Posts

Cofounder Conflict Could Be One of the Biggest Threats to Your New Business

If you asked brand-new entrepreneurs to make a list of everything they think might one day pose a threat to their startup, you’d probably hear a variety of answers with similar themes. 

Some might be (rightfully) worried about ultimately developing a product in search of a marketplace. Others may be worried about how they’re going to overcome the cash flow issues they’ll likely face. Others still might be worried about getting “taken for a ride” by the venture capital people they’re putting so much of their faith in. 

While all of these are understandable concerns, none of them should be at the top of that list. The fact of the matter is, the number-one threat to your business isn’t an external factor at all. 

It’s the people you’ve cofounded that business with. 

While it’s absolutely true that founding a business with at least one other person increases your chances of becoming a success, it’s equally true that about 50% of cofounder relationships fail, and most of those failures are ugly. 

This is because cofounder conflict is very real and far more common than many people prefer to assume. But by taking the time to learn as much about it as you can, you put yourself (and your colleagues) in the best position to mitigate risk from these issues as much as possible — before it’s too late. 

Why Cofounder Conflict Happens 

Cofounder conflict can ultimately happen for a myriad of reasons, and not all of them are going to be immediately obvious. 

Sometimes when you start a business with someone else, you don’t realize just how incompatible your managerial styles are because you’ve never had the chance to put them on display. But once your startup is up on its feet and real decisions are being made on a daily basis, you might discover that you and your cofounder have two very different working styles. 

Other times it comes down to the fact that roles and responsibilities among cofounders are not clearly defined. Who is actually supposed to be doing what? What is your specific job description and how does it overlap with that of your cofounders? What boundaries are in place that give each of you your necessary space, but that also allow you to truly collaborate with one another in the way you need in order to run a successful business? 

Another issue could be the absence of stipulations on how “significant future changes will affect the management and control of the business.” Without a buy-sell agreement and succession plan in place, your business is at risk if any major event — like your partner’s death, divorce, or bankruptcy — may occur. 

Finally, one of the biggest causes of cofounder conflict is that entrepreneurs make the mistake of taking any conflict as a warning sign that something sinister is afoot. 

The truth is that running a business is hard and there are times where you will have arguments and disagreements with the people around you. This is true regardless of how similar your backgrounds are or how closely your visions align. 

If you go through life assuming that conflict is something you can totally avoid, you’re in for a number of surprises and almost none of them are good. The key to a successful, long-term relationship with your cofounders involves not running from that conflict but embracing it. Have the argument, talk through your differences, hash things out and come to a solution together.  Every moment may not be as fun as you’d hoped, but you will absolutely come out better for it. 

Mitigating Cofounder Conflict: Breaking Things Down 

Here’s the good news: once you’ve taken steps to learn about what cofounder conflict actually is and why it happens, you put yourself in the best position to avoid it in your own efforts — at least as much as possible. 

By far, the key to at least relieving some of this conflict involves first identifying why it is happening with your particular startup. Are you having frequent arguments with your cofounders because of significant personality changes? Is it because your work ethics differ a great deal? Do you come from different backgrounds? Do you have totally contrasting management styles? 

When left unchecked, these differences can form a major chasm that can be difficult to overcome. But, if you identify them in your early days as an entrepreneur, you may be able to find a way to meet your cofounders “in the middle,” so to speak, to avoid bigger issues later on. 

Remember that being an entrepreneur and founding a business with someone else ultimately requires a fair amount of give and take. Your startup does not belong exclusively to you and it would be unfair of you to act that way. Therefore, once you start to see conflict develop, don’t be afraid to address it head-on… but also understand that you must be willing to make compromises, too. Don’t just spend time identifying problems with someone else — offer up solutions of your own. 

In terms of mitigating some of these potential risks, a buy-sell agreement can be very effective (and should be viewed as a necessity). This legally-binding document “anticipates the intent and needs of the owners, as well as the potential conflicts that may arise among them if one or more wishes to sell his/her interest in the business, or is forced to dispose of such interest.” 

If you acknowledge your startup for what it really is — a collaboration between two or more people — you stand the best possible chance at ending the lion’s share of these cofounder conflicts before they’ve ever had a chance to start. At that point, the proverbial runway will be clear and there really is no limit to what you can accomplish together.

Consulting with a tax and accounting professional during the process of negotiating a buy-sell agreement can be very beneficial for all parties involved. Contact us for more information. 

Holiday Gifting with a Tax Twist

Some holiday gifts you provide to members of your family, employees, and others may also yield tax benefits. Here are some examples: 

Employee Gifts – It is common practice this time of year for employers to give employees gifts. Although gifts are generally excluded from the recipient’s gross income, an employee cannot exclude gifts from his or her employer as a gift. 

However, if the gift is infrequently offered and has a fair market value so low that it would be impractical and unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such, it would be tax-free to the employee and tax-deductible by the employer. 

A gift of cash, regardless of the amount, is considered additional wages and is subject to employment taxes (FICA) and withholding taxes. 

Caution: When a gift recipient is a W-2 employee, the employer must not issue them a 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income. This is a common error made by employers.

If an employer gives gift certificates, debit cards, or similar items that are convertible to cash, their value is considered additional wages, regardless of the amount.

If, as a means of promoting goodwill, an employer makes a general distribution of hams and turkeys to employees, they would not be taxable to the employee and would be deductible by the employer. That also goes for a coupon that is nontransferable and convertible only into a turkey, ham, or gift basket at a particular establishment. However, if that coupon can be converted into cash, then the value would be treated as employee wages. 

A Gift of College Tuition – An interesting quirk to the gift tax laws is that an individual can pay a student’s tuition directly to a qualified school, college, or university, and it will be exempt from gift tax and gift tax reporting. What student wouldn’t love to have part of his or her tuition paid? It would make a great gift. 

As an aside, college tuition generally qualifies for a tax credit. Another quirk in the tax laws says that the education credit goes to the individual who claims the child as a dependent, resulting in another gift from the individual who pays the tuition.

