• Hire Contractors in 2015? The Deadline for 1099s Is February 1, 2016

    12 January 2016
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    If you operate a business and hired an individual (like an independent contractor) who is not an “employee” and you paid him or her $600 or more for the 2015 calendar year, you are required to issue him or her a Form 1099 at the end of the year to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit – or at the very latest, February 1, 2016.

    That is, the due date for mailing the recipient his or her copy of the 1099 that reports 2015 payments is February 1, 2016, while the copy that goes to the IRS is due at the end of February.

    It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.

    IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file 1099s for your vendors. It also provides you with verification that you complied with the law in case the vendor gave you incorrect information. We highly recommend that you have a potential vendor complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.

    The penalties for failure to file the required informational returns have been doubled this year and are $250 per informational return. The penalty is reduced to $50 if a correct but late information return is filed not later than the 30th day after the February 29, 2016, required filing date, or it is reduced to $100 for returns filed after the 30th day but no later than August 1, 2016. If you are required to file 250 or more information returns, you must file them electronically.

    In order to avoid a penalty, copies of the 1099s you’ve issued for 2015 need to be sent to the IRS by February 29, 2016. They must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s for submission to the IRS. This service provides recipient copies and file copies for your records. Use the 1099 worksheet (http://images.client-sites.com/1099-Worksheet.pdf) to provide Dagley & Co. with the information needed to prepare your 1099s.

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  • September 2015 Tax Due Dates for Individuals

    31 August 2015
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    A fresh month means a new list of deadlines. Here are the upcoming tax due dates for individuals for September 2015. Check back later this week for September deadlines for businesses.

    September 1 – Tax Planning

    Tax season is around the corner! Contact Dagley & Co. to schedule a consultation appointment. You’ll find our information at the bottom of this screen.

    September 10 – Report Tips to Employer

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

    September 15 – Estimated Tax Payment Due
    The third installment of 2015 individual estimated taxes is due. The United States’ 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 contact Dagley & Co. for particular state safe harbor rules.

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  • Everything You Need To Know About Balance Sheets (And Why You Need Them)

    25 August 2015
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    Alright small business owner. Let’s talk about balance sheets.

    The best way for small business owners to stay aware of their company’s financial status is to have an accurate, up-to-date balance sheet. By keeping this information up to date every quarter, you can help yourself avoid a lot of problems and surprises down the road.

    A balance sheet provides you with an at-a-glance summary of your company’s financial health as of a specific day. It is broken down into what the business’s assets are, what the business’s liabilities are, and the amount of owner or shareholder equity. The balance sheet gets its name from the fact that the assets must be balanced by and equal to the liabilities plus the equity. Some business owners have found current balance sheets so helpful that they update them every month.

    Understanding the Asset Portion of the Balance Sheet

    When entering assets onto the balance sheet, the business owner needs to include everything that is owned by the business, whether current or liquid assets, fixed assets (http://www.investopedia.com/terms/f/fixedasset.asp), or some other type of asset. Current or liquid assets include:

    • Cash that is immediately available
    • Money that is owed to you (Accounts Receivable)
    • Products currently in stock (Inventory)
    • Expenses paid in advance, such as insurance premiums
    • Money-market accounts, investments and other securities
    • Additional monies owed to you

    Fixed assets are items that can’t be easily sold or moved, including equipment and furnishings, buildings, land and vehicles. In most cases these assets depreciate, or decrease in value. Beyond current and fixed assets, items that are intangible, such as goodwill, copyrights and patents, are also considered assets on a balance sheet. It is important to note that money that is owed to you that you expect will not be paid is classified as a Reserve for Bad Debts, which decreases the amount of the Accounts Receivable on the balance sheet.

    Understanding the Liability Portion of the Balance Sheet

    When entering liabilities onto the balance sheet, the business owner needs to include all of the business’s debts, both current and long term. Current liabilities include accounts payable, sales and payroll taxes, payments on short-term business loans such as a line of credit, and income taxes. Long-term liabilities are those that are paid over a longer period of time, generally over more than a year. These include mortgages and leases, future employee benefits, deferred taxes and long-term loans.

    Understanding the Equity Portion of the Balance Sheet

    When entering information onto the equity portion of the balance sheet, you should include the value of any capital stock that has been issued, any additional payments or capital from investors beyond the par value of the stock, and the net income that has been kept by the business rather than distributed to owners and shareholders.

    In order to be sure that all of the information on the balance sheet is correct, you can double-check your numbers by subtracting assets from liabilities – the result should equal the equity amount. For more information on how to structure a balance sheet, check out this website: “http://www.accountingcoach.com/balance-sheet/explanation/4″>sample balance sheet</a>.

