• May 2017 Individual Due Dates

    28 April 2017
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    A new month is upon us. Dalgey & Co. has your two individual due dates from May 2017:

    May 10 – Report Tips to Employer 

    If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 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.
    May 31 –  Final Due Date for IRA Trustees to Issue Form 5498 

    Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2016. The FMV of an IRA on the last day of the prior year (Dec 31, 2016) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2017. If you are age 70½ or older during 2017 and need assistance determining your RMD for the year, please give this office a call. Otherwise, no other action is required and the Form 5498 can be filed away with your other tax documents for the year.

    Contact Dagley & Co. with any questions regarding May’s individual due dates.

     

     

     

     

     

     

     

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  • 8 Financial Tips to Help Save Money While Building Your Startup

    20 April 2017
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    Starting a new business or startup can be both an exciting and tough time. At Dagley & Co. we’ve compiled a list of eight tips you can use to save money while building your startup company:

    1. Be careful with perks.

    As a new business, you want to attract the best employees to your company. However, trying to offer the same perks as a venture capital can put you in debt quickly. Many successful businesses started in a garage, and there is no shame in keeping things simple at first. Once you’ve made it, you can start thinking about adding cappuccino machines, ping pong tables, and other perks to your office environment.

    1. Use free software programs.

    As you begin building your new business, resist the urge to invest in the latest, most expensive software programs. Instead, look for inexpensive software programs, or find programs that offer a lengthy free trial period. For example, instead of investing in Microsoft Office, you may consider using the free software programs offered by Google or Trello.

    1. Make the most of your credit cards.

    If you already have credit cards, make sure you are getting the most out of any perks they offer, such as frequent flyer miles or cash back. If you are planning to apply for a business credit card, research your options carefully, and choose the card that will give you the best benefits.

    1. Hire interns from local colleges.

    Instead of looking to the open market to find all of your employees, consider hiring interns from a local college instead. These individuals work for much less than a seasoned professional would, and they are often eager to prove themselves in the workplace.

    1. Barter for services.

    As you work to grow your business, you may need a variety of services from independent contractors or other companies. Instead of offering to pay cash for the services you receive, try to offer a different type of benefit that won’t impact your bottom line as much. For example, you may offer some of your own products or services, or you may allow the other party to collect a small amount of the profits you earn because of their services.

    1. Minimize your personal expenses.

    Because you will likely be investing a lot of your own money into your startup, you can increase profitability by reducing your personal expenses. Be careful about how you spend money, especially when you start bringing in revenue. Avoid making large purchases, such as a new house or car, unless they are absolutely necessary. Consider working with your accountant to keep track of all of your expenses so you can identify opportunities to cut back.

    1. Outsource some of your projects.

    To save more money while your business is getting off the ground, consider outsourcing some of your smaller projects, such as building or updating your website. Outsourcing one-time projects to independent contractors or consulting companies can be much more cost-effective than trying to hire a full-time employee to handle the job.

    1. Use LinkedIn for recruitment.

    Recruiting new employees can be expensive, especially if you are determined to find the best people. To cut down on these costs, consider using LinkedIn to recruit new people for your startup. Although you will have to do some of the legwork, you won’t spend as much as you would with other recruiting strategies.

    Regardless of the steps you take to save money as your business grows, you will still need to manage your funds carefully to ensure that your financial situation is improving over time. A professional accountant can help you set up a realistic budget and cash flow forecast to keep you on the right track. Contact Dagley & Co. today to learn more.

     

     

     

     

     

     

     

     

     

     

     

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  • Uber and Lyft Drivers’ Tax Treatment

    6 April 2017
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    Do you drive for Uber or Lyft, or are thinking of getting into this business? We’ve outlined what it’s like to work for these types of companies, including taxes, expenses, and write-offs:

    Uber and Lyft treat drivers as independent contractors as opposed to employees. However, more than 70 pending lawsuits in federal court, plus an unknown number in the state courts, are challenging this independent contractor status. As the courts have not yet reached a decision on that dispute, this analysis does not address the potential employee/independent contractor issue related to rideshare divers; it only deals with the tax treatment of drivers who are independent contractors, using Uber as the example.

    How Uber Works – Each fare (customer) establishes an account with Uber using a credit card (CC), Paypal, or another method. The fare uses the Uber smartphone app to request a ride, and an Uber driver picks that person up and takes him or her to the destination. Generally, no money changes hands, as Uber charges the fare’s CC, deducts both its fee and the CC processing fee, and then deposits the net amount into the driver’s bank account.

