April is a busy month for business owners, accountants, accounting departments, CFOs and more. As Tax Day is quickly approaching, plan out your month in advance with these business due dates:
April 18 – Household Employer Return Due
If you paid cash wages of $2,000 or more in 2016 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 2015 or 2016 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.
April 18 – Corporations
File a 2016 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 5-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.
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 2017 estimated tax of a calendar year corporation is due.
April 18 – Partnerships
Last day file 2016 calendar year fiduciary return or file an extension.
Contact Dagley & Co. with any questions, or if you’d like to schedule your last-minute tax refund meeting.
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Business owners and employees often use the standard mileage rate when taking a deduction for the business use of their vehicle. The standard mileage rate is determined annually by the IRS by using data based on the prior year’s costs. For 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 53.5 cents per mile for business miles driven, down from 54 cents for 2016. Operating expenses include:
- Vehicle registration fees
- Straight line depreciation (or lease payments)
What business owners using the standard mileage rate frequently overlook is that parking and tolls, as well as state and local property taxes paid for the vehicle and attributable to business use, may be deducted in addition to the standard mileage rate.
Regardless of whether the standard mileage rate or actual expense method is used, a self-employed taxpayer may also deduct the business use portion of interest paid on an auto loan on their Schedule C. However, employees may not deduct interest paid on a consumer car loan.
If you have questions related to taking a tax deduction for the business use of your vehicle, please give Dagley & Co. a call.
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Are you a childcare provider? If so, did you know are certain tax laws that provide you and your business with special tax breaks? These breaks include deductions for travel, capital purchases, supplies, children’s meals and the business use of your home. Dagley & Co. has broke down each tax break category for you:
Travel – Your auto expenses are based on the number of qualified business miles that you drive. Auto expenses for you (as a day care provider) could include transportation:
- To and from a class taken to enhance your day care skills;
- For field trips with those for whom you are providing care;
- For errands related to day care business (e.g., going to the bank to deposit day care receipts or to the store to shop for day care supplies); or
- To chauffeur day care attendees.
To claim business use of your vehicle, use the actual expense method or the standard mileage rate. However, the actual method requires far more detailed records; you must keep track of your business miles and total miles to prorate the costs of fuel, insurance, repairs, etc. You will probably find the standard mileage rate to be far less complicated, as you only need to contemporaneously record your business miles and the purpose of each trip. Even with the standard method, you’ll still need to know the total miles driven for the year. For 2017, the rate is 53.5 cents per mile, down from 54.0 cents per mile in 2016.
Capital Purchases – Capital items are those that normally last more than one year, including cribs and playground equipment. Be sure to keep receipts for these items, as they can generally be depreciated or expensed, whichever works best for you.
Supplies and Business Expenses – The cost of items such as crayons, coloring books, paper plates, cups, cleaning supplies, and first aid supplies are also deductible in the year they are purchased. However, you need to keep receipts for all such purchases.
Food – You can also deduct the actual cost of any food that is provided to the children in your care. It can be a bookkeeping nightmare to keep track of which grocery items were purchased for the childcare business and which were for personal consumption. Luckily, the government allows a care provider to deduct standard meal rates in lieu of actual amounts. This method does not require you to keep grocery receipts, and the IRS will not contest a food deduction based on the standard rates. The rates are the same throughout the contiguous U.S. states, with higher allowances for Alaska and Hawaii.
Year State Breakfast Lunch Dinner Snack 2016 ContiguousAlaska
Business Use of the Home – Generally, when a taxpayer claims a business deduction for the use of his or her home, the portion of the home that is used must be exclusively used for business purposes. Knowing that childcare providers do not use a specific space in the home 100 percent of the time, Congress added an exception related to the business’s licensing, certification, registration, or approval as a day care center or family/group care home under the provisions of any applicable state law. This exception applies only if the childcare owner or operator has applied for, been granted, or is exempt from such approval. In addition, the exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial, such that any educational, developmental or enrichment activities are only incidental to the custodial services. The services must be provided for adults age 65 or older, children, or other individuals who are physically or mentally incapable of caring for themselves.
When calculating the percentage use of a home for business, there are two factors: the space used to operate the day care business and the amount of time that the space is used to provide day care, including preparation and cleaning time.
