Time to Start Thinking About Year-End Tax Moves

With year-end just around the corner, it is time to think about those last-minute actions you can take to improve your tax situation for 2016. Year-end tax planning is probably something you will want to deal with before the holiday season crush arrives.

There are numerous steps that can be taken before January 1 to save a considerable amount of tax. Not all actions recommended in this article will apply to your particular situation, but you will likely benefit from many of them.

Maximize Education Tax Credits – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2016. If it is not the maximum allowed for computing the credits, you can prepay 2017 tuition as long as it is for an academic period beginning in the first three months of 2017. That will allow you to increase the credit for 2016. This technique is especially helpful when a student has just started college in the fall.

Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount.

Don’t Forget Your Minimum Required Distribution – If you are over 70.5 years of age and have not taken your 2016 required minimum distribution from your IRA or qualified retirement plan, you should do that before December 31 to avoid possible penalties. If you turned 70.5 this year, you may delay your 2016 distribution until the first quarter of 2017, but that will mean a double distribution in 2017 that will be taxed.

Advance Charitable Deductions – If you regularly tithe at a house of worship or make pledges to other qualified charities, you might consider pre-paying part or all of your 2017 tithing or pledge, thus advancing the deduction into 2016. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next. If you are age 70.5 or over, you can also take advantage of a direct IRA-to-charity transfer, which will count toward your RMD and may even reduce the taxes on your Social Security income.

Maximize Health Savings Account Contributions – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions earlier in the year. This opportunity applies even if you first become eligible in December.

Prepay Taxes – Both state income and property taxes are deductible if you itemize your deductions and you are not subject to the AMT. Prepaying them advances the deductions onto your 2016 return. So if you expect to owe state income tax, it may be appropriate to increase your state withholding tax at your place of employment or make an estimated tax payment before the close of 2016, and if you are paying your real property taxes in installments, pay the next installment before year-end.

Pay Tax-deductible Medical Expenses – If you have outstanding medical or dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 10% of AGI floor for deducting medical expenses, or if adding the payments would put you over the 10% threshold. You can even use a credit card to pay the expenses, but if you won’t be paying off the full balance on the card right away, do so only if the interest expense on the credit card is less than the tax savings. You might also wish to consider scheduling and paying for medical expenses such as glasses, dental work, etc., before the end of the year. See the “Seniors Beware” article if you or your spouse is age 65 and over.

Take Advantage of the Annual Gift Tax Exemption – You can give $14,000 to each of an unlimited number of individuals without paying gift tax each year, but you can’t carry over unused amounts from one year to the next. (The gifts are not tax deductible.)

Avoid Underpayment Penalties – If you are going to owe taxes for 2016, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters.

There are additional factors to consider for a number of the strategies suggested above, and you are encouraged to contact this office prior to acting on any of the advice to ensure that you will benefit given your specific tax circumstances.

Year-End Investment Moves

If you invest in publicly traded securities, here are a couple of tax-saving possibilities you shouldn’t forget to consider before year-end.

Zero Capital Gains Rate – If you are having a low-income year, there may be a way for you to take advantage of it. There is a zero long-term capital gains rate for those taxpayers whose regular tax brackets are 15% or less. This may allow you to sell some appreciated securities that you have owned for more than a year and actually pay no or very little tax on the gain.

Offset Gains with Losses – At this time of year, you should review your portfolio with an eye to offset gains with losses and to take advantage of the $3,000 ($1,500 for married taxpayers filing separately) of allowable annual capital loss allowance. Any losses in excess of those amounts are carried forward to future years. However, keep in mind that if you replace a security that you sell for a loss, either 30 days before or after the date of sale, it will be considered a wash sale, and the loss cannot be used on your return, and instead, adjusts the basis of the replacement security.

Please contact our office for assistance with your year-end tax planning needs.