    The Value of a Balance Sheet

    At first glance a balance sheet may look like an incomprehensible collection of numbers, but once you understand all of the various components and how they relate to one another, they will provide you with the opportunity to detect trends and spot issues before they become problems. Your balance sheet can alert you to:

    • Times when inventory is outpacing revenue, thus alerting you to a need for better management of your inventory and production process
    • Cash flow problems and a shortage of cash reserves
    • Inadequacies in your cash reserves that are making it difficult to invest in continued growth
    • Problems with collecting accounts receivables

    The most essential tools that are available to you as a small business owner for gauging your operation’s financial health are the balance sheet, the income statement and the cash flow statement. If you are unsure of how to prepare these documents for yourself or don’t have the time, then let a qualified professional at Dagley & Co. take over and provide the information that you need.

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  • August 2015 Tax Due Dates

    31 July 2015
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    A new month brings new tax due dates – but don’t stress. It’s August, and there aren’t too many you need to worry about, so we’ll quickly guide you through them below. Contact us at Dagley & Co. if you have any questions about these due dates.

    August 2015 Individual Due Dates

    August 10 – Report Tips to Employer

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

    August 2015 Business Due Dates

    August 10 – Social Security, Medicare and Withheld Income Tax

    File Form 941 for the second quarter of 2015. This due date applies only if you deposited the tax for the quarter in full and on time.

    August 17 – Social Security, Medicare and Withheld Income Tax

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

    August 17 – Non-Payroll Withholding

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

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  • July 2015 Tax Due Dates for Individuals

    7 July 2015
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    Working for tips? You’ll need to report those soon. Image via public domain.

    As we head into July, it’s important to keep some of these tax due dates for individuals in mind. Go here to read our list of July tax deadlines for business owners.

    July 1 – Time for a Mid-Year Tax Check Up

    Time to review your 2015 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.

    July 10 – Report Tips to Employer

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

    July 15 – Social Security, Medicare and Withheld Income Tax

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

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  • Tax Tips for Students Working Summer Jobs

    1 July 2015
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    Are you, or are you the parent of, a teenager with a summer job? It’s important to be aware of the special tax issues which student-aged people should consider when working a summer job. We’ve compiled a list for you:

    1. Completing Form W-4 When Starting a New Job – This form is used by employers to determine the income taxes that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $6,300 (the standard deduction amount) without being liable for income tax. However, if the student is a dependent and has investment income, the tax determination becomes more complicated and subject to special rules.
    2. Cash Jobs – Many students do odd jobs over the summer and are paid in cash. Just because the job is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see below). These earnings include income from odd jobs like babysitting and lawn mowing.
    3. Self-Employment Tax – When an individual works for an employer, the employer withholds Social Security and Medicare taxes from the employee’s pay, matches the amount dollar for dollar, and remits the combined amount to the government. Self-employed workers are required to pay the combined employee and employer amounts themselves (referred to as self-employment tax) if their net earnings are $400 or more. This tax pays for their future benefits under the Social Security system. Even if a worker is not liable for income tax, this 15.3% tax may apply. Even though skirting the law, some employers prefer to treat their workers as “independent contractors” who receive their pay with no taxes withheld, because the employers avoid paying their share of the employment taxes. While the employees may like getting a larger check each pay day, they may find themselves owing income tax and possibly the self-employment tax on their earnings when they file their tax returns for the year. If the worker is offered a job on an independent contractor basis, and that job would normally be filled by an employee, the worker should seriously consider if this arrangement is suitable under the circumstances.
    4. Employed in a Family Business – If the family business is unincorporated, and pays wages to a child under age 18, the child is not subject to payroll taxes (FICA) since they do not apply to a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the parent’s business will not have to pay its half either. In addition, paying the child, and thus reducing the business’s net income, can reduce the parent’s self-employment tax. However, the wages must be reasonable for the services performed.
    5. ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay—such as pay received during summer advanced camp—is taxable.
    6. Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes under the following conditions:
    7. Tips – If the student works as a waiter, camp counselor, or some other common summer jobs, the student may receive tips as part of the summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The IRS provides publication 1244 that can be used to record tips for a month on a daily basis. The employer withholds FICA (Social Security and Medicare) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2.
    • The person is in the business of delivering newspapers;
    • All of the pay for these services directly relates to sales rather than to the number of hours worked; and
    • A written contract controls the delivery services and states that the distributor will not be treated as an employee for federal tax purposes.
    1. Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

    Please get in touch with us at Dagley & Co. if you have additional questions related to a child’s employment.

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  • Eight Ways to Get Your Customers to Pay On Time

    16 June 2015
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    You shouldn’t have to wrestle your customers for payments owed to you. Here are some tips for smooth invoicing. Image via public domain.

    A wise businessman once said, “a sale isn’t a sale until you’ve collected payment — it’s just a loan.”