Example – Edna uses her living room, kitchen, and bathroom ten hours a day, five days a week to provide licensed day care services. The home is 2,400 square feet, and the living room, kitchen, and bathroom are a combined 1,400 square feet. Edna’s percentage use of her home for business is determined as follows:
Edna’s Home Use Expenses (full year)
Homeowner’s Insurance 550
Mortgage Interest 6,150
Property Tax 2,550
Business Deduction $2,514 (.1736 x $14,480)
There is also a simplified deduction method for the business use of a home; it may be useful for individuals who work from a home office, but it is generally unsuitable for a childcare business.
The deduction for the business use of a home is limited to gross income from the business. If that limit applies to you, any home mortgage interest and property taxes that you have paid, as well as any casualty losses that you have incurred for the year, are always deductible when you itemize deductions, regardless of whether you claim a deduction for the business use of the home.
If you have questions related to how any of these tax breaks apply to you and your childcare business, please give Dagley & Co. a call.
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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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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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When two married people are jointly involved in the operation of an unincorporated business, it is very common, yet incorrect, for all of that business’s income to be reported as just one spouse’s income, even when/if they both work in the business.
In such cases, the spouse not taking credit for his or her portion of the earned income loses out on the chance to accumulate his or her own eligibility for Social Security benefits. In addition, to claim a child care credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the spouse not including a portion of the income from the joint business has another source of earned income, the couple will not be allowed a child care credit.
There are ways to remedy this situation, however. One option is to file a partnership return for the activity, in which case each spouse will receive a K-1 that reports his or her share of the net profit. An approach that avoids the necessity of filing a partnership return, and that is probably less complicated, is a qualified joint-venture election, in which each spouse elects to file a separate Schedule C for his or her respective share of the business. This gives them both self-employed income for the purposes of the self-employment tax and for claiming the child care credit.
A qualified joint venture refers to any joint venture involving the conduct of a trade or business if:
(1) The only members of the joint venture are husband and wife,
(2) Both spouses materially participate in the trade or business, and
(3) Both spouses elect to apply this rule.
Generally, to meet the material participation requirement, each spouse will have to participate in the activity for 500 hours or more during the tax year.
If the net income from the business exceeds the annual cap on income subject to the Social Security tax, the combined self-employment tax for the spouses with split Schedule Cs will exceed what a single spouse would have paid if he or she had filed a single Schedule C.
An additional benefit when filing split Schedule Cs is the opportunity for both spouses to participate in IRAs and self-employed retirement plans.
If you have questions about how splitting the business income between spouses might apply to your specific situation, please contact Dagley & Co. today.
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Business owners often replace vehicles they have used in their business. When replacing a business vehicle, the tax ramifications are different when selling the old vehicle and when trading it in for a new vehicle. If the vehicle is sold, the result is reported on the taxpayer’s return as an above-the-line gain or loss. Since a trade-in is treated as an exchange, any gain or loss is absorbed into the replacement vehicle’s depreciable basis, thereby avoiding any current taxable gain or reportable loss.
Thus, it is generally better to trade in a vehicle that would result in a gain if it were sold and to sell a vehicle if doing so would result in a loss.
Let’s say a taxpayer sells a 100%-business-use vehicle for $12,000. The original purchase price was $32,000, and $17,000 is taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better to sell the vehicle and deduct the loss rather than trade in the vehicle.
Sale price $12,000
Original Cost $32,000
Depreciation Taken <$17,000>
Depreciated Basis $15,000 <$15,000>
Loss <$ 3,000>
On the other hand, had the business owner sold the vehicle for $16,000, the sale would result in a $1,000 taxable gain, and trading it in would be a better option. Caution: Sales to the same dealer are treated as trade-ins.
If a vehicle is used for both business and personal purposes, the loss or gain must be prorated for the proportion of business use, as the personal portion of any loss is not deductible.
If you are considering trading a vehicle in, determine whether the tax benefits exceed the additional money received from selling the old business vehicle, as trade-in values are generally less than actual sales values. You should also consider the time and energy it will take to sell the vehicle on your own.
This concept can also be used when selling or disposing of other business assets. If you have questions about how this tax strategy might apply to your specific tax situation, please give Dagley & Co. a call.
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February 1 – 1099s Due to Service Providers
If you are a rental property or business owner read along. If paid $600 or more for the services of individuals (other than employees) during 2015, you are required to provide Form 1099 to those workers by February 1. “Services” can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 29, 2016 (March 31, 2016 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call Dagley & Co. for preparation assistance.
