Adam Shay CPA, PLLC was recently a corporate sponsor of the 2014 Coastal Entrepreneur Awards and we had the opportunity to attend the ceremony. There are many great entrepreneurs in Wilmington, NC and hearing their stories was truly inspiring.

One commonality among all award winners and a topic that has resonated with me over the years is the importance of having a support system or a team. This is crucial to not only an entrepreneur's accomplishments, but also success in all aspects of life.

I think back to a leadership conference that I attended in the fall. The event was for our Leadership Wilmington class and was about how to become a successful leader.  Tom Morris of The Morris Institute was our guest speaker. He used the fable of Beowulf to demonstrate just how important building a team was. I will give you a few highlights to refresh your memory on Beowulf. He was a great warrior who defended his land against dragons. He always fought alone, but had enough spectators and followers to help him conquer anything. After two victorious wins against monsters, he was finally defeated and killed by a dragon. Why? To make a long story very short, it was because he did not ask for help. The third dragon could have easily been defeated if Beowulf had turned those spectators into an army. He stood in his own way.

What is my point? Do not be a Beowulf. Do not stand in your own way. Instead of being afraid to ask for help, utilize your support system. If you listen to any awards ceremony, you will hear the recipients thanking their team.  Whether it is their spouse, their children, their mentors, their bosses, their banker, their accountant, their business partner, or their fans, the list goes on.  Who would you thank?

If you work hard at surrounding yourself with successful, supportive, like-minded people, you too will reach your goals.

What are common reasons you would get a notice? You could receive notices for over/underpaid tax liabilities, unreported items, payroll tax discrepancies, etc. If you have had gotten an Internal Revenue Service and/or Department of Revenue letter in that mail and put it to the side, this blog is for you. The worst thing that you can do when receiving notices is ignore them.

The first thing you should do is check to see if the letter is accurate. Let's use payroll tax for our discussion. 

Just recently, the IRS issued letters in regards to '941' refunds (payroll). The letter stated that the business owner was due a refund when in reality, they were not. This seems like good news if they owe you, but it's still important to address what it's in regards to. If the refund had been accurate, you should find out what you were doing incorrectly and fix it. 

There have been other cases when they would issue a notice stating that the business owner has underpaid. Again, they key is to check the notice against your records. If you truly do owe, you should get it taken care of immediately. The agencies will assess interest and penalties in addition to any tax liability. This accrues over time. It could end up costing you a hefty expense and a headache.

The safest thing to do if you receive a notice is to reach out to your tax professional who can advise you.

The dreaded "d" word. DIVORCE. One life event that no one anticipates nor wants to dwell on if you find it happening to you. There are things that need to be addressed from a tax stand point.

Five things you need to know from a tax standpoint:

1. If you live in North Carolina, the state requires you to be legally separated for one year before filing for divorce. Depending on how long you are separated and a few other factors, you can either file "Married Filing Separate" or "Single" if you feel that you cannot (or do not want to) file as you have been, "Married Filing Joint".

2. If you decide to file "Married Filing Separate", and one of you itemizes, you BOTH must itemize. Why does this matter? You could be the one that is adversely affected by this if you are not the one claiming the mortgage interest and real estate taxes that most likely bumped you to filing itemized deductions verses standard in previous years.

3. If you have children, make sure that you are in agreement on who claims them. If you are not communicating and you both claim them, the second return filed will be rejected by the IRS. It is helpful to have this included in your separation or divorce agreement so that it is clear to both of you.

4. If there are statements that are issued to both of you, you will want to discuss who will claim what (interest, dividends, mortgage interest, etc). Remember, if the statement has your social security number on it, it was reported to the IRS that way and will need to be dealt with accordingly.

5. Just as you are considered "married" for the entire year in which you actually get married for tax purposes, the same is true with divorce.

Be sure to check with your tax professional to discuss specifics of your situation.

We get a lot of questions about military spouses and income tax given our proximity to Camp Lejeune in Jacksonville.  For Military spouses, their income may be non-taxable in the state where they  are currently living.

A military spouse is exempt from paying income tax when he or she:

a. Lives in a state that is different from his or her permanent residence;

b. Lives in a state solely in order to live with the service member; and

c. the service member is living in the state in order to satisfy military orders.

There are some other things that must be kept in mind. While the spouse is exempt from paying state tax in the place they are currently living in, they must still pay and file state taxes in the state that they consider home. 

Let's illustrate: Mary is in NC with her husband John, who is in the Marines. They lived in IL when John enrolled in the Marines. Mary works at the local florist.  Mary wished to use IL as her home state of record and forgot to tell her employer that.  Throughout the year, NC tax was withheld from her pay check. What happens? Mary will receive a refund at year end from NC. She will still need to file a tax return for IL and will also owe state taxes there.