Example: Whitney is attending college and is the dependent of her mother and father. Whitney’s grandfather makes a tuition payment directly to the college; since it was made directly to the school, Whitney’s grandfather does not have any gift tax issues. Since Whitney is a dependent of her parents, her parents would claim any available tuition credit. Thus, by paying the tuition, Grandpa made a gift of tuition to his granddaughter and a gift of the tuition credit to her parents.

College Student’s Supplies – If you have a spouse or child attending college, the costs of certain course materials qualify for the American Opportunity Tax Credit (AOTC) if the course materials are needed as a condition of enrollment and attendance. Thus, for example, if a computer is needed as a condition of enrollment and attendance at the college, the computer’s cost would qualify for the AOTC of the individual who claims the student as a dependent if the individual otherwise qualifies for the credit. 

Electric Car Credit – If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most electric cars come with a tax credit. To qualify to claim the credit on your 2019 tax return, the car will have to be “placed in service” by December 31, 2019. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough – you will need to receive the car and start using it before New Year’s Day. Before you leap, you should know that the credit is non-refundable, meaning it can only offset your actual tax liability and that any excess credit over your tax liability will be lost. However, there is an exception when the electric vehicle is partially used for business, in which case the portion of the credit allocated to business use will become a general business credit that is first applied to the tax in the credit year. Any remaining credit will be carried back one year, and then if not all of it is used still, the rest will be carried forward. 

Work Equipment – If your spouse is self-employed and you purchase tools or electronics used in the spouse’s business, the costs of these items will qualify as a business tax deduction on the return for the year when the equipment is put into service. 

Solar Electric Credit – If you and your spouse or another resident of the home decide to gift a home solar system to each other, you will qualify for a non-refundable tax credit equal to 30% of the cost of the home solar property (note that the credit will drop to 26% in 2020). If your tax liability is less than the credit, then the excess credit can be carried over to a future year. The solar credit is available to all residents of the home, even if they do not have an ownership interest in the home. Example: A mother and son live together in a home owned by the mother. The son purchases a solar system; as a result, the son will get the tax credit since he resides in the home. Caution: To claim a credit for the system’s costs on your 2019 return, the installation must be completed by December 31, 2019. 

Charitable Gifts – Of course, contributions to qualified charitable organizations can be deducted, provided you itemize your deductions. If you are over age 70.5 and have not taken your required minimum distribution (RMD) from your IRA account for 2019, you might consider making direct transfers to the charities of your liking, thereby satisfying your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer, which would need to be completed by December 31, 2019, to count for 2019. It’s best not to wait until the last minute to initiate the transfer. 

Some words of caution about charitable contributions during the holiday season: When you are shopping at a mall and drop cash into the holiday kettle, you won’t get a receipt for your contribution, and a cash charitable contribution cannot be claimed as an itemized deduction without documentation. The same goes for buying and then giving new, unused toys to holiday toys-for-kids drives, which have become very popular. Tip: Save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If the drop point is unmanned and it is not possible to obtain a contribution verification from the organization, the IRS will allow a deduction of up to $249, provided you document the purchase of what you’ve donated. 

Also, during the holiday season, all of the scammers will climb out from under their rocks and do their best to trick you out of your well-intended contribution dollars. Be cautious, and make sure your contributions are going to legitimate charities. 

If you have questions about how any of these suggestions might impact your tax situation, please contact us.

Tax Changes For 2019

As the end of the year approaches, it is a good time to review the various changes that impact 2019 tax returns. Some of the changes are likely to apply to your tax situation. In addition, be aware that various tax-related bills currently in Congress may or may not pass this year. If any of them do pass, we will quickly get the details to you. 

Medical Threshold – Medical expenses are deductible as itemized deductions only if the total medical expenses for the tax year exceed a specified percentage of a taxpayer’s income. After dropping to 7.5% for 2017 and 2018, this threshold reverts to 10% for 2019. As a result, any medical expenses from 2019 are deductible only to the extent that they exceed 10% of a taxpayer’s adjusted gross income for the year. 

Electric Vehicle Credit Phaseout – As an incentive to get taxpayers to move away from conventional-fuel (gasoline or diesel) vehicles, Congress has provided tax credits of up to $7,500 for the purchase of plug-in electric vehicles. However, Congress’s rules limit the full credit to the first 200,000 vehicles sold by a given manufacturer. Once a company sells 200,000 qualifying vehicles, the credit begins to phase out for that company. Tesla, Chevrolet, and Cadillac have all reached the phaseout point. The table below shows the credits available depending upon the quarter when the vehicle is purchased. 

Vehicles Beginning Phaseout out 2019
Date Acquired

>>>

Vehicle

Before 2019 Jan – Mar 2019 Apr – June 2019 July – Sept 2019 Oct – Dec 2019 Jan – Mar 2020 After Mar 2020
Tesla* $7,500 $3,750 $3,750 $1,875 $1,875 $0 $0
Chevrolet* $7,500 $7,500 $3,750 $3,750 $1,875 $1,875 $0
Cadillac* $7,500 $7,500 $3,750 $3,750 $1,875 $1,875 $0

*All qualifying models

If a qualifying vehicle is used partiality for business, the credit is proportionally allocated between personal and business tax credits. The personal portion can only offset the individual’s current-year tax liability; any excess is lost. The business portion can be carried back for one year and then forward up to 20 years until it is used up; any credit remaining after the 20th year is lost. As a tip, please note that the credit limit is per vehicle, not per taxpayer, so individuals who make multiple purchases can receive multiple credits. 

Alimony – One delayed effect of the 2017 tax reform is that the treatment of alimony changes for some individuals starting in 2019. 

For divorces or separations entered into before 2019, alimony payments continue to be deductible for the payer and taxable for the recipient. These payments also still qualify as earned income for purposes of the recipient’s qualification for an IRA deduction. For divorces or separations that occurred after December 31, 2018, alimony payments are no longer deductible for the payer. Also, for the recipient, they are no longer taxable income and do not count as earned income IRA deduction. 

Divorces or separations entered into before 2019 continue to follow the pre-2019 rules unless they have been modified after December 31, 2018. In that case, the alimony payments are subject to the post-2018 rules if the modification expressly provides for this. 