De Minimis Expense Election Required Before Year End

Small businesses can adopt an accounting procedure that allows them to expense, rather than to capitalize, the purchase (cost) of tangible business property. Generally, the maximum that can be expensed under this provision is whatever amount the business decides between $1 and $2,500 per item or per invoice. So if you have not adopted the accounting procedure, you have until December 31, 2016, to do so for 2017. (The rules require that the accounting procedure be in place as of the beginning of the business’s tax year.) In addition, and even if your business may have already adopted an accounting procedure, an annual election is required to be included with your 2017 tax return to apply the accounting procedure to 2017. This can be used for computers, printers, tools, etc., rather than the Sec 179 expense allowance, which recaptures as income if the item is disposed of early.

If you need assistance developing a de minimis expense accounting procedure and making the election to apply that procedure for 2017, please give our office a call.

Having a Low Taxable Income Year? Ways to Take Advantage of It

Being unemployed, having had an accident that’s kept you from earning income, incurring a net operating loss (NOL) from a business, having an NOL carryover from a prior year, suffering a casualty loss or other incidents that result in abnormally low taxable income for the year can actually give rise to some interesting tax planning strategies.

But, before we consider actual strategies, let’s look at key elements that govern tax rates and taxable income.

Taxable Income – First, of all, to be simplistic, taxable income is your adjusted gross income (AGI) less the sum of your personal exemptions and the greater of the standard deduction for your filing status or your itemized deductions:

AGI                  XXXX
Exemptions
Deductions
Taxable Income XXXX

If the exemptions and deductions exceed the AGI, you can end up with a negative taxable income, which means to the extent it is negative you can actually add income or reduce deductions without incurring any tax.

Graduated Individual Tax Rates – Ordinary individual tax rates are graduated. So as the taxable income increases, so do the tax rates. Thus, the lower your taxable income, the lower your tax rate will be. Individual ordinary tax rates range from 10% to as high 39.6%. The taxable income amounts for 10% to 25% tax rates are:

Filing Status (2016) Single Married Filing Jointly Head of Household Married Filing Separate
10% 9,275 18,550 13,250 9,275
15% 37,650 75,300 50,400 37,650
25% 91,150 151,900 130,150 75,950

So for instance if you are single, your first $9,275 of taxable income is taxed at 10%. The next $28,375 ($37,650 – $9,275) is taxed at 15% and the next $53,500 ($91,150 – $37,650) is taxed at 25%. Here are some strategies you can employ for your tax benefit. However, these strategies may be interdependent on one another and your particular tax circumstances.

Take IRA Distributions – Depending upon your projected taxable income, you might consider taking an IRA distribution to add income for the year. For instance, if the projected taxable income is negative, you can actually take a withdrawal of up to the negative amount without incurring any tax. Even if projected taxable income is not negative and your normal taxable income would put you in the 25% or higher bracket, you might want to take out just enough to be taxed at the 10% or even the 15% tax rates. Of course, those are retirement dollars; consider moving them into a regular financial account set aside for your retirement. Also be aware that distributions before age 59½ are subject to a 10% early withdrawal penalty.

Defer Deductions – When you itemize your deductions, you may claim only the deductions you actually pay during the tax year (the calendar year for most folks). If your projected taxable income is going to be negative and you are planning on itemizing your deductions, you might consider putting off some of those year-end deductible payments until after the first of the year and preserving the deductions for next year. Such payments might include house of worship tithing, year-end charitable giving, tax payments (but not those incurring late payment penalties), estimated state income tax payments, medical expenses, etc.

Convert Traditional IRA Funds into a Roth IRA – To the extent of the negative taxable income or even just the lower tax rates, you may wish to consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you with an opportunity to convert to a Roth IRA at a lower tax amount.

Zero Capital Gains Rate – There is a zero long-term capital gains rate for those taxpayers whose regular tax brackets are 15% or less (see table above). This may allow you to sell some appreciated securities that you have owned for more than a year and pay no or very little tax on the gain.

Business Expenses – The tax code has some very liberal provisions that allow a business to currently expense, rather than capitalize and slowly depreciate, the purchase cost of certain property. In a low-income year it may be appropriate to capitalize rather than expense these current year purchases and preserve the depreciation deduction for higher income years. This is especially true where there is a negative taxable income in the current year.

If you have obtained your medical insurance through a government marketplace, employing any of the strategies mentioned could impact the amount of your allowable premium tax credit.