    Income Reporting – Uber issues each driver a Form 1099-K reflecting the total amount charged for the driver’s fares. Because the IRS will treat the 1099-K as gross business income, it must be included on line 1 (gross income) of the driver’s Schedule C before adjusting for the CC and Uber service fees. Uber then deposits the net amount into the driver’s bank account, reflecting the fares minus the CC and Uber fees. Thus, the sum of the year’s deposits from Uber can be subtracted from the 1099-K amount, and the difference can be taken as an expense or as a cost of goods sold. Currently, a third party operates Uber’s billing, coordinates the drivers’ fares and issues the drivers’ 1099-Ks.

    Automobile Operating Expenses – Uber also provides an online statement to its drivers that details the miles driven with fares and the dollar amounts for both the fares and the bank deposits.

    Although the Uber statement mentioned above includes the miles driven for each fare, this figure only represents the miles between a fare’s pickup point and delivery point. It does not reflect the additional miles driven between fares. Drivers should maintain a mileage log to track their total miles and substantiate their business mileage.

    A driver can choose to use the actual-expense method or the optional mileage rate when determining operating expenses. However, the actual-expense method requires far more detailed recordkeeping, including records of both business and total miles and costs of fuel, insurance, repairs, etc. Drivers may find the standard mileage rate far less complicated because they only need to keep a contemporaneous record of business miles, the purposes of each trip and the total miles driven for the year. For 2017, the standard mileage rate is 53.5 cents per mile, down from 54.0 cents per mile in 2016.

    Whether using the actual-expense method or the standard mileage rate, the costs of tolls and airport fees are also deductible.

    When the actual-expense method is chosen in the first year that a vehicle is used for business, that method must be used for the duration of the vehicle’s business use. On the other hand, if the standard mileage rate is used in the first year, the owner can switch between the standard mileage rate and the actual-expense method each year (using straight-line deprecation).

    Business Use Of The Home – Because drivers conduct all of their business from their vehicle, and because Uber provides an online accounting of income (including Uber fees and CC charges), it would be extremely difficult to justify an expense claim for a home office. Some argue that the portion of the garage where the vehicle is parked could be claimed as a business use of the home. The falsity with that argument is that, to qualify as a home office, the space must be used exclusively for business; because it is virtually impossible to justify that a vehicle was used 100% of the time for business, this exclusive requirement cannot be met.

    Without a business use of the home deduction, the distance driven to pick up the first fare each day and the distance driven when returning home at the end of a shift are considered nondeductible commuting miles.

    Vehicle Write-off – The luxury auto rules limit the annual depreciation deduction, but regulations exempt from these rules any vehicle that a taxpayer uses directly in the trade or business of transporting persons or property for compensation or hire. As a result, a driver can take advantage of several options for writing off the cost of the vehicle. These include immediate expensing, the depreciation of 50% of the vehicle’s cost, normal deprecation or a combination of all three, allowing owner-operators to pick almost any amount of write-off to best suit their particular circumstances, provided that they use the actual-expense method for their vehicles.

    The options for immediate expensing and depreciating 50% of the cost are available only in the year when the vehicle is purchased and only if it is also put into business use during that year. If the vehicle was purchased in a year prior to the year that it is first used in the rideshare business, either the fair market value at that time or the original cost, whichever is lower, is depreciated over 5 years.

    Cash Tips – Here, care must be taken, as Uber does not permit fares to include tips in their CC charges but Lyft does. Any cash tips that drivers receive must be included in their Schedule C gross income.

    Deductions Other Than the Vehicle – Possible other deductions include:

    • Cell phone service
    • Liability insurance
    • Water for the fares

    Self-Employment Tax – Because the drivers are treated as self-employed individuals, they are also subject to the self-employment tax, which is the equivalent to payroll taxes (Social Security and Medicare withholdings) for employees—except the rate is double because a self-employed individual must pay both the employer’s and the employee’s shares.

    If you are currently a driver for Uber or Lyft, or if you think that you may want to get into that business, and if you have questions about taxation in the rideshare industry and how it might affect your situation, please give Dagley & Co. a call.

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  • January 2017 Individual Due Dates

    3 January 2017
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    JANUARY 2017 INDIVIDUAL DUE DATES

    January 3 – Call for Your Tax Appointment –

    It’s the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so ASAP.

    January 10 – Report Tips to Employer –

    If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.

    January 17 – Individual Estimated Tax Payment Due –

    It’s time to make your fourth quarter estimated tax installment payment for the 2016 tax year.