Finalization of State- and Local-Tax Deduction Limitation – The 2017 tax reform limited the itemized deduction for state and local taxes (SALT) to $10,000 (or $5,000 for married individuals filing separately). This has adversely impacted taxpayers in high-tax states such as California, Connecticut, New Jersey, and New York. Elected officials in several states have attempted to work around this restriction by establishing (or proposing to establish) state charities. The idea is that taxpayers would make deductible contributions that, in return, would give them tax credits against their SALT equal to most of the value of the charitable contributions. Unfortunately, these officials have overlooked the 1986 U.S. Supreme Court ruling that, if a taxpayer receives something in return for a donation (i.e., a quid pro quo), the contribution is not deductible.

The final regulations generally reduce the charitable contribution deduction by the amount of any SALT credit received. However, as an exception, if the credit does not exceed 15% of the contribution, the entire contribution is deductible.

Penalty for Not Being Insured – The Tax Cuts and Jobs Act (tax reform) that was enacted at the end of 2017 eliminated the Obamacare shared-responsibility payment, effective starting in 2019. Congress didn’t actually repeal this penalty; instead, it effectively abolished it by setting zero values for both the percentage of household income used in the calculation and the flat dollar amount of the penalty. As a result, the amount of the penalty is always zero. However, keep in mind that the penalty could be restored in the future if the direction of the political winds changes. In addition, beginning in 2020, some states may pick up where the federal government left off and charge a penalty to residents without qualified health insurance coverage.

Qualified Opportunity Funds – Taxpayers who receive capital gains on the sale or exchange of property (if the other party is unrelated) may elect to defer – and, potentially, partially exclude – those gains from their gross income if they are reinvested in a qualified opportunity fund (QOF) within 180 days of the sale or exchange. The amount of the gain (not the amount of the proceeds, as in Sec. 1031 deferrals) needs to be reinvested to defer the gain. The deferral period ends when the QOF investment ends or on December 31, 2026 – whichever is sooner. At that time, taxes must be paid on the deferred gain.

However, 10% of the deferred gains are forgiven QOF investments that have been held for at least five years, and 15% of the gains are forgiven when those investments have been held for at least seven years. Note that, with the deferral end date of December 31, 2026, qualifying for the 15% forgiveness requires a QOF investment on or before December 31, 2019.

Seniors Get a Special Tax Form – Lawmakers have long sought to provide taxpayers who are age 65 and older with a simplified tax form in place of the Form 1040. In the 2018 budget bill, Congress finally included a requirement that the IRS create such a form. As a result, the IRS will introduce Form 1040-SR, which will look a lot like the old form before the 2018 tax reform instituted its division of the Form 1040 into multiple postcard-size schedules. It is unclear how much simpler the Form 1040-SR will be, but it will be available for 2019 returns. Note: Form 1040-SR will be optional.

Family and Medical Leave Credit – The employer credit for family and medical leave, which was created in the 2017 tax reform, ends after 2019. This two-year program provides employers with a tax credit equal to 12.5% of the wages they paid to qualifying employees during any period when those employees were on family and medical leave, provided that the rate of the leave payments are at least 50% of the employees’ regular wages. The credit can be claimed for a maximum of 12 weeks of leave for any employee during the tax year. For each percentage point for which the leave payments exceed 50% of regular wages, this credit increases by 0.25 percentage points (up to a maximum of 25%). Participation in this credit program is optional.

Inflation Adjustments – Just about every tax-related value is adjusted for inflation. Some values are adjusted for any level of change, but others are adjusted only if the change reaches a specific dollar amount (so these values may not change every year). The table below includes the actual 2019 inflation adjustments and the projected 2020 adjustments for some of the most frequently encountered values.

 

Year 2018 2019 2020
Standard Deduction
Single or Married Filing Separately 12,000 12,200 12,400
Head of Household 18,000 18,350 18,650
Married Filing Jointly 24,000 24,400 24,800
Additional Standard Deduction (Age 65+ or Blind)
Unmarried 1,600 1,650 1,650
Married 1,300 1,300 1,300
Other Values
Annual Gift-Tax Exclusion 15,000 15,000 15,000
Foreign Earned-Income Exclusion 103,900 105,900 107,600
IRA Contribution Limit 5,500 6,000 6,000
IRA Contribution Limit (Age 50+) 6,500 7,000 7,000
401(k) Contribution Limit 18,500 19,000 *
401(k) Contribution Limit (Age 50+) 24,500 25,000 *

All values are in U.S. dollars. 

* Value not available as of publication

Form W-4 Revision – During the previous tax season, many people received a smaller federal tax refund than normal, or actually owed taxes despite usually getting a refund. In most cases, this was due to the last-minute passage of the tax-reform law at the end of 2017, which did not give the IRS sufficient time to adjust the W-4 form and related computation tables for the 2018 tax year so as to account for all of the new law’s changes. The planned major revision to the W-4 for the 2019 tax year has since been delayed until 2020, so all taxpayers should make sure that their 2019 withholding is adequate. 

If you are conversant with tax terminology, you can use the IRS’s newly updated withholding estimator. This tool helps taxpayers to determine whether their employers are withholding the right amount of tax from their paychecks. However, please note that the results are only as good as the information that is put into the estimator. Users need to properly estimate their other income for the year from various sources. 

If you have questions related to any of the subjects discussed in this article, please contact us.

How to Create Projects in QuickBooks Online

You already know how to determine whether your business is making or losing money overall: you run a Profit and Loss report. But what if you want to break this data down further? How can you tell whether the specific jobs you do for customers, with all their related income and costs, are profitable?

This kind of insight can have an enormous impact on future business decisions about product and service pricing, worker costs, and expenses. It can even signal whether or not you should take on specific jobs.

If you’re using QuickBooks Online Plus or Advanced, you can use their Project tools to calculate profitability. The theory is simple. You assign all relevant sales, time, and expenses to the project. QuickBooks Online will do the rest.