If you would like to discuss how these strategies might provide you tax benefit based upon your particular tax circumstances or would like to schedule a tax planning appointment, please give our office a call.

Year End Tax Planning

Dear Clients and Friends:

As the end of the year approaches, it’s time to evaluate and implement tax minimization initiatives and strategies for 2016 and 2017. Influences and dynamics that compound the planning challenges this year include political and economic uncertainty, together with Congress’s all too familiar failure to act on a number of important tax breaks that will expire at the end of 2016.

Expiring Tax Breaks

Some of these expiring tax breaks will likely be extended, but perhaps not all, and as in the past, Congress may not decide the fate of these tax breaks until the very end of 2016 (or later). For individuals, these breaks include: the exclusion of income on the discharge of indebtedness on a principal residence, the treatment of mortgage insurance premiums as deductible qualified residence interest, the 7.5% of adjusted gross income floor beneath medical expense deductions for taxpayers age 65 or older, and the deduction for qualified tuition and related expenses. There is also a host of expiring energy provisions, including among them: the nonbusiness energy property credit, the residential energy property credit, the qualified fuel cell motor vehicle credit, the alternative fuel vehicle refueling property credit, the credit for 2-wheeled plug-in electric vehicles, the new energy efficient homes credit, and the hybrid solar lighting system property credit.

Higher Income Earners
Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax.
The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
 
Medicare Tax
The 0.9% additional Medicare tax also may require year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of the employee’s filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving strategies to implement:
Year-End Tax Planning Strategies for Individuals
  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be accomplished. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
  • Postpone income until 2017 and accelerate deductions into 2016 to lower your 2016 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2016 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2016. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2017 will result in a higher 2017 tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • A Roth IRA may be more advantageous than a traditional IRA. If you are eligible to convert a traditional IRA to a Roth IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA. Keep in mind, however, that such a conversion will increase your AGI for 2016.
  • IRA. If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion-that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
  • Bonuses. It may be advantageous to try to arrange with your employer to defer, until early 2017, a bonus that may be coming your way.
  • Credit Cards. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2016 deductions even if you don’t pay your credit card bill until after the end of the year.
  • State and local tax. If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to push the deduction of those taxes into 2016 assuming you’re not subject to the alternative minimum tax (AMT) in 2016.
  • Rollover Distribution. Take an eligible rollover distribution from a qualified retirement plan before the end of 2016 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2016. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2016, but the withheld tax will be applied pro rata over the full 2016 tax year to reduce previous underpayments of estimated tax.
  • AMT. Estimate the effect of any year-end planning moves on the AMT for 2016, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state and local property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2016, or suspect you might be, these types of deductions should not be accelerated.
  • Miscellaneous. You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
  • Medical Expenses. For 2016, the “floor” beneath medical expense deductions for those age 65 or older is 7.5% of adjusted gross income (AGI). Unless Congress changes the rules, this floor will rise to 10% of AGI next year. Taxpayers age 65 or older who can claim itemized deductions this year, but won’t be able to next year because of the higher floor, should consider accelerating discretionary or elective medical procedures or expenses (e.g., dental implants or expensive eyewear).
  • Contested Taxes. Consider paying contested taxes before the end of the year, so as to be able to deduct them this year while continuing to contest them next year.
  • Casualty Loss. Evaluate whether to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Required Minimum Distribution. Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2016, you can delay the first required distribution to 2017, but if you do, you will have to take a double distribution in 2017-the amount required for 2016 plus the amount required for 2017. Think twice before delaying 2016 distributions to 2017, as bunching income into 2017 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2017 if you will be in a substantially lower bracket that year.
Miscellaneous
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you become eligible in or before December of 2016 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2016.
  • If you are thinking of installing energy saving improvements to your home, such as certain high-efficiency insulation materials, do so before the close of 2016. You may qualify for a “nonbusiness energy property credit” that won’t be available after this year, unless Congress reinstates it.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and/or estate taxes. The exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Year-End Tax-Planning Moves for Businesses & Business Owners
  • Business Property Expensing. Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and qualified real property-qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make purchases before the end of 2016 will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
  • Bonus Depreciation. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the full 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2016.
  • Safe Harbor. Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2016.
Miscellaneous
  • A corporation should consider accelerating income from 2017 to 2016 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2017 if it will be in a higher bracket this year.
  • A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2016. (Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.)
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2016 (and substantial net income in 2017) may find it worthwhile to accelerate just enough of its 2017 income (or to defer just enough of its 2016 deductions) to create a small amount of net income for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.
  • If your business qualifies for the domestic production activities deduction (DPAD) for its 2016 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2016, even if the business has a fiscal year.
  • To reduce 2016 taxable income, consider deferring a debt-cancellation event until 2017.
  • To reduce 2016 taxable income, consider disposing of a passive activity in 2016 if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
These are just some of the year-end strategies and initiatives will minimize your income taxes. We welcome the opportunity to discuss how we can customize a particular plan that will work best for you. Visit our online tax planning guide and contact a Tarlow partner at 212-697-8540, with any questions regarding this letter.
Very truly yours,
Tarlow & Co., CPAs