    If you’ve been in business for any length of time, you know how true this quote is. Many small businesses that were profitable on paper have gone bankrupt waiting for payments from customers to arrive.

    This makes accounts receivable (AR) collections one of the most important tasks for small business owners. Unfortunately, it’s also one of the most neglected. Here are eight strategies you can implement to help boost your AR collections and improve your cash flow:

    1. Make sure your invoices are clear and accurate. If invoices are vague, ambiguous or flat-out wrong, this is sure to delay customer payments as they call to try to get things straightened out. In short, you don’t want to give customers a reason not to pay your invoices quickly. We recommend QuickBooks to our clients for clear, accurate invoicing.
    2. Create an AR aging report. This report will track and list the current payment status of all your client accounts (e.g., 0-30 days, 30-60 days, 60-90 days, 90+ days). This will tell you which clients are current in their payments and which clients are past due so you know where to focus your collection efforts. To go on our earlier point, QuickBooks is great because it automatically does this for you.
    3. Give a bookkeeping employee responsibility for AR collections. If collecting accounts receivable isn’t the main responsibility of one specific employee, it will probably fall by the wayside as other tasks crowd it out. Therefore, make one of your bookkeeping employees primarily responsible for this task.
    4. Move quickly on past-due accounts. Don’t delay taking action once a client’s account reaches the past-due stage. Studies have revealed that the likelihood of collecting past-due receivables drops drastically the longer they go uncollected. Your designated bookkeeping employee should start making collections efforts the day after an account becomes past due.
    5. Plan your collections strategy carefully. Decide ahead of time how you will approach late-paying clients. For example, a friendly reminder call and/or email from your designated bookkeeping employee is probably a good first collection step. If this doesn’t get results, you can proceed to more aggressive steps such as sending past due notices and dunning letters.
    6. Consider offering a payment plan. Sometimes, customers have legitimate reasons why they can’t pay their invoices on time. Maybe the customer is having temporary cash flow problems and wants to pay you but simply can’t right now. In this scenario, you might consider working out a payment plan that allows the customer to pay the balance due over a period of time. The agreement should be made in writing and signed by both parties.
    7. Hire a collection agency. If all of these steps fail to resolve a collection problem, you might have to turn to a collection agency as a last resort. However, this is a serious step that should not be taken lightly, since it will probably jeopardize your relationship with the customer. Decide whether or not collecting the past-due amount is worth possibly losing the customer. Also keep in mind that the collection agency will keep a large percentage of the amount collected.
    8. Hire Dagley & Co. We are here to help if you have customers that are falling behind. Sometimes it’s best to have a third party go after late bills, and we can handle the correspondence in a way that is professional so that you can keep your personal relationship with your clients and customers upbeat.

    Very few small businesses can afford not to make AR collections a top priority. Following these eight steps will help you improve your collections — and these improvements will boost both your cash flow and your bottom line.

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  • June 2015 Tax Due Dates for Individuals

    2 June 2015
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    When most people think of tax deadlines, they have one date in mind for the whole year: April 15. It turns out there are tax deadlines throughout the year, particularly for those who receive tips on the job, are independent contractors, are living abroad, and more. Read on to find out if any of these June tax due dates apply to you, and get in touch with us at Dagley & Co. if you would like more clarification or assistance in hitting these deadlines. You’ll find our contact information at the bottom of this webpage.

    June 1 – 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, 2014. The FMV of an IRA on the last day of the prior year (Dec 31, 2014) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2015. If you are age 70½ or older during 2015 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.

    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 2015 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 this office 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 2014 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 15. 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 this office 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, 2015 for 2014. 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 2014. Contact our office for additional information and assistance filing the form.

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  • Low Income? Do Not Miss Out On The Earned Income Tax Credit!

    27 May 2015
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    If you work and have a lower income, the Earned Income Tax Credit (EITC) is for you. If you qualify, this credit could be worth up to $6,242 in 2015. This means you could pay less federal tax – or even better, you could get a refund. The credit is a refundable credit, so you can receive the benefits of the credit even if you do not owe any taxes. That’s money you can use to make a difference in your life.

    Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it simply because they don’t understand the criteria.

    If you qualify for but failed to claim the credit on your return for 2012, 2013 and/or 2014, you can still claim it for those years by filing an amended return or an original return if you have not previously filed.

    The EITC is based on the amount of your earned income and whether there are qualifying children in your household. If you have children, they must meet relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit. The EITC income qualifications are annually inflation adjusted. The qualifications shown below are for 2015. Please call for those that apply for prior years.

    If you were employed for at least part of 2015, you may be eligible for the EITC based on these general requirements:

    • You earned less than $14,820 ($20,330 if married filing jointly) and did not have any qualifying children.
    • You earned less than $39,131 ($44,651 if married filing jointly) and have one qualifying child.
    • You earned less than $44,454 ($49,974 if married filing jointly) and have two qualifying children.
    • You earned less than $47,747 ($53,267 if married filing jointly) and have more than two qualifying children.