What if Mary's "home" was a state (such as FL) where there was no income tax? Mary would get the NC refund and not owe state tax .

Should Mary have IL tax withheld instead of NC and avoid this whole thing? If she knows that she wants to claim IL as her state for tax purposes.  She could always claim NC as her tax state if she wishes. She would need to notify the payroll company so they adjust her paycheck for the correct state withholdings.

When in doubt, check with your local department of revenue and/or seek professional tax assistance.

YES! The way that you initially prepare your businesses tax return and company's books will follow you throughout the life of your business.  The common mistakes that are made within the first few years of business could be avoided if you seek professional assistance. This will save you time, energy, and money. This could be from filing paperwork for the issuance of an Employer Identification Number (EIN) all the way down to the actual bookkeeping and tax return. Common questions that can be answered by your CPA/accountant include but are not limited to:

1. Should my company be a listed as a sole proprietor, partnership, corporation? Which one would be best for me?

2. When I was registering with the Internal Revenue Service, they asked me if I was an "LLC". What is an "LLC"? What are the benefits of being an "LLC"?

3. When I set up the company Quick Books, did I list the assets that I purchased correctly? I don't think I know the difference between a "Profit and Loss Statement" and a "Balance Sheet" and what type of account should appear where?

4. I feel like we should be paying estimated tax payments but I am not sure how much (Remember, as a "self-employed" individual, there are no actual withholdings on your income).

These are a handful of questions that are common to the start-up business. We are here to help guide you through this process. It takes both time and money to correct these types of issues (amending the tax returns, calling the Internal Revenue Service and Department of Revenue, correcting the books, etc). Think of hiring a CPA/accountant as an investment to your company. You have the satisfaction of knowing all of these items have been covered and filed correctly. Last but not least, remember that legal and professional fees are a tax deduction for the business in the year in which they are paid.

One question that you will see on Schedule C "Profit or Loss from Business" and Schedule E "Rental" are:

Did you make payments where you were required to file 1099's?

If "yes," did you file the 1099's?

 

Have you ever wondered what that actually means? Usually, 1099-MISC would be issued for these cases. Common words associated with this form are contract laborers, commission, etc. Let's discuss what that is.

What is a 1099-MISC? This is a form used to report certain payments made to a recipient in any given tax year.

Who do I need to issue a 1099-MISC to? Should I receive a 1099-M?

Any recipient that was paid the following would receive a 1099-MISC:

  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
  • At least $600 in rents, services (including parts and materials), prizes and awards and other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish or, generally, the cash paid from a notional principal contract to an individual, partnership or estate;
  • Any fishing boat proceeds;
  • Gross proceeds paid to an attorney.

Are there exceptions?

There are always exceptions. Some payments do not need to be reported on a 1099-MISC. I will list a few:

  • Payments to a corporation (Note the "gross proceeds paid to attorney" from above. Corporation or not, they still need a 1099-MISC issued if they were paid more than $600.)
  • Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
  • Payments of rent to real estate agents. But the real estate agent must use For 1099-MISC to report the rent paid to the property owner.
  • Wages paid to employees (use W-2's).Payments made electronically may be recorded via 1099-K forms issued by the payment processor.

There are other exceptions but these are most common.

 

A few other items I would like to point out:

  • Be sure to get W-9's filled out at the start of work. This form is a formal document requesting all needed information from the contract laborer. This will help to avoid not being able to get the information that you need to fill out the 1099 at year-end.
  • If you are not sure if a recipient would need a 1099, it is better to have the W-9 on file that to not.
  • Income is income. There could be instances where someone did not follow the rules and you were not issued a 1099-MISC or perhaps you were not paid over $600 from any given person. However, if this was truly income, you are required to report it as such.

The first step in determining the deduction is making sure that you (and the space) actually qualify for it. You must regularly use part of your home exclusively for conducting business. One of the key words here is "exclusively". This space shouldn't also be your 'spare bedroom' that would be used to accommodate friends and relatives visiting from out of town. Rather, it would need to be a room with a true office setup (no bed). In addition, the business part of your home must be either your principal place of business or the location where you meet with clients or customers in the normal course of conducting business.

Starting in 2013, there are two ways to calculate the home office deduction. One is taking the square footage of space used for the office divided by the total square footage of total home. This calculated percentage would be used for the home office deduction calculation. You would multiply that % by the actual expenses (utilities, water, etc.) to arrive at  your home office deduction.

The alternative way to calculate this expense is more straightforward. For 2013 and forward, the IRS is allowing $5 standard deduction per square foot of home used for business (maximum 300 square feet). The maximum deduction would be $1,500. While this is usually not as high as the actual method, there is a reduction on records needed.

