1099 Basics – In July

That’s right, it’s never too early to start the process of preparing your 1099s (you will thank us come January). Here are a few tips to start preparing those 1099s.

Who do I prepare 1099s for?

The simplest answer for the most common type of 1099, the 1099-MISC, is they need to be prepared for anyone that provided services to you. However, they are not given to someone who is an employee (here’s your refresh), and you need to have paid them $600 or more for the year (we’re talking accounting, legal, janitorial services, repairs, snow removal or lawn maintenance, etc. unless the company is incorporated). If the company is incorporated, then a 1099-MISC is not required, except with lawyers … then you still get to fill out the form.

Other items reported on a 1099-MISC include rent paid to an individual or a business that is not incorporated, royalties of $10 or more, other income payments including prizes and awards, employee wages paid after death in the year following death, director fees, etc.

Another common 1099 form is the 1099-INT. This form is required for interest paid of $10 or more, any foreign tax on interest withheld and paid, or backup federal withholdings regardless of the amount of the interest payment.

Please note, this is a very simplified list of items that 1099s need to be issued for. IRS.gov has several booklets that go into more detail on what is required and instructions for each form is available. On their website, type 1099 instructions in the search box and a list of forms and instructions will pop up.

So what am I supposed to do in July?

Identifying the vendors that need 1099s now will save you a lot of headache come year end. You can do this by having each of your vendors complete and return to you a Form W-9 (also found on IRS.gov). This form will give you their business name, address, tax identification number and type of entity. Best practice is to have all of your vendors complete this form, even if you know they will not be providing services to you. If circumstances change and you are required to provide a 1099 to them in another year, then you are already prepared!

Once the W-9s are returned, you can begin updating your records so when it comes time to complete your 1099s you will have the correct name, address, and TIN on file. You should also flag your vendors so it accumulates the amounts for you. Many accounting programs, such as QuickBooks, allow you to indicate the vendor will need a 1099 at the end of the year. Most also allow you to indicate the type of form and which box the amounts should be reported in. Having your system set up to accurately do the work for you will save tons of time at year end.

If all of these suggestions are followed, you should have time in January to put your feet up on your desk and relax because you won’t be spending hours trying to find vendor information and trying to figure out the amounts to report.

If you have questions, we’re always here to help.

Employer Provided Vehicles: What You Need to Know

Welcome to tax season. When it comes to taxes, there are many factors and considerations to keep in mind (go figure!). One you might not be thinking of is properly accounting for business versus personal use of vehicles. Trust us, it’s important.

Why do I need to know about this?

First and foremost, the IRS and state taxing authorities will almost ALWAYS ask about this during an exam. If the IRS wants to know about it, you should know about it too. Personal use of a company owned vehicle is considered a taxable benefit and should be included as taxable wages/salary to the employee, unless he or she reimburses the business for personal use. Also, the amount of business versus personal mileage will determine the amount of deductions (i.e.-depreciation) that can be taken in regard to the vehicle.

What do I need to do in order to be in compliance?

Each employee who drives a company owned vehicle should keep records, such as a mileage log, to track business and personal miles. These records should be submitted regularly to the business accounting department so they can properly account for the personal usage. Undocumented mileage may be considered personal miles upon exam. Commuting miles, driving from home to the office, are also considered personal miles.

Do I really need to go through the hassle?

Yes – but there is help! There are apps available to help log business and personal miles. You can also adopt a company policy restricting personal use of company vehicles.

An example of this would be disallowing personal use. When no personal use is allowed, this usually means the vehicle is stored on the employer’s premises. The only exception would be de minimus personal use, such as a stop for lunch between two business locations (food is important, people).

However, frequency is a factor of consideration to the de minimus exception. Another policy would be to allow personal use only for commuting from home to the office. The commuting miles would still be a taxable benefit to the employee, but the mileage log would no longer be required.