    In addition you must meet a few basic rules:

    • You must have a valid Social Security Number.
    • You must have earned income from employment or from self-employment.
    • Your filing status cannot be married, filing separately.
    • You must have been a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
    • You cannot be a qualifying child of another person.
    • Your investment income for the year cannot exceed $3,400 (call for other years).
    • If you do not have a qualifying child, you must:
    • Be age 25 but under 65 at the end of the year,
    • Live in the United States for more than half the year, and
    • Not be a qualifying child of another person.
    • You cannot file Form 2555 or 2555-EZ (excluding foreign earned income)

    Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If that election is made, the military member must include in earned income all nontaxable combat pay received. If spouses are filing a joint return and both spouses received nontaxable combat pay, then each one can make a separate election.

    If you have questions about your qualifications for this credit or need help amending or filing a prior year return to claim the credit, please get in touch with us at Dagley & Co.

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  • Safe-Harbor Home Office Deduction: Is It Better For You?

    11 May 2015
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    home office

    Though many businesses require office space, millions more are operated out of an entrepreneur’s home – and this can lead to a tax deduction. Taxpayers can elect to take a simplified deduction for the business use of the taxpayer’s home.  The deduction is $5 per square foot, with a maximum square footage of 300.  Thus, the maximum deduction is $1,500 per year.  Here are the details of this simplified method:

    • Annual Election – A taxpayer may elect to take the safe-harbor method or the regular method on an annual basis.  Thus, a taxpayer may freely switch between the methods each year.  The election is made by choosing the method on a timely filed original return and is irrevocable for that year.
    • Depreciation – When the taxpayer elects the safe-harbor method, no depreciation deduction for the home is allowed, and the depreciation for the year is deemed to be zero.
    • Additional Office Expenses – Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the safe-harbor method is used.
    • Home Interest and Taxes – Prorated home interest and taxes are not allowed as an office expense when using the safe-harbor method.  Instead, 100% of the home interest and taxes are deductible as usual on Schedule A.
    • Deduction Limited by Business IncomeAs is the case with the regular method, under the safe-harbor method the home office deduction is limited by the business income.  For the safe harbor, the deduction cannot exceed the gross income derived from the qualified business use of the home for the taxable year reduced by the business deductions (deductions unrelated to the qualified business use of a home).  However, unlike the regular method, any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.
    • Home Office Carryover – This cannot be used in a year in which the safe-harbor method is used.  The carryover continues to future years and can only be used when the regular method is used.
    • Qualifications – A taxpayer must still meet the regular qualifications to use the safe-harbor method.
    • Reimbursed Employee – The safe-harbor method cannot be used by an employee who receives advances, allowances, or reimbursements for expenses related to qualified business use of his or her home under a reimbursement or other expense allowance arrangement with the employer.
    • Determining Square Footage – To determine the average square footage of the business, use these guidelines:
      • Square Feet Maximum – Never use more than 300 square feet for any month, even if the taxpayer has multiple businesses.  Where there are multiple businesses, use a reasonable method to allocate between businesses.
      • Determining Average Square Feet for the Year – Use zero for months when there was no business use or when the business was not for a full year.
      • 15-Day Minimum – Don’t count any month in which the business use is less than 15 days.

    As an example, a taxpayer begins using 400 square feet of her home for business on July 20, 2015, and continues using the space as a home office through the end of the year.  Her average monthly allowable square footage for 2015 is 125 square feet (300 x 5 months = 1500/12 = 125).           

    • Multiple Businesses – Where there are multiple businesses, only one method may be used for the year—either the regular or safe harbor.
    • Mixed-Use Property – A taxpayer who has a qualified business use of a home and a rental use for purposes of § 280A(c)(3) of the same home cannot use the safe-harbor method for the rental use.
    • Taxpayers Sharing a Home – Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe-harbor method but not for a qualified business use of the same portion of the home.

    As an example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the safe-harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.          

    • Depreciation Rate When Switching Methods – When the safe-harbor method is used and the taxpayer subsequently switches back to the regular method, use the depreciation factor from the appropriate optional depreciation table as if the property had been depreciated all along.

    When choosing between the methods, the following factors should be considered:

    • There is no reduction in basis for depreciation or depreciation recapture when using the safe-harbor method.
    • When using the regular method, the income limitation takes into account home interest, taxes, and other expenses before allowing the depreciation portion of the deduction.  That is not true for the safe-harbor method as the interest, taxes, and other business-use-area expenses are not considered.

    If you have questions related to this simplified method of claiming a deduction for the business use of your home, please get in touch with Dagley & Co.

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