Can’t Keep Up with Bills? QuickBooks Online Can Help

There are more pleasant accounting tasks than paying bills, but QuickBooks Online organizes and simplifies this critical chore.

How does your company keep track of its bills now? If you’re like a lot of small businesses, you’re still dealing with a lot of paper. You may have a paper or electronic calendar where you enter all of the due dates as bills come in. When you see one approaching, you either take out your checkbook or schedule an online payment. Then you store all of your paid paper bills in file folders in case you have to look back at them.

It’s probably pretty clear to you that this isn’t the best system. You occasionally miss payments because a bill was lost in transit or for some other reason didn’t make its way to you. Or you were out of the office for a few days and didn’t look back on deadlines you missed.

QuickBooks Online can help keep bill-payment running smoothly and your relationships with vendors on the up-and-up.

Two-Step Process
Before you can start paying bills, you have to enter them into QuickBooks Online. This will entail a bit of extra work the first time you deal with a particular vendor, but there are numerous benefits to handling your accounts payable in this fashion, like:

  • Speed. Once you’ve created a framework (template) for a bill, it will take minimal time to pay it in the future.
  • Documentation. All of your bill payments will be recorded in QuickBooks Online, so you won’t have to hunt through checkbook registers or file folders to see if a bill was paid.
  • Timeliness. QuickBooks Online will always remind you when a bill must be paid (if you’ve set it up correctly).

To enter a bill, click the plus (+) sign at the top of the screen and click on Vendors and then Bill. This screen opens:

You’ll enter information about each bill on a screen like this. There are fields not pictured here that you’ll sometimes have to complete. So let’s start a conversation about the whole process.

Looks pretty simple, doesn’t it? It is – if you have a simple bill like the one you receive for gas and electric. You select the vendor by clicking on the arrow next to the blank field in the upper left and choosing from the list that opens. The Mailing Address and Terms should fill in automatically if you’ve done all of your initial QuickBooks Online setup. If not, you can add and edit this information.

Bill date refers to the date of the bill itself, not the day payment is due to the vendor. That goes in the Due date field. Select your Account from the list that opens when you click in that field, and enter a Description and Amount. If that’s all that’s required for that bill, you can save it and proceed to the next. It’s now recorded as a bill that needs to be paid.

Recurring Payments
Some of your bills are just one-offs, but others arrive on a regular basis. So QuickBooks Online has tools that will minimize the time required to process them after you’ve entered the basic information once. After you’ve completed a bill, click Make recurring at the bottom of the page to see this screen:

QuickBooks Online lets you create templates for bills to use in future payments.

This screen is self-explanatory. You simply tell QuickBooks Online how much notice you want before a bill’s due date so you can process the payment. Take care with this screen to avoid paying bills too early, which affects your cash flow unnecessarily, or too late.