Getting Started

First, you’ll need to make sure that QuickBooks Online is ready to track projects. Click the gear icon in the upper right and select Account and Settings. Click on the Advanced tab and go down to the Projects section. If this feature is turned Off, click the pencil icon over to the right, click in the box to turn it On, and Save this option.

To create a project, click on Projects on the home page and then on the New Project button over to the right. This panel will slide out from the right:

Before you begin tracking a Project in QuickBooks Online, you’ll have to create a master record for it.

Enter a Project name in that field and select a Customer from the drop-down list (or ). Notes are optional but recommended. Click Save and your new project will appear in a list on the Projects page. QuickBooks Online stores that information along with the customer in your company file and makes it available when you create, for example, invoices, checks, expenses records, and time activities.
Linking Projects in Forms

Your project will appear in different places in different forms. On an invoice, it appears in the Customer drop-down list as a sub-item under the linked customer. You’ll select the project name rather than the customer to make sure the invoice was “tagged” to the project and wasn’t just a one-off bill. If you’re recording an expense, you’ll see a column for Customer/Project with other line item details.

There’s also another way to connect transactions to their related projects. On the Projects home page, click on a project name in the list. Click the Add to Project button in the upper right and select the correct transaction from the list that drops down. In some cases, like invoices, the project will already have been selected and will appear in the Customer field.

If you enter a transaction and realize later that you forgot to connect it to a project, you can correct this in most cases (like expenses and bills) by going back to the original transaction and adding (or changing) the Customer/Project name. Invoices are tricky, though, depending on their status. We’d recommend you consult with us about this.

Understanding Profitability


You can see what your profit margin is on any project at any time.

After you’ve been entering project-related income and expenses for a while, you’ll probably be curious about whether or not you’re making money – even if the project is still in progress. To do this, open the Projects home page and click on the project name. The screen that opens (like in the image above) will be devoted to that one project. You can click on tabs to see:

  • An Overview that lists your income and costs, as well as your profit.
  • A list of related Transactions.
  • Time Activity records.
  • Project Reports (Project profitability, Time cost by employee or vendor, and Unbilled time and expenses).

We encourage you to use QuickBooks Online’s Project tools but would caution you about making changes to some existing transactions, especially invoices. To ensure that you are on the right track with this feature, please contact us to set-up a consultation.

Employer-Offered Benefits That Can Save You Money and Taxes

Article Highlights:

  • Health Insurance
  • Retirement Plans
  • Qualified Transportation Fringe Benefits
  • Flexible Spending Accounts (FSAs)
  • Group Term Life Insurance
  • Qualified Employee Discounts
  • Employer-Provided Education Assistance
  • Adoption Expenses
  • Child and Dependent Care Benefits
  • Health Savings Accounts

Tax law includes several tax- and financially favored benefits that employers can offer or provide to their employees. This article is intended to make you aware of these perks, with the caveat that all employers, especially small businesses, may not provide all, or perhaps any, of these covered perks. But whichever of these benefits your employer offers, you should seriously consider taking advantage of them, if you haven’t already.

Health Insurance – The Affordable Care Act (also known as Obamacare) requires businesses with over 50 employees to offer at least 95% of its full-time employees, and their dependents, with affordable minimum essential health care coverage. Companies that do not meet this requirement are subject to penalties. If you work for one of these larger employers and the company picks up the entire health insurance premium cost, consider yourself lucky, as the prices of health insurance coverage have risen dramatically over the last few years. More likely, you may have to pay part of the premium costs, and the plan may have a high deductible or co-pays. Even so, the tax-free benefit of what the employer covers is valuable. While not required to, businesses with fewer than 50 employees may offer health care coverage, often for competitive purposes in retaining employees. The health insurance premiums paid on your behalf by your employer are tax-free to you. If you aren’t aware of the value of this nontaxable employee benefit, you can look at your Form W-2, box 12a, code DD, which shows your share of the cost of employer-sponsored health coverage. You can claim the part of the coverage that you pay for with post-tax dollars as a medical expense if you itemize your deductions.

Retirement Plans – Although some larger employers may provide a company-funded retirement plan that will pay you a monthly benefit when you retire, most generally offer 401(k) plans with which an employee can save for retirement by making pre-tax contributions up to $19,000 for 2019. If the employee is age 50 or over, they can qualify to make a catch-up contribution of up to $6,000, bringing the total to $25,000. Some employers also match their employees’ contributions up to a certain amount, which means an employee should endeavor to contribute at least the amount that the employer will match.

Qualified Transportation Fringe Benefits – Certain transportation-related fringe benefits that an employer may provide to employees are tax-free to the employee. Before the passage of the tax reform in late 2017, employers were able to provide employees with tax-free reimbursement for parking, transit passes, commuter transportation, and bicycle commuting, subject to certain limits, and the employer could deduct the cost. The tax reform had a significant impact on these benefits. It eliminated the $20-per-month bicycle benefit and no longer allowed the employer to deduct reimbursements made to employees for other transportation benefits, making some employers less likely to offer any transportation fringe benefits. However, they remain tax-free to the employee; for 2019, the limit on tax-free employer reimbursements is $265 per month each for qualified parking, transit passes, and commuter transportation.

Flexible Spending Account (FSA) – This is a unique account established by an employer that allows employees to contribute to the account through salary-reduction contributions. The benefit is that the contributions are pre-tax, meaning the employee doesn’t pay taxes on the money contributed to the account. This allows employees to pay for individual out-of-pocket health care costs with pre-tax dollars. The health care expenses can be used for health plan deductibles, co-payments, and even some over-the-counter-medications. The annual limit on contributions is inflation-adjusted and is $2,700 for 2019. However, if you don’t use the money in your FSA, you will lose it.

Group Term Life Insurance – The cost for the first $50,000 of group term life insurance (GTLI) coverage provided by an employer is excluded from the employee’s taxable income. However, the employer-paid cost of group-term coverage in excess of $50,000 is taxable income to the employee, even if he or she never receives it (i.e., it is “phantom income”). So, while the tax-free coverage of the first $50,000 is a good perk, an employee shouldn’t automatically sign up for more than $50,000 of GTLI coverage without considering whether they genuinely need the coverage and what the extra cost will be. In some cases, an employee who wants more than $50,000 in coverage may be able to privately acquire a policy that will cost less than the tax on the imputed income for the extra coverage through the employer’s plan.