    January 17 – Farmers & Fishermen Estimated Tax Payment Due – If you are a farmer or fisherman whose gross income for 2015 or 2016 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2016 using Form 1040-ES. You have until April 18, 2017 to file your 2016 income tax return (Form 1040). If you do not pay your estimated tax by January 17, you must file your 2016 return and pay any tax due by March 1, 2017 to avoid an estimated tax penalty.

     

    Contact Dagley & Co. with any questions, or concerns about January’s due dates.

     

     

     

     

     

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  • December 2016 Individual Due Dates

    1 December 2016
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    Happy Decemeber! The busiest and most wonderful time of year has finally begun. With this, means your end of year planning must start ASAP. Before you get overwhelmed, plan out your Decemeber month calander TODAY. We’ve provided some indiviudal dute dates to make it a smoother process. As always, contact Dagley & Co. with any year-end questions regarding tax, business, or individual planning.

    December 1 – Time for Year-End Tax Planning

    December is the month to take final actions that can affect your tax result for 2016. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2016 should call for a tax planning consultation appointment.

    December 12 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 12. 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.

    December 31 – Last Day to Make Mandatory IRA Withdrawals

    Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2016. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.

    December 31 – Last Day to Pay Deductible Expenses for 2016

    Last day to pay deductible expenses for the 2016 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2016). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call the office for more information).

    December 31 –  Last Day of the Year

    If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.

     

     

     

     

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  • Accounting 101: How to Read an Income Statement

    3 November 2016
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    An income statement is a very important document that your company produces. This statement can be challenging to prepare if you are new to the business, or if you are not familiar. We have gathered some good tips and tricks to make it easier for you to read and prepare you income statement accurately.

    What is an Income Statement?

    An income statement, which may also be referred to as a “profit and loss statement,” is an important financial report that communicates your business’s ability to earn a profit. This statement includes information about the money that came into your company during a given period, the expenses your company incurred during that period, and the total amount of profit you earned after all expenses were paid. If your expenses during this time exceeded the amount of income you earned, your income statement will show a loss for the period.

    Sections of an Income Statement

    In most cases, your income statement will be divided into various sections, including Revenue, Operating Expenses and Taxes. Within each section, smaller subsections exist to provide more detailed information. The final line on the statement provides your net profit or loss, which is calculated as the difference between your revenue and all of the expenses paid to earn that revenue.

    Not every income statement includes the same information. However, most statements will include the following lines:

    • Heading– At the top of the statement, you will find a heading that provides the name of your company and the period of time the statement covers.
    • Revenue– The “Revenue” subheading begins the section of the statement that provides details about revenue earned during the period.
    • Gross Sales– This line of the statement tells you the value of all sales made during the period before any deductions for expenses.
    • Returns and Allowances– Returns and Allowances include the cost of any goods returned by customers or discounted by your company.
    • Net Sales– Net Sales is calculated by subtracting the value of Returns and Allowances from your Gross Sales.
    • Cost of Goods Sold– This line lists the total wholesale cost of all of the goods you sold during the period.
    • Gross Profit– Gross Profit is calculated by deducting the Cost of Goods Sold from Net Sales.
    • Operating Expenses– The Operating Expenses subheading begins the section of the income statement that includes all of the expenses your company paid to operate during the period in question.
    • Sales and Marketing– Beneath the Operating Expenses subheading, you will find a smaller subheading labeled “Sales and Marketing.” In this section, you will find a list of all of the expenses your company incurred in relation to marketing. Examples include advertising, commissions and direct marketing. At the bottom of this section, you will find a total of these expenses.
    • General Administrative– This section of the document includes all of the administrative expenses paid during the period, including office supplies, utilities and more. At the end of this section, all general administrative expenses are totaled.
    • Depreciation and Amortization– Under this heading, any expensive assets your business is currently depreciating will be listed, along with the total amount of depreciation for the period.
    • Total Operating Expenses– This section of the income statement provides the total of your operating expenses for the period, including depreciation, administrative expenses and advertising expenses.
    • Operating Income– Your Operating Income is the amount of income left over after all of your operating expenses are deducted from your gross profit.
    • Non-operating Income– This section includes all of the income you earned outside of your standard operations, such as by the sale of assets or investments.
    • Non-operating Expenses– Non-operating expenses include expenses you paid that were not related to the operations of your business. These expenses may be related to earning non-operating income.
    • Income before Taxes– The value on this line is calculated by adding your Operating Income and Non-operating Income and then subtracting your Non-operating Expenses.
    • Taxes– This section includes all of the taxes your business paid during the period, including prepaid income tax and payroll taxes.
    • Total Net Income– The final line on your income statement is your total net income. It is calculated by subtracting your total Taxes from Income before Taxes. If your expenses for the period exceeded your income, this value will be negative, representing an overall loss.