The moral of the story…

Keeping records on employer vehicles is good. Keeping accurate records so the IRS can’t bug you (too much) is great! If you need help down the road (see what we did there?), let us know. From figuring out what counts as business or personal use, to drafting an appropriate personal use policy or even teaching the basics of this, we’ve got you covered. We’re happy to jump in the driver’s seat (okay we’re done with the awful puns now) to help.

Tax Accountants, CFOs & Bookeepers … Oh My!

When people hear I’m an accountant and used to be an auditor, I can put money on the next two statements that come out of their mouth. “Oh, so you do taxes?” and “I didn’t know you worked for the IRS!”

I mean, yes, I have done taxes, but that’s a very small portion of my work. In fact, many of my colleagues don’t do any taxes and probably never will. And we’ve said it before, but we will remind you again: just because someone is an auditor does not mean they work for the IRS.

This leads me to my point. Although some accountants do taxes and some go on to work for the IRS, there are many more areas that accountants find themselves working in. In fact, there are so many unique areas that we thought we would break them down for you. Here are some of the different types of accountants:

  • Tax Auditor – These accountants work for the government and help make sure tax returns are filed correctly.
  • Public Accounting Auditor – These accountants are employed by public accounting firms (like us!) and are hired by companies to make sure all accounting records and financial statements are accurate. They work closely with these companies to correct any issues, and make sure the company has good safeguards and controls around their accounting department.
  • Internal Auditor – I promise, this is the last auditor! This type of auditor is generally employed by a specific company and focuses on uncovering and correcting inefficiencies and preventing fraud within the organization. They also check the work of the accounting department to ensure everything looks correct. They do all of this to help your business run better.
  • Tax Accountant – This type of accountant helps companies or individuals with all things related to, you guessed it, tax. This could be personal or business returns, tax planning, estate planning and even succession planning for their business. Tax accountants often focus on a specialized area of tax, such as international tax or state and local tax, to name a few.
  • Forensic Accountant – This type of accountant practices in a very specialized area of accounting focused around detecting and uncovering issues. This could be fraud, embezzlement or even bankruptcies. These accountants may also act as expert witnesses in court.
  • Bookkeeper – Working as a bookkeeper focuses on originating and organizing business transactions and entering this information into the accounting system. Common duties of a bookkeeper include sending customer invoices, processing cash receipts and paying bills, to name a few.
  • Controller – The Controller acts as a manager of the accounting department, and is responsible for all transactions and controls within the department. Often times, this includes the preparation of financial statements and checking to ensure there is accuracy throughout the department.
  • Chief Financial Officer –– This is a high-level accounting position in a business, which can sometimes be overseen by the president or vice president of finance in the organization. Being at such a high level, this position holds a substantial amount of responsibility. Some of the duties of a CFO include overseeing the accounting function, managing taxation of the business and assisting with strategic planning. It is safe to say that a CFO is not just a one trick pony. (To learn more about the cast of financial characters, check out this blog).
  • Consultant – This type of accountant brings a high subject matter expertise to their clients. They often times have many years of experience in many different areas of accounting, and can help a business with many of their needs, rather than focusing on one specific area. This could include strategic planning, implementing accounting systems, making sure the company is running efficiently or even helping a business grow.

Accountants are able to specialize in a certain area within their practice and are therefore able to meet clients’ specific needs. Specialization can also be fun for accountants (yes, we said fun!) because they are able to focus on what they enjoy.

So there you have it. We’re not all tax accountants and most of us have never, and will never, work for the IRS. However, we do come from different backgrounds that have given us vastly different experiences that have helped us decide where we belong in the world of accounting.

(Shameless plug: if any of these people sound like someone your business could use, contact us!)

Ringing in the New Year with New Mileage Rates

Mileage changesAs you get read to embark on 2017, one of the things to keep in mind is the IRS. Why you may ask? Well the IRS likes to ring in the New Year with all sorts of changes (don’t believe us? Check out this blog).

One of their newest additions is the change in rate for mileage. Beginning on January 1, 2017, the standard mileage rates for business, medical and moving will change. Happy New Year.