Qualified Employee Discounts – A certain amount of an employee discount on purchases from an employer or on services provided by an employer is excludable from the employee’s income. The exclusion is limited to the employer’s gross profit percentage for property or 20% of the price at which the employer sells services to non-employee customers for services.

Employer-Provided Education Assistance – An employee doesn’t have to include, in his or her income, amounts paid by the employer for educational assistance under a qualified education-assistance program. The maximum amount of educational support that an employee can exclude is $5,250 for any calendar year. Excludable assistance under a qualified plan includes, among others, tuition, fees, books, supplies, and equipment. The education is any training that improves an individual’s capabilities, whether or not it is job-related or part of a degree program.

Adoption Expenses – An employee may exclude amounts paid or expenses incurred by the employer for qualified adoption expenses connected to the employee’s adoption of a child, if the amounts are furnished under an adoption-assistance program in existence before the costs are incurred. If the adopted child is a special needs child, the exclusion applies regardless of whether the employee has adoption expenses. The maximum exclusion amount is inflation adjusted annually and is $14,080 for 2019 per child, for both non-special needs and special needs adoptions. The exclusion phases out when the employee’s modified adjusted gross income is between $211,160 and $251,160 for 2019. Taxpayers can claim a tax credit for qualified adoption expenses, subject to the same phaseout range as for the exclusion. Still, any employer-paid excludable expenditures can’t be used for the credit.

Child and Dependent Care Benefits – Qualified payments made or reimbursed by an employer on behalf of an employee for child and dependent care assistance are excluded from the employee’s gross income. The amount of the exclusion is limited to the lesser of $5,000 ($2,500 for married individuals filing separately), the employee’s earned income, or the income of the employee’s spouse. A child and dependent care tax credit is available to taxpayers. Still, no credit is allowed to an employee for any amount excluded from income under his or her employer’s dependent care assistance program.

Health Savings Accounts – Employees who have a high-deductible health plan through their employer can open a health savings account (HSA) and make annually inflation-adjusted pre-tax contributions, which, for 2019, can be up to $7,000 for families and $3,500 for a single individual. When you make distributions for medical expenses, the money comes out tax-free. However, distributions not used to pay qualified medical expenses are taxable, and if the plan’s owner is under the age of 65, nonqualified distributions are subject to a 20% penalty. Some individuals let the account grow and treat it as a supplemental retirement plan, waiting until after age 65 to begin taking taxable but penalty-free distributions.

If you have questions on how job-related benefits might apply to you or if you are an employer interested in providing any of these benefits to your employees, please contact us.

3 Common Personal Income Tax Problems and How to Respond

Common tax problems can go far beyond the numbers that you report, and they can require additional evidence that your bank statements and paychecks can’t provide. Additionally, the IRS isn’t the only source of those problems. State tax authorities are hungry for revenue, and if you divide your time among different states, you may find it challenging to establish nexus and may even have to file taxes in multiple states.

Below are some of the most common personal income tax issues people are likely to face.

1. You didn’t make (or underpaid) estimated tax payments.

Self-employment is the most common cause of this. When you’re used to having taxes withheld from your paychecks at work, it can be a shock to have to pay taxes yourself. You can end up owing not just a large amount of self-employment and income taxes, but also penalties for not making tax payments on time. Estimates must be deposited quarterly, or you will face an underpayment penalty.

If your total tax due when you go to file is under $1,000, you won’t have to worry about getting smacked with an underpayment penalty. However, it’s a good idea to set aside at least 25%-30% of your income for estimated tax payments and commit to paying this amount every month if quarterly taxes are too complicated to figure out.

Other situations like freelancing on the side or rental income while you’re still employed can also cause you to fall short at tax time, so make sure to have extra taxes withheld from your paycheck if you don’t want to make estimated payments. State tax payments also shouldn’t be neglected.

2. You didn’t correctly file state tax returns after moving.

Moving to a state with little or no income taxes like Nevada or Florida can be appealing if your bank account feels squeezed in high-tax states like New York or California. Many people divide their time between multiple states for work or personal reasons. If it’s not just a two- or three-week creative retreat or corporate assignment, it can make nexus challenging to determine in some cases.

With the prospect of a lower tax burden becoming even more appealing, it seems logical to move to the tax-haven state you’ve been eyeing. But even after you file for a change of address with the postal service, change your voter registration, and get recognized as a resident by your new state, the high-tax state that you left is likely to also still treat you like one.

Typically, you must spend at least 183 days of the year in the other state and maintain a primary residence there. Merely owning property in another state won’t do if your family doesn’t also live there while you work or travel. Where you spend time outside of work also matters because where you sleep every night is what ultimately matters.

If your move is indeed permanent and your residency is valid, you may have to file a part-year resident tax return for the final months you stayed in the old state. You won’t need to worry about it for following years, but keep track of how many days you spent in each state before and after moving day.

3. You neglected to file state income tax returns as a non-resident.

If you have a business or rental income in another state, you may be required to file state tax returns as a non-resident. If this income is significant, it can end up producing a large tax bill if you’re unprepared.

If you have an out-of-state job, your payroll provider may also be incorrectly withholding taxes for the appropriate state or city. In concentrated regions like the tri-state area, especially for New York City and Philadelphia residents, ensure that city taxes are being correctly withheld if you are a resident, and that withholding curtails if that is no the longer the case. There are usually reciprocity agreements among states and municipalities in areas where state lines cross. Still, you should carefully check to make sure you don’t owe non-resident taxes in addition to what you owe your home state.

Failure to make tax payments on time, and to the right agency, are income tax problems that are often overlooked and can quickly spiral out of control. To avoid these issues and many more, please contact us so we can consult you on your state and local taxation, as well as rules for establishing nexus.