    Getting Professional Help

    Preparing an income statement is no easy task, and interpreting it can also be difficult for many business owners. Dagley & Co. will not only ensure that your income statement is accurate, but we will also be able to help you gain important insight from these statements that can be used to boost your business’s profitability in the future. Give us a call today at (202) 417-6640.

     

     

     

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  • 9 Finance Tips All Business Owners Should Follow

    22 September 2016
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    With the right tools, resources, and a professional by your side, you can enhance the way you do business, reduce your spend, and increase your profit margins. To get started, you need some basic information on finance. Below are 9 finance tips all business owners should follow.

    #1: Recognize the Importance of Your Books

    Invoices, bank statements, and even some accounting work is commonly done through software programs today. However, it’s more than just accounting for your revenue and losses that’s important. In other words, you need to turn this data into usable information. Your figures can help you know how to grow profits even further if you know how to read them properly.

    #2: Stop Putting It Off

    It is much harder to manage that stack of papers at the end of the month than it is to spend a few minutes each day entering details. Having a pro to do this for you makes it even easier. If you are procrastinating, though, you’re hurting your short-term and long-term financial goals.

    #3: Know Your Risks

    A Headway Capital study found that 57% of business owners planned to grow this year. Most companies set out to grow for the year, but they often lack attention spent on minimizing risks. What’s the worst-case scenario? What’s your break-even point? Addressing risks as a part of your financial strategy really can streamline your finances should the year not go as you planned.

    #4: You Really Didn’t Budget, Did You?

    Some small to medium businesses lack the time it takes to budget. It’s understandable, but that doesn’t make it okay. Budgeting helps address those risks, but it also helps you to make better buying decisions. And, when you have tools in place to help you monitor inventory, expenses, and other unforeseen costs, you can create better budgets that allow you to do more with your profits.

    #5: Tax Mistakes Are Common

    Small to medium businesses suffer from some of the most complicated taxes. Without having a professional to monitor and guide your taxes throughout the year, your business could suffer significantly. The IRS says that, in 2014, $1.2 billion in civil penalties were placed against small business income tax filers. Most small businesses need reliable support to ensure tax filing and reporting isn’t a secondary importance.

    #6: Build from Your Strengths

    You don’t have to build your business on new products or start from scratch each time. It’s best to simply build onto what you have. For example, you’ll want to pinpoint where your biggest profit margins come from. Once you understand who your moneymakers are, target them within your business. By identifying and focusing on these areas, you can build your revenue and profits faster, therefore giving you the room to expand in other areas later.

    #7: Building a Business Is More Than Hours Worked

    It’s very common for business owners to spend a lot of time and hard work building their business on their own. Are you putting in 80 hours a week? If so, you may be limiting your growth potential. Instead, empower professionals and employees to help you with delegated tasks. This can give you more time to spend on what’s really making you money and help you to sleep at night.

    #8: Focus on Lean Practices

    Less really is more. As a business owner, you’ll want to incorporate the lean philosophy of keeping less on hand so you reduce your overhead. You create more value for your customers with less.

    #9: Access Capital When You Can, Not When You Need To

    Having a steady stream of income on hand is important. Instead of waiting until you are desperate for funding, and having to show your investors that you are in that place, focus on planning ahead and minimizing the risk of a negative situation.

    As a business owner, making wise financial decisions for your company is an ongoing process. But, you don’t have to do it alone. Allow Dagley and Co. to help you along the way to better manage your money and you could see it grow faster than you thought possible.

     

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  • Due Dates June 2016 – Individual and Business

    29 May 2016
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    June 2016 Individual Due Dates

    June 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 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.

    June 15 – Estimated Tax Payment Due

    It’s time to make your second quarter estimated tax installment payment for the 2016 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: payroll withholding for employees; pension withholding for retirees; and estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

    When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

    Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:  The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

    Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

    However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

    This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

    CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call Dagley & Co. for particular state safe harbor rules.

    June 15 – Taxpayers Living Abroad

    If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15 is the filing due date for your 2015 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 17. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below).

    Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date.

    Combat Zone – For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or the last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area.

    In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation.

    It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 72 months.

    Please contact Dagley & Co. for assistance with an extension request or an installment agreement.

    June 30 – Taxpayers with Foreign Financial Interests

    A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2016 for 2015. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2015. Contact Dagley & Co. for additional information and assistance filing the form.