You have three options when you’re creating a Recurring Bill template. You’ll choose one from the list that opens when you click the arrow in the Type field:

  • Scheduled. This is best used when the details of a transaction don’t change, like rent or a loan payment. You don’t have to do anything for the payment to be dispatched; it’s done automatically for you at the interval you set. You can, however, ask to be notified every time this occurs.
  • Reminder. You could use this for periodic payments that will require editing before they’re sent. For example, you’ll probably need to change the amount on your utility bills every month. QuickBooks Online will place a reminder in your Activities list on the home page.
  • Unscheduled. If you have bills that contain a great deal of detail but aren’t due on a set schedule, you can save the template and call it up when you need it by clicking the gear icon in the upper right and selecting Recurring Transactions.

Next month, we’ll talk about the process of actually paying bills. If in the meantime you start entering bills and find that you’re having trouble completing the fields required for more complex bills, call us to schedule a session or two.

Accounting 101: How to Read an Income Statement

Your income statement is one of the most important documents your company produces. However, if you are the owner of a new business, or if you aren’t familiar with this type of statement, preparing and interpreting it can be challenging. To read your income statement accurately, consult the information below.

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.
  • Nonoperating Income – This section includes all of the income you earned outside of your standard operations, such as by the sale of assets or investments.
  • Nonoperating Expenses – Nonoperating expenses include expenses you paid that were not related to the operations of your business. These expenses may be related to earning nonoperating income.
  • Income before Taxes – The value on this line is calculated by adding your Operating Income and Nonoperating Income and then subtracting your Nonoperating 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.

In some cases, an income statement will have more than one column so that you can compare income and expenses from different periods.

Getting Professional Help

Preparing an income statement is no easy task, and interpreting it can also be taxing for many business owners. However, you can dramatically simplify this process by allowing an accounting professional to help you with your income statement and the other financial reports your business produces. A reputable accounting professional will ensure that your income statement is accurate, and 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.

Little-Known Tactic Increases Child Care Credit

When both spouses in a married couple are jointly involved in the operation of an unincorporated business (generally a Schedule C), it is fairly common – but incorrect – for all of that business’s income to be reported as just one spouse’s income, even when 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 this office.

Thinking of Converting Your Home to a Rental? Better Read this First

If you are considering converting your home to a rental, there are a number of tax issues you need to consider before making a final decision.

One of the first issues to consider is that by converting your main home to a rental, you may be giving up an opportunity to realize tax-free income. Currently, taxpayers are allowed to exclude $250,000 ($500,000 for married taxpayers filing jointly) of home gain when they sell a home if they owned and occupied the home as a primary residence two of the five years prior to the sale. Once converted, the property is no longer your primary residence, and if you sell it more than three years after the conversion, any gain would no longer qualify for the home gain exclusion and would be fully taxable.

Not all homes will have appreciated in value, and in some cases, as we’ve seen over the last few years, some homes may have declined in value from the time they were purchased. If a primary residence is sold at a loss, that loss is not deductible for tax purposes because losses are never allowed for personal use property.

Some homeowners have the mistaken belief that if they convert their home that has declined in value to rental use, they can then deduct a loss when they sell the property, which is not the case.

When a residence or other nonbusiness property is converted from personal use to business use, such as a rental, it needs to be appraised by a certified real estate appraiser, and that appraised value is the value (basis) from which a loss is determined when the property is subsequently sold. In other words, any loss attributable to the period it was a personal use property is not allowed.

However, for purposes of computing gain, the value (basis) from which gain is measured is the original cost of the home plus improvements less any depreciation claimed.

If your decision is to convert the home to a rental, the rental period begins when you actually make the home available for rent, which is generally the date you advertise the property for rent. From this point on the depreciation, mortgage interest, property taxes, other taxes, utilities, repairs, advertising and other expenses are reported along with rental income on Schedule E of the 1040.

Rentals are considered passive activities, and generally losses from passive activities can only offset gains from passive activities. However, there is a special rule that allows up to $25,000 of losses from rental real estate activities to be deductible annually. That special loss allowance phases out ratably for taxpayers with AGIs between $100,000 and $150,000, and once the top of the phaseout range is reached, no loss is allowed. In this case, the loss that can’t be deducted can be carried over to future years. That carryover may not do much good year by year for someone whose AGI is consistently over the top of the phaseout range, until the year the property is sold and the suspended losses are released and can be deducted.

For more details related to converting your home to rental use and applying the rules to your specific situation, please give this office a call.