Crowdfunding Can Have Unexpected Consequences

Article Highlights:

  • Crowdfunding Sites
  • Gifts
  • Charitable Gifts
  • Business Ventures
  • SEC Registration

Raising money through Internet crowdfunding sites prompts questions about the taxability of the money raised. Several sites host money-raising projects for fees ranging from 5 to 9%, including GoFundMe, Kickstarter, and Indiegogo. Each site specifies its own charges, limitations, and withdrawal processes. Whether the money raised is taxable depends upon the purpose of the fundraising campaign.

Gifts – When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.

On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual; the contributor is then liable to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax-deductible.

A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (whom we’ll call the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; if the amount is over $15,000, the fundraiser is required to file a gift tax return and to reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.

Gifts to specific individuals, regardless of the need are not considered a charitable contribution under tax law. An example is raising funds to help pay for someone’s funeral expenses. Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.

Charitable Gifts – Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:

  • Contribution Less Than $250 – To claim a deduction for a contribution of less than $250, the taxpayer must have a canceled check, a bank or credit card statement, or a letter from the qualified organization; this proof must show the name of the organization, the date of the contribution, and the amount of the contribution.
  • Cash contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization; this acknowledgment must include the following details:
    • The amount of cash contributed;
    • Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, along with a description and good-faith estimate of the value of those goods or services (other than intangible religious benefits); and
    • A statement that the only benefit received was an intangible religious benefit, if that was the case.

Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.

Business Ventures – When raising money for business projects, two issues must be contended with: the taxability of the money raised and the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.

  • No Business Ownership Interest Given – This applies when the fundraiser only provides the contributor nominal gifts, such as products from the business, coffee cups, or T-shirts; the money raised is taxable to the fundraiser.
  • Business Ownership Interest Provided – This applies when the fundraiser provides the contributor with partial business ownership in the form of stock or a partnership interest; the money raised is treated as a capital contribution and is not taxable to the fundraiser. The amount contributed becomes the contributor’s tax basis in the investment. When the fundraiser is selling business ownership, the resulting sales must comply with SEC regulations, which generally require any such offering to be registered with the SEC. However, the SEC regulations carve out a special exemption for crowdfunding:
  • Fundraising Maximum – The maximum amount a business can raise without registering its offering with the SEC is $1.07 million in 12 months. Non-U.S. companies, businesses without a business plan, firms that report under the Exchange Act, certain investment companies, and companies that have failed to meet their reporting responsibilities may not participate.
  • Contributor Maximum – The amount an individual can invest through crowdfunding in any 12 months is limited:
  • If the individual’s annual income or net worth is less than $107,000, his or her equity investment through crowdfunding is limited to the greater of $2,200 or 5% of the investor’s annual net worth.
    • If the individual’s annual income or net worth is at least $107,000, his or her investment via crowdfunding is limited to 10% of the investor’s net worth or annual income, whichever is less, up to an aggregate limit of $107,000.

On the bright side, even if the money raised is income to the business, it will probably net out to zero taxable if it is spent on tax-deductible business expenses.

Does the IRS Track Crowdfunding? – The answer is, maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (credit card, PayPal, etc.). These third-party processors are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. The question is, will the third party follow the de minimis rule?

If you have questions about crowdfunding-related tax issues, please contact us

Don’t Overlook These Essential Small Business Tax Credits

At their core, tax credits are a very particular type of benefit designed to offset the actual tax liability associated with small businesses around the country. Tax credits are not the same thing as a tax deduction, which lowers that business’s actual income. Tax credits are typically offered to incentivize everything, from hiring more workers to stimulate the economy, to making meaningful contributions to specific industries.

While some tax credits are apparent, others are decidedly less so. This is why proper tax planning is essential as a small business owner. It is important to be proactive about getting the money that is owed to you. There are several crucial small business tax credits in particular that you’ll want to take advantage of when tax season rolls around.

The General Business Tax Credit

As the name suggests, this is something of a “kitchen sink” tax credit made up of many smaller, individual credits. Collectively, they are designed to act as a way to motivate savvy business owners, such as yourself, to participate in certain activities. If you purchased a qualified electric vehicle for your business, branched out into a new market, or retained a certain number of employees, you may very well be qualified.

Paid Family and Medical Leave

This particular tax credit is relatively new, having only just been authorized in 2017. It’s intended to motivate small business owners to provide paid leave to all employees who are covered by the Family and Medical Leave Act. Employees who qualify are entitled to up to 12 weeks of totally unpaid, job-projected leave — all while still retaining access to their group health benefits as well. Note that this is something that happens every year.

The credit itself is equal to a percentage of the wages that an employer pays to those qualified employees while they’re on leave for things like unexpected medical emergencies or even giving birth. 

The Alternative Motor Vehicle Credit

This credit is a sizable one of up to $8,000, so it is absolutely in your own best interest to claim it if you qualify. As the name suggests, it’s a way to incentivize small business owners to purchase an “alternative fuel source” vehicle. Note that the cars that fall into this category would be those that use hydrogen fuel-cell technology, not hybrids or electric cars since those are still considered to be “traditional” types of fuel.

Yes, the list of qualified vehicles is currently small — but that doesn’t mean it won’t expand in the future, and the credit itself is still worth keeping an eye on. 

Credits for Qualified Research Expenses

Depending on the specific type of small business you’re running, you may have to engage in a significant amount of research and development to better serve your customers. The United States government would like to encourage you to do as much of that as possible, which is how the qualified research expenses credit (otherwise known as the “Increasing Research Activities Credit”) came into being.

To qualify for this credit, you need to engage in domestic research and development for things like certification testing, environmental testing, developing or applying for patents, prototype and model development, and more. Research associated with the development of new or even improved products, processes, and formulas would also qualify.

This credit can cover up to 20% of all of your related expenses that fall under this umbrella. 

The New Markets Credit

Last but not least, we have the New Markets Credit — one designed to encourage investment in Community Development Enterprises and Community Development Financial Institutions, otherwise known as CDEs and CDFIs, respectively. These are the types of organizations that assist lower-income communities around the country.