    June 2016 Business Due Dates

    June 15 – Employer’s Monthly Deposit Due

    If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2016. This is also the due date for the non-payroll withholding deposit for May 2016 if the monthly deposit rule applies.

    June 15 – Corporations

    Deposit the second installment of estimated income tax for 2016 for calendar year corporations.

    June 30 – Taxpayers with Foreign Financial Interests

    A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2016 for 2015. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2015. Contact Dagley & Co. for additional information and assistance filing the form.

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  • Receiving Cash Tips? The IRS Is Watching

    13 May 2016
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    If you collect tips, you must include them in your taxable income. This requirement is not limited to waiters and waitresses; it applies to anyone who collects tips, including taxicab drivers, beauticians, porters, concierges, etc.

    Tips are amounts freely given by a customer to a person providing a service. They are generally given as cash, but they include tips made on a credit or debit card or as part of a tip-sharing arrangement. Tips can also be in the form of non-traditional gifts such as tickets to events, wine and other items of value. If you receive $20 or more in tips in any month, you should report all of your tips to your employer, with these exceptions:

    Tip-splitting Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement by you (the employee initially receiving them). You should report to your employer only the net tips you received.

    Service (cover) charges — These are charges arbitrarily added by the business establishment (employer) — for example, a specific percentage of the bill for parties exceeding X in number — and are excluded from the tip-reporting requirements. If your employer collects service charges from customers, your share of these charges, as determined by your employer, is taxable to you and should already be included as part of your wages.

    Keep a running daily log of tip income Tips are a frequently audited item, and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income.

    Report tips to your employer If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes. If the tips received are less than $20 in any month, don’t think you are off the hook; although they need not be reported to the employer, these tips are still taxable and must be reported on your tax return, as they are subject to income, Medicare and Social Security taxes.

    Employer allocation of tips If you work for a large restaurant, you may find when you get your W-2 form that you got tips you didn’t know about. Restaurants with a large serving staff report a total called “allocated tips” to the IRS. Here is what allocated tips are all about:

    Tip allocation applies to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport,” which happens if an employee reports tips that are less than 8% of the employee’s share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8% amount.

    If this situation applies to you, the allocation amount will be noted in a separate box on your W-2, and these allocated tips won’t be included in the total wages shown on your W-2 form. You will need to report the allocated tip amount as additional income on your tax return unless you have adequate records to show that the amount is incorrect. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.

    Self-Employed Individuals – If you are self-employed, you don’t have an employer to report tips to, and you simply include the tips you’ve received in your self-employed income on your tax return for the year you received the tips.

    Because they are usually paid in cash, tips are a frequent audit item. If you are receiving tips and have any questions, please give Dagley & Co. a call.

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  • April 2016 Due Dates

    5 April 2016
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    April 2016 Individual Due Dates

    April 1 – Last Day to Withdraw Required Minimum Distribution

    Last day to withdraw 2015’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2015. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2015 were required to make their 2015 IRA withdrawal by December 31, 2015.

    April 11 –  Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 11. 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.

    April 18 –  Individual Tax Returns Due

    File a 2015 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.

    Caution: The extension gives you until October 17, 2016 to file your 2015 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call Dagley & Co. to discuss your individual situation if you are unable to file by the April 18 due date.

    Note: the normal April 15 due date is a federal holiday in the District of Columbia, so for almost all individuals their 2015 Form 1040 returns aren’t due until the next business day, which is Monday, April 18 (except residents of Massachusetts and Maine, who have until April 19 to file).April 15 – Household Employer Return Due

    April 18 – Estimated Tax Payment Due (Individuals)

    Estimated Tax Payment Due (Individuals)
    It’s time to make your first quarter estimated tax installment payment for the 2016 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

    When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

    Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

    Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

    However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

    This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call Dagley & Co. as soon as possible. 

    CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call Dagley & Co. for particular state safe harbor rules.

    April 18 – Last Day to Make Contributions

    Last day to make contributions to Traditional and Roth IRAs for tax year 2015.

    April 2016 Business Due Dates

    April 18 – Household Employer Return Due 

    If you paid cash wages of $1,900 or more in 2015 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2014 or 2015 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call Dagley & Co.

    April 18 – Social Security, Medicare and Withheld Income Tax

    If the monthly deposit rule applies, deposit the tax for payments in March.

    April 18 – Corporations

    The first installment of 2016 estimated tax of a calendar year corporation is due.

    April 18 – Partnerships

    File a 2015-calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15.

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