Payments that may be covered include the following: Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, Compensation for workers who are not considered employees (including fishing boat proceeds to crew members), Dividends and other corporate distributions, Interest, Amounts paid in real estate transactions, Rent, Royalties, Amounts paid in broker and barter exchange transactions, Payments to attorneys, Payments of Indian gaming profits to tribal members, Profit-sharing distributions, Retirement plan distributions, Original issue discount, Prizes and awards, Medical and health care payments, Debt cancellation (treated as payment to debtor), and Cash payments over $10,000.
February 1 – W-2 Due to All Employees
All employers need to give copies of the W-2 form for 2015 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.
February 1 – File Form 941 and Deposit Any Undeposited Tax
File Form 941 for the fourth quarter of 2015. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
February 1 – File Form 943
All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2015. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 1 – W-2G Due from Payers of Gambling Winnings
If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2015.
February 1 – File Form 940 – Federal Unemployment Tax
File Form 940 (or 940-EZ) for 2015. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 1 – File Form 945
File Form 945 to report income tax withheld for 2015 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 10 – Non-Payroll Taxes
File Form 945 to report income tax withheld for 2015 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time.
February 10 – Social Security, Medicare and Withheld Income Tax
File Form 941 for the fourth quarter of 2015. This due date applies only if you deposited the tax for the quarter in full and on time.
February 10 – Certain Small Employers
File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2015. This due date applies only if you deposited the tax for the year in full and on time.
February 10 – Federal Unemployment Tax
File Form 940 for 2015. This due date applies only if you deposited the tax for the year in full and on time.
February 16 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in January.
February 16 – Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in January.
February 29 – Payers of Gambling Winnings
File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2015. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was February 1.
February 29 – Informational Returns Filing Due
File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2015. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others (see February 1.)
February 29 – All Employers
File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2015. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to March 31. The due date for giving the recipient these forms was February 1.
February 29 – Large Food and Beverage Establishment Employers
File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31.
February 29 – Farmers and Fishermen
File your 2015 income tax return (Form 1040) and pay any tax due. However, you have until April 18 to file if you paid your 2015 estimated tax by January 15, 2016.
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If you want to start a business, you’re probably about get down and dirty with the registration process. The simplest and least expensive form of business is a sole proprietorship. A sole proprietorship is a one-person business that reports its income directly on the individual’s personal tax return (Form 1040) using a Schedule C. There is no need to file a separate tax return as is required by a partnership or corporation (if the business is set up as an LLC with just one member, filing is still done on Schedule C, although an LLC return may also be required by the state). Generally, there are very few bureaucratic hoops to jump through to get started.
However, we strongly recommend that you open a checking account that is used solely for depositing business income and paying business expenses. You will also need to check and see if there is a need to register for a local government business license and permit (if required for your business).
If you are conducting a retail business, you will need to obtain a resale permit and collect and remit local and state sales taxes.
If you hire employees, you will need to set up payroll withholding and remit payroll taxes to the government. Before you can do that, however, you’ll need to apply to the IRS for an employer identification number (EIN) because you can’t just use your Social Security number for payroll tax purposes. An EIN can be obtained online at the IRS web site or by completing a paper Form SS-4 and submitting it to the IRS.
As a sole proprietor, you can also very simply set aside tax-deductible contributions for your retirement.
Example: Paul has been working for a computer firm as an installation specialist but has decided to go out on his own. Unless he sets up a partnership, LLC or corporation, Paul is automatically classified as a sole proprietor. He does not need to file any legal paperwork. His business is automatically classified and treated as a sole proprietorship in the eyes of the IRS and his state government.
However, there is a big downside to conducting business as a sole proprietor, and that drawback is liability. Sole proprietors are 100% personally liable for all business debts and legal claims. As an example, in the case that a customer or vendor has an accident and is injured on your business property and then sues, you the owner are responsible for paying any resulting court award. Thus, all your assets, both business and personal, can be taken by a court order and sold to repay business debts and judgments. That would include your car, home, bank accounts and other personal assets.
Other forms of business, such as LLCs and corporations, can protect your personal assets from business liabilities. If you feel that your business is susceptible to lawsuits and would like to explore alternative forms of business, please give Dagley & Co. a call so we can discuss the tax ramifications of the various business entities with you. If you decide on something other than a sole proprietorship, you’ll need legal assistance to formally set up your new business.
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