The vast majority of all qualified projects involve either purchasing, renovating, or constructing real estate in areas that have a 20% poverty rate or with median family incomes that don’t exceed 80% of that of the larger area. This means building or renovating hospitals, for example, or industrial buildings that go on to create jobs. 

Note that while all of these small business tax credits are critical, they represent just a small fraction of those that may be available to you. For the complete list, be sure to review the IRS’s official website devoted to that very topic. As always, you should also enlist the help of your qualified Tarlow tax professional to prepare your business taxes. Not only can we help ensure you’re taking full advantage of these and other critical credits, but we can also help you avoid the types of costly mistakes that small business owners and the self-employed often make. Contact us for more information today.

Who Owes You? 5 QuickBooks Online Reports That Can Tell You Fast

How many of your invoices are unpaid? Have any of your customers gone over 30 days past due? Did you bill all of the time and expenses for that project you just completed for a customer?

If you’re doing your accounting manually, there’s simply no way to get that information quickly. Depending on your bookkeeping system, you may not be able to get it at all.

QuickBooks Online has more than one solution to this problem. Each time you log in, the Dashboard contains a graphic in the upper left corner that tells you how many invoices are overdue and unpaid. Click on the colored bar labeled OVERDUE, and you’ll see a list of invoices with the unpaid ones right at the top.


You can tell at a glance how much of your money is tied up in unpaid invoices.

While this is important information for you to have as you start your workday, it doesn’t tell the whole story. To get that, you’ll need to access some of QuickBooks Online’s reports, five of them in particular. Click Reports in the left vertical pane, and then scroll down to the heading labeled Who owes you.

These reports are listed in two columns. Each has the outline of a star next to it. Click on the star, and the report will be added to the Favorites list at the top of the page. Click on the three vertical dots next to it, and you’ll be able to Customize the report. And as you hover over the title, you’ll see a small, circled question mark. Click on this to get a brief description of the report.

There are several reports on this list that can provide insight into where your outstanding revenue is. We recommend you run five of them at least once a week, and more frequently if your business sells large quantities of products or services. The suggested reports are:

Accounts receivable aging detail

This report provides a list of overdue invoices, along with aging information. There are several columns in the report, but you’ll want to pay special attention to the last one: OPEN BALANCE.

Tip: If you have many customers or simply a high volume of unpaid invoices, you might consider running the Accounts receivable aging summary instead.

Changing the Content

Before you run the report, you should explore the customization tools provided for it. They won’t be the same for every report, but you can start to get an idea of what can be done. Hover over the report title and click Customize. A panel like the one pictured below will slide out of the right side of the screen.


QuickBooks Online provides deep customization tools for reports.

You can see some of your customization options in the image above. Beyond these, you can also work with filters and headers/footers. When you’re satisfied with your changes, click Run report.

If you want to run a report with its default settings, click on the report title in the list to display it. You’ll have access to limited customization from there.

Four other reports you should be generating regularly are:

  • Customer Balance Summary: Shows you how much each customer owes your business
  • Open Invoices: Lists invoices for which there has been no payment
  • Unbilled Charges: Just what it sounds like: tells you who hasn’t been invoiced yet for billable charges
  • Unbilled Time: Lists all billable time not yet invoiced

We don’t expect you’ll have any trouble understanding reports like these; they’re fairly self-explanatory. QuickBooks Online offers many other reports, including the standard financial reports that need to be generated monthly or quarterly, like Balance SheetProfit and Loss, and Statement of Cash Flows. You’ll need these if you apply for a loan or need to supply in-depth financials for any other reason. If you have any questions about how to run QuickBooks reports, please contact us. We can help you analyze them to get a comprehensive, detailed picture of your company’s fiscal health.

Life-Changing Events Can Impact Your Taxes

Article Highlights:

  • Marriage
  • Buying a Home
  • Having or Adopting Children
  • Getting Divorced
  • Death of Spouse

Throughout your life, there will be significant occasions that will impact not only your day-to-day living but also your taxes. Here are a few of those events:

Getting Married – If you are getting married, it is essential to understand that once you are married, you no longer file returns using the single status. Instead, you will file as married taxpayers filing jointly (MFJ). When you file MFJ, both spouses combine their income on one return. When both spouses have substantial income, your combined incomes could put you in a higher tax bracket. However, when filing MFJ, you benefit by being able to claim a standard deduction equal to twice that of the standard deduction for a single taxpayer. It may be appropriate for newly married couples to estimate the differences of filing as unmarried and filing as married before tax-filing time. Depending on your situation, you may decide to adjust withholding to compensate for the MFJ status.

Keep in mind that filing status is determined on the last day of the tax year. Regardless of when you get married during the year, you will be considered married for the entire year for tax purposes. In addition, when a spouse is changing names, the Social Security Administration should be notified, and the IRS should be informed of any address change by either or both spouses.

Buying a Home – Buying a home, especially your first home, can be a trying experience. Without a landlord to take care of repairs and upkeep of the property, those tasks will become your responsibility as a homeowner. When you rent, you are responsible for making a rental payment, which is not tax deductible. On the other hand, when you own a home, in addition to being accountable for its maintenance, you have to make homeowner’s insurance, mortgage, and property tax payments. While the routine upkeep costs aren’t tax deductible, the interest on the mortgage and the property taxes you pay may be tax deductible, providing you with a significant saving in income tax. However, if the standard deduction amount for your filing status exceeds the total of all itemized deductions the law allows you to claim, you won’t get a tax benefit from the home mortgage interest and property tax payments. So, when determining if you can afford a home, it’s important to consider whether you’ll benefit from those home-related tax savings. Also, consider the long-term benefits of homeownership. Homes have generally appreciated in the past, so you can look forward to your home gaining value. When you sell it, the gain up to $250,000 ($500,000 for a married couple) can be excluded from income if the property has been owned and used as your primary residence for any two of the five years just before the sale.