The new rates will be:

  • 53.5 cents for business mileage (that’s a whopping half cent change from 54 cents in 2016)
  • 17 cents for medical or moving purposes (it was 19 cents in 2016)

Why the change? As a reminder, the mileage rates for business are based on a fancy study on the fixed and variable costs of operating an automobile. So the IRS is just keeping up with the times.

These are important calculations to watch if you’re reimbursing your employees for driving on or for the job. While half a cent might not seem like much, it can add up if you’re not paying attention to these types of changes. Anything paid to an employee above the federal mileage rate becomes taxable wages to the employee.

Don’t feel like calculating the mileage rates? You can always calculate the actual cost of using a vehicle instead.

 

New Year, New Updates

One of the incredibly fun things about being an employer is keeping track of all the updates related to tax forms that impact benefits and withholdings for your employees. Okay, maybe that doesn’t sound so fun – but it is important!

As 2017 quickly approaches, here’s a brief update on some of the updates you should be prepared for in the new year:

W2s

The IRS has kindly updated the W-2 deadline to January 31 (in case you don’t remember what a W-2 is, here’s your refresh). This is an important deadline to pay attention to as employers typically used to have until the end of February, if filing on paper, or the end of March, if filing electronically, to submit this form.

Why the change? The IRS is complying with a new federal law, which is trying to make it easier for them to detect and prevent fraud. This rule also applies to Form 1099-MISC (here’s your reminder).

Flex Spending Accounts

For any plan starting in 2017, the employee salary reduction for contributing to health flexible spending accounts was increased to $2,600. It was previously $2,550 in 2016.

Medical Savings Account

If your organization has a high deductible health plan, your employees (or you as the employer) can make contributions to it.

What do we mean by a high deductible plan? Well for 2017, the IRS states a high deductible plan is one with an annual deductible of $2,250-$3,350 for individual coverage (this is the same as it was for 2016). If your employee has family coverage, this deductible changes to $4,500-$6,750 (previously $4,450-$6,700 in 2016).

The maximum out-of-pocket expense has also been raised to $4,500 for individuals (previously $4,450) and $8,250 for family ($8,150 in 2016).

Social Security

The Social Security wage base was increased by $8,700 for 2017, bringing it to $127,700. The maximum tax employees and employers will pay for Social Security in 2017 will be $7,886.40.

There continues to be no limit to the wages subject to Medicare tax. In other words, all applicable wages are subject to 1.45% tax for Medicare.

And don’t forget about your organization

The IRS has also changed a few of the company filings as well. These include partnership tax returns and C-corporation tax returns.

Not quite sure what we’re talking about? Learn more about entity selection for your organization.

Partnership tax returns are now due March 15, instead of April 15. C-corporations, on the other hand, will now have their tax returns due April 15 instead of March 15.

But what if your corporation doesn’t follow a calendar year? Well, there’s still rules that apply to you too. If your partnership isn’t on a calendar year, your return is due on the 15th of the third month following your year end. The same is true for C-corporations, who will need to file on the fourth month after their year-end.

However, if your corporation has a June 30 year-end, you do not get the extra month. You will still need to file your returns on September 15th.

The moral of the story …

In case you didn’t think accounting and the financial side of your business was complex enough, there’s the issue of updates from the IRS. These must be complied with and they can be complicated. If in doubt, ask. We’re always here to help.

Exit Planning: Estate Planning

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

After several blog posts, we’ve reached the final post in our exit planning blog series. So, what does the final component of the exit planning process have in store for you? Personal wealth and estate planning!

As a note, just because this is the last step in the process, it doesn’t mean this shouldn’t be considered when you’re actually out of the business. In fact, the earlier business owners start this step, the more benefits they may receive.

It’s no surprise that the IRS lays claim to a business owner’s wealth, especially when it comes to estates. However, there are other beneficiaries a business owner might want this wealth to go to. As a business owner, you will want to have a wealth transfer method that will pass on the wealth with minimal interruption from that pesky IRS.

