most banks will require your tax ID before you can apply for a business loan or set up a business checking account. You can apply for a tax ID at the IRS website. Just print out a copy of the SS-4 form. And if you’re selling any services or products that are subject to sales tax in your state, you must collect that tax from your customers and pay it to the state. It’s important to note that if you have more than one location for your business, you must obtain and display a Sales and Use Tax Permit in each location.
- Obtain a Business License
Your new business needs a business license in order to operate legally, even if you’re operating from home. You can find all the information to do this at the SBA website or your city’s business website. You’ll need to know your business code. Different codes require a specific application process, and each city has its own set of rules and requirements. Generally, you’ll have to provide your federal ID number, type of business, number of employees, business address, contact information and the name of the business owner.
- Know the Labor Laws
Workers compensation coverage is required for businesses with more than three employees. If you have more than three employees, you’ll need to attain workers compensation on a self-insured basis, through a commercial carrier or through the state Workers Compensation Insurance program. Employers are also required by federal and state laws to display posters in the workplace that inform employees of employer responsibilities and employee rights under labor laws. You can easily attain these posters free from state and federal labor agencies.
- Choose a Business Location
Deciding where to set up shop is a critical business decision. The real estate mantra of “location, location, location” has merit for a successful business venture. You’ll want to ensure that the area has the human resources to meet staffing needs. For example, if your startup is focused on detailed work, you most likely wouldn’t want to choose a rural community for its location. Always investigate the available labor pool in your chosen area. Determine the demographic profile of your location. You’ll need to know who your customers are and their proximity to your location. This is important if you’re a retailer or in some type of service business. If you’re customer base is local, you need to ensure that there is a sufficient percentage of the population that needs your product or services to support your business. The community of the location should also have a stable economic base.
Launching a new business takes a lot of planning and effort, but it can lead to a very rewarding lifestyle. Follow our steps and you’ll be in good shape to tackle the task. Contact us at Dagley & Co. so we may help you with every step of the process – and your business taxes!
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Does your favorite tax benefit expire this year? More than 50 tax provisions that Congress routinely extends on a yearly basis expired at the end of 2014. The big problem is, each year they are extending the provisions later and later in the year, creating uncertainty for taxpayers on whether they can depend on these tax incentives or not. This makes tax planning unclear and leaves taxpayers wondering about their projected tax liability.
Although there were serious discussions among some members of Congress in the spring related to passing an extender bill, those discussions withered away with the summer heat and little has been discussed recently about either making some of the provisions permanent or extending some or all of them for another year. So whether we will have extender legislation and, if we do, what will be included in that legislation is up in the air.
So you may wish to review the expiring provisions to see how you will be affected if they are not extended. Each of these tax benefits expired at the end of 2014 and will not apply in 2015 unless Congress acts. Although more than 50 provisions are expiring, the list below only includes those that most likely will impact individuals and small businesses:
- Teachers’ Above-the-Line Expense Deduction – Elementary and secondary teachers have been allowed to deduct up to $250 for classroom supplies without itemizing their deductions. As an alternative, these teachers can deduct these expenses as a charitable itemized deduction if they work for a public school or charitable organization and obtain the required documentation verifying the expenses.
- Principal Residence Acquisition Debt Forgiveness Exclusion - When a lender forgives debt, the amount of the debt forgiven is income to the borrower; and, although the law allows a taxpayer to exclude that debt relief income to the extent the taxpayer is insolvent, many taxpayers saddled with this problem were not insolvent. To alleviate that situation, Congress passed a law allowing debt relief income from the discharge of qualified principal residence acquisition debt to also be excluded from one’s income. This exclusion does not apply to forgiven equity debt income.
- Excludable Commuter Transportation and Transit Passes – The tax law allows an employer to reimburse, tax-free, an employee for qualified parking, certain commuter transportation and transit passes. For several years now, the monthly maximum has been the same for all three ($250 in 2014). However, the nontaxable amount of commuter transportation and transit passes will drop to $130 in 2015 if the higher deduction is not extended.
- Mortgage Insurance Premiums – A temporary provision has been allowing lower-income taxpayers to deduct mortgage insurance premiums on contracts in connection with acquisition indebtedness on the taxpayer’s principal residence.
- General Sales Tax Deduction – This temporary provision allows taxpayers to take a deduction for state and local general sales and use taxes in lieu of a deduction for state and local income taxes. The big losers here will be residents of states that do not have a state income tax; these taxpayers will end up without either deduction if the provision is not extended.
- Qualified Conservation Contributions – This special rule for contributions of capital gain real property made for conservation purposes allowed qualified conservation contributions to be deducted up to 50% of a taxpayer’s AGI (100% for qualified farmers and ranchers). Without an extension, the allowable contribution will be limited to 30% of the taxpayer’s AGI. The portion of the contribution that exceeds the AGI limitation is carried over for up to five future years.
- Above-the-line Tuition Deduction – This deduction allows moderate and low-income taxpayers to take an above-the-line deduction (maximum $4,000) for qualified higher education tuition and related expenses. As an alternative, most taxpayers will qualify for the American Opportunity Tax Credit.
- IRA to Charity Contribution – A temporary provision allowed taxpayers age 70½ or older to directly transfer up to $100,000 from an IRA to a qualified charity without including the distribution in income, and it would also count towards their required minimum distribution. Although no charitable deduction is allowed, the benefit is the same as (or even better than) taking a taxable distribution and then getting a charitable deduction. It also keeps the donor’s AGI lower for purposes of all the AGI limitations built into the tax laws. It is especially helpful for those with Social Security income that becomes taxable because of an IRA distribution. As a hedge, in case this provision is extended, act as if it has been.
- Bonus Depreciation – For the past several years, as an incentive for businesses to invest in equipment and boost the economy, this provision allowed businesses to take bonus depreciation in the first year the property is placed in service. At one time it was 100%, but was 50% in 2014. The impact here, if the provision is not extended, is that equipment will have to be depreciated over the equipment’s useful life, generally 5 or 7 years. Where applicable, the Sec 179 expense deduction can be used, but it too is reduced drastically without extension (see below).
- Sec 179 Expense Deduction – As part of the economic recovery efforts of the last few years, Congress temporarily increased the Sec. 179 expensing limit from $25,000 per year to $500,000, which it has been since 2010. The property cost limit phaseout threshold was also increased to $2 million. Without extension the maximum deduction will return to $25,000 with a $200,000 cost limit phaseout.
- Qualified Real Property Sec 179 Deduction – For years 2010 through 2014, the definition of qualified property for purposes of the Sec 179 deduction was temporarily amended, with some limitations, to include:
- Qualified leasehold improvement property,
- Qualified restaurant property, and
- Qualified retail improvement property
Thus, without an extension, these properties will no longer qualify for the Sec 179 expense deduction.
- 15-year Life – A temporary provision allows 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. Without an extension, these items will have to be depreciated over a 31-year life.
Where Congress left off this summer was with a Senate bill that would extend the provisions for 2015 and 2016 and House legislation that would only extend a few of the provisions for 2015 only. With the partisan battles going on in Congress, the distraction of the upcoming elections and the holiday recesses just around the corner, what will happen to the extender legislation is anyone’s guess at this point. If history is an indicator, passage will come very late in the year.
If you have any questions, please get in touch with us at Dagley & Co. You’ll find our information at the bottom of this page.