Having or Adopting Children – Besides the loss of sleep, changing diapers, middle of the night feedings, and constant attention, a newborn also brings some tax benefits, including a maximum $2,000 child tax credit, which can go a long way in reducing your tax liability. If both spouses work, you will no doubt incur childcare expenses, which can result in a maximum (can be less) credit of between $600 and $1,050 for one child or twice those amounts for two or more children. The credit amounts are based on a maximum childcare expense of $3,000 for one child and $6,000 for two or more multiplied by 20 to 35 percent of the expense based upon a taxpayer’s income.

Of course, the medical expenses are deductible if you itemize your deductions, but only to the extent that the medical expenses exceed 10% of your adjusted gross income. Although rarely encountered, the expense of a surrogate mother is not deductible.

If you adopt a child under age 18 or a person physically or mentally incapable of taking care of himself or herself, you may be eligible for a tax credit for the qualified adoption expenses you paid. The credit, which is a maximum of $14,080 for 2019, is not refundable, but if the credit is more than your income tax, you can carry over the excess and have five years to use up the credit. If the child is a special needs child, the full credit limit will be allowed for the tax year in which the adoption becomes final, regardless of whether you had qualified adoption expenses. The credit phases out for higher-income taxpayers.

It is also time to begin planning for the child’s future education. The tax code offers two tax-favored education savings accounts. The Coverdell account allows a maximum contribution of $2,000 per year, and the Qualified State Tuition plan, more commonly known as a Sec 529 plan, allows large sums of money to be put aside for a child’s education. There is no tax deduction for contributing to either of these programs. However, the earnings from the plans are tax-free if used for qualified education expenses, so the sooner the funds are contributed, the more significant the benefit from tax-free earnings.

Getting Divorced – If you are recently divorced or are contemplating divorce, you will have to plan for significant tax issues such as asset division, alimony, and tax-return filing status. If you have children, additional issues include child support; claiming of the children as dependents; the child, childcare, and education tax credits; and perhaps even the earned-income tax credit. Here are some details:

  • Filing Status – As mentioned earlier, your filing status is based on your marital status at the end of the year. If on December 31, you are in the process of divorcing but are not yet divorced, your options are to file jointly or to each submit a return as married filing separately. There is an exception to this rule if a couple has been separated for all of the last six months of the year, and if one taxpayer has paid more than half the cost of maintaining a household for a qualified child. In that situation, the spouse can use the more favorable head-of-household filing status. If each spouse meets the criteria for that exception, they can both file as heads of household; otherwise, the spouse who doesn’t qualify must have the status of married filing separately. If your divorce has been finalized and if you haven’t remarried, your filing status will be single or, if you meet the requirements, head of household.
  • Child Support – This is support for the taxpayer’s children provided by the non-custodial parent to the custodial parent. It is not deductible by the parent making the payments and is not income to the recipient parent.
  • Children’s Dependency – When a court awards physical custody of a child to one parent, the tax law is particular in awarding that child’s dependency to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the custodial parent may release this dependency to the non-custodial parent by completing the appropriate IRS form.
  • Child Tax Credit – A federal credit of $2,000 is allowed for each child under the age of 17. This credit goes to the parent who claims the child as a dependent. Up to $1,400 of the credit is refundable if the credit exceeds the tax liability. However, this credit phases out for high-income parents, beginning at $200,000 for single parents.
  • Alimony – The recent tax reform also impacts the tax treatment of alimony. For divorce agreements that were finalized before the end of 2018, the recipient (payee) of the alimony must include their income for tax purposes. The payer, in such cases, is allowed to deduct the payments above the line without itemizing deductions. This is technically referred to as an adjustment to gross income. The recipient, who includes this alimony income, can treat it as earned income to qualify for an IRA contribution, thus allowing the recipient to contribute to an IRA even if he or she has no income from working. For divorce agreements that are finalized after 2018, alimony is not deductible by the payer and is not taxable income for the recipient. Because the recipient isn’t reporting alimony income, he or she cannot treat it as earned income to make an IRA contribution.
  • Tuition Credit – If a child qualifies for either of two higher-education tax credits, (the American Opportunity Tax Credit [AOTC] or the Lifetime Learning Credit), the credit goes to whoever claims the child as a dependent even if the other spouse or someone else is paying the tuition and other qualifying expenses.

Death of Spouse – Losing a spouse is painful emotionally. Unfortunately, it can be accompanied by several tax issues that may or not apply to the surviving spouse. Here is an overview of some of the most frequent problems:

  • Filing Status – If a spouse passes away during the year, the surviving spouse can still file a joint return for that year if the surviving spouse has not remarried. However, after the year of death, the surviving spouse will no longer be able to file with the deceased spouse jointly and will have to use a less favorable filing status.
  • Notification – If the deceased spouse is receiving Social Security benefits the Social Security Administration must be immediately notified. This would also be true of pensions and retirement plans of the deceased spouse.
  • Estate Tax – Where the deceased spouse’s assets and prior reportable gifts exceed the current lifetime inheritance exclusion ($11.4 million for 2019), an estate tax return may be required. However, the lifetime inheritance exclusion can be changed at the whim of Congress. Even when an estate tax return isn’t needed because the value of the deceased spouse’s estate is less than the exclusion amount, it may be appropriate to file the estate tax return. There could be an impact on the estate tax of the surviving spouse when he or she passes.
  • Inherited Basis – Under normal circumstances, the beneficiary of a decedent’s assets will have a tax basis in those assets equal to the fair market value of the assets on the date of death. Thus, generally, a qualified appraisal of the assets is required. However, for a surviving spouse, this can be more complicated depending upon whether the state of residence is a community property state and how title to the property was held.
  • Changing Titles – The title to all jointly held assets needs be changed into the survivor’s name alone to avoid complications in the future.
  • Trust Income Tax Returns – Many couples have created living trusts that, while they are both alive, don’t require a separate tax return to be filed for the trust and can be revoked. But upon the death of one of the spouses, this trust may split into two trusts, one of which remains revocable and the other becomes irrevocable. A separate income tax return for the latter trust will usually have to be prepared and filed annually.

These are just a few of the issues that must be addressed upon the death of a spouse, and it may be appropriate to seek professional help from your Tarlow tax advisor.

If you have questions about the tax impacts of life-changing events or situations, please contact us.