Some additional facts to keep in mind when taking the home office deduction are as follows:

  • When using the % method, you are allowed to take a portion of depreciation on the home office. Be sure to keep up with this as the amount will need to be used if the home is sold. The depreciation recapture will reduce the cost basis in the home.
  • You cannot take depreciation on the home office when using the simplified method.

Here are some helpful links:

http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Home-Office-Deduction

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction

http://www.irs.gov/pub/irs-pdf/f8829.pdf

 

As always, contact your tax professional with additional questions.

Fixed assets are a long term tangible piece of property that is expected to last more than one year. Examples include but are not limited to the following:

  • Property (building and land)
  • Furniture & fixtures
  • Machinery and equipment
  • Computer equipment
  • Vehicles

These are the main categories but there are plenty more.

It is important to classify them correctly when preparing you accounting records. These items would show up on a company's Balance Sheet verses the Profit and Loss statement. If you are not using a software, it is helpful to your accountant if you keep a list of items that you purchase throughout the year including date of purchase, description of asset, total asset price. This way, if they were recorded incorrectly, they can be easily adjusted.

These fixed assets are reported on the tax return (due March or April 15th depending on the entity type) as well as the business property tax listing (due January 31 for most NC counties).

Tax planning strategies can come in to play with the purchase of fixed assets.   Be sure to check with your CPA to see what is best for you.

Can I write off meals and entertainment as a business expense?

As long as the expense is "ordinary and necessary", yes.

Where do I put the expense if I own a sole proprietorship?

This expense would show up on the Individual Tax return (1040) on 'Profit or Loss From Business' (Schedule C).

What if I do not own my own business?

The expense would be entered on 'Itemized Deductions' on Schedule A. Remember, if you do not itemize, the expense may not benefit you at all. In addition, these expenses are only 50% deductible AND only the portion that exceeds 2% of your Adjusted Gross Income is a deduction (last number on first page of 1040).

What if my business is a separate entity (Partnership, S-Corporation, Corporation)?

Assuming the entity paid the expense, you would put the expense on that particular return.

Are meals and entertainment 100% deductible?

For true meals and entertainment, they are 50% deductible. An example could be you took a client to lunch to talk about business. Most programs will ask for the total and do the calculation for you. Do not rely on the program. Double check the calculation. If you have specific questions, ask a professional.

What if the 'meals and entertainment' happened while I was out of town for a business seminar/trip?

Meals and entertainment in this scenario will also be 50% deductible. When in doubt, ask a CPA firm.

What type of records should I keep?

You should keep the receipt with the total, date, and location. Also, you should keep record of who you met with and the particular business relationship.

Here is a helpful link:

http://www.irs.gov/publications/p463/ch02.html

If you are filing a joint tax return, your spouse is not your dependent but your children are. In some instances, there can be others that you would claim as a dependent. The two categories would either be a "qualifying child" or a "qualifying relative". Let's discuss.

Qualifying Child

There are five steps to qualify a child as a dependent:

1. Relationship – The obvious and most common would be your children. In some instances, there could be others that meet this requirement. To meet this test, in addition to children, a child could be your stepchild, foster child, or a descendant of any of them (ex: grandchild). This test would also include your brother, sister, half siblings or descendants of any of them (ex: niece).

2. Residency – The child must have the same residence as you for more than half of the year.

3. Age – The person must be under the age of 19 at the end of the year in question AND younger than you (under the age of 24 if they are a full time student). They can be any age if they are permanently disabled.

4. Support – The person must not provide more than half of their support during the year.

5. Joint Return – The child cannot file a joint return for the year. For example, if you are trying to claim your daughter and she is married. If she files a tax return with her husband, you usually cannot also claim her.

 

Qualifying Relative

There are four tests that will qualify a relative as a dependent:

1. They cannot be a "qualifying child" per the previous description.

2. Gross Income – the dependent must earn less than $3,900 in 2013. Always check on this number as the amount will change.

3. Support Test – You provide more than half of their support for the year.

4. Member of Household or Relationship – The person must live with you all year as a member of your household or be one of the relatives that doesn’t have to live with you (see IRS Publication 501 for a list of qualifying relatives).

*Remember, if you have a child during the year, they will be your dependent on the tax return for that year. Be sure to tell your tax preparer that you had a child and provide the child's legal name and social security number (as it would appear on the social security card).

As always, there can always be exceptions to some of these rules. When in doubt, contact a professional and/or refer to IRS publication 501 for guidance.

 

As always, we recommend that you discuss the specifics of your situation with a CPA firm.