So, how do you go about keeping the IRS interruptions to a minimum? According to the BEI, focusing on the following three issues can help ensure success in the wealth preservation planning process.

  1. Money for Yourself – To make decisions regarding how much money should be left (to children, charities, etc.), you must first decide how much wealth you want to keep for yourself after exiting the business. This can be determined by looking at the objectives and goals you set in the beginning of your exit planning process.
  2. Money for Kids – The idea of leaving money to children after the sale of the business is a common, but sometimes difficult one. It’s often hard to decide, given the success of the business, how much is too much or too little to leave to children. It’s important to remember that children usually do not receive the full amount up front. Rather, it is transferred through trusts or over time.
  3. Minimize Tax Impact – With tax outcomes always fluctuating due to governmental policies and procedures, it’s hard to make a solid plan and know exactly how much money will be left untouched. To try to keep the amount of money taxed to a minimum, business owners (and their advisors) must be proactive.

A few other pointers for estate planning…

  • Estate Planning Preferences –Having your preferences documented can make the estate distribution process go a lot smoother. Consider including how you want personal property distributed, any personal representatives you may have, donations to charities, how the estate will be distributed, trust designs and power of attorney, to name a few.
  • Personal Lifetime Wealth Management – Understanding the decisions and actions that must take place to manage your personal wealth is crucial in making sure you obtain the highest amount upon leaving the business. It is important to consider spending strategies, estimated income and retirement, investment strategies and possible insurance strategies.
  • Wealth and Estate to Family – More than likely, you have decided to leave some part of the estate to family members, be it your children, spouse or both. Things to consider for your family include insurance proceeds, timing of income stream, transfer of assets and estate allocation preferences.
  • Protection of Personal Assets – Protecting your personal assets can enhance security of your assets against any claims against your company. Such assets to be considered may be loans to the company, collateral, ownership and rights and lifetime transfers.

Personal wealth and estate planning can help ensure you have a solid exit plan in place that is ready for whatever life may throw at you next.

In closing, we want to remind you that exit planning is a crucial step to ensure your business continues on long after it has left your hands. If done correctly, having a solid exit plan in place can help business owners be sure their dreams and goals are reached.

The Tax Implications of Crowdfunding

As you begin your endeavor, there are several ways to pursue funding (like these). One of the ways to gain funding for your endeavor is crowdfunding.

Crowdfunding is “a method of raising capital through the collective effort of friends, family, customers and individual investors” (source).

Crowdfunding generally uses the method of online platforms (social media for instance), to engage a large group of individuals and increase exposure.

In the search for increased reach and exposure, crowdfunding has even attracted our friends at the IRS. Recently, they explained the tax treatment of crowdfunding, especially as it relates to income inclusion.

What?

Code Sec. 61(a) defines gross income as all income from whatever source derived. Obviously, there are some exceptions (shocking no?), but for the most part, all the income you earn is part of taxable income, regardless of where it’s derived, unless it is specifically excluded.

So why does the IRS care?

Based on the above reference, they have concluded that crowdfunding payments are taxable income unless one of these exceptions are met:

  • Loans with a repayment obligation
  • Capital contributed to your organization in exchange for some portion of your company (equity interest)
  • Gifts

Crowdsourcing is a fairly new concept in the tax world so there is no case law at this time. It will be exciting to see how the tax courts react to this down the road.  (Yes, I’m a tax nerd and think this stuff is exciting.)

When do I have to pay tax on crowdsourcing receipts?

If the crowdfunding payments do not meet one of the exceptions listed above, they are probably taxable in the year the payments hit your account.

Which brings us to another term you’re excited to learn: constructive receipt. This basically means that income is taxable in the year funds have been credited toward your account and made available for you to draw on in the future, even if they have not physically received those funds.

The moral of the story?

There are tax ramifications for just about everything you do in business. So it’s important to be mindful of your finances, and what you’re reporting.

Still confused or need more help? We’re here.