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Treadmill Desk!

I recently was shown an article in The New Yorker, “The Walking Alive,” that introduced me to the idea of a treadmill desk.  I was very inspired by it, and a little over a week after seeing the article, here is my “custom build” from a treadmill and standing desk sold apart and not designed to work together.  So far, it works great.  I would consider getting one of the designed combo units if you are up for spending the money.

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Think you don’t need a business plan?

There are many reasons you do need a business plan.  Most of them don’t involve taxes, but instead involve your businesses success.  There is though, at least one tax related reason why you do need a business plan.  If you have multiple years of losses, the IRS may start to question if your business has a profit motive at all. Even having losses just three years out of five can increase your chance of an IRS audit.

What will the IRS be looking for in that audit?

Well besides looking to make sure that all of your expenses are legitimate, they are going to make sure that you are really running a business and not just a hobby.  If you make money from a hobby, you must pay tax on your profit, but if you lose money you are not allowed to take that loss, subject to limited exceptions.

Having a business plan can help you rebut the IRS assertion that your business is really just a hobby.  It enables you to show you have a plan to eventually make money, and even possibly that part of that plan recognized that you may lose money for a few years.  Of course no one likes to lose money, and maybe your plan will not include an expectation to lose money in any years. Still, being about to show the IRS that you do plan to make your business profitable is powerful to combat the IRS if they try to apply the hobby-loss rules to you.

Need more guidance on writing a business plan?  Call us, or check out some of these resources:

SCORE Nashville: Guides and Templates (see their Simplified Guide to Writing a Business Plan)

U.S. Small Business Administration: How to Write a Business Plan

Entrepreneur: Your Business Plan Guide

Do I owe taxes on Kickstarter project money?

Yes, most people raising money on Kickstarter or other crowdfunding sites are going to owe tax on the money raised.

There may be some exceptions – but odds are they do not apply to you.  If you think they do, you need to talk to a tax professional to be sure. The two major exceptions are gifts (an unlikely argument if the contributors are being promised a product) and equity (contributors are buying a share of your business).  The equity argument is not only unlikely, but at the moment it is illegal in the United States. Equity based crowdfunding will soon be legal in the United States, but there will still be many rules and regulations around it.

Assuming you do owe taxes, what taxes are you going to owe? First, you are going to owe federal income tax.  Your federal income tax will be based on the money you collect less any expenses incurred during the year.  Many Kickstarter projects are not going to have taxable income because their expenses exceed the revenue collected from Kickstarter. There is also an argument that if the project has not been finished you can use what is called accrual accounting to defer the tax until the product is delivered. Because most Kickstarter projects do not promise to return the money collected if the project does not get finished, this probably cannot be used.  The IRS will consider it what is called an advanced payment that tax is owed on the year collected.

If you do owe any federal income tax, you are also likely to owe federal self-employment taxes. This will depend a lot on if you are are a sole-proprietor, partnership, corporation, or other business entity such as LLC (which can be taxed as a partnership or s-corporation). This tax can be up to 15.3% of your self-employment income.

Federal taxes may not be the only tax you owe.  Depending on the nature of your product or service, and what state you are in, you are also likely to owe sales tax.  Other possible taxes include state income taxes and if you are in Tennessee (where I am) possibly the county and municipal business tax.

Kickstarter will report your income to the IRS if you exceed certain limits.  They are required to send a Form 1099-K if your receipts exceed $20,000 and you have 200 or more transactions during the year. Remember, being sent a 1099 or not does not affect whether or not you owe tax, it only affects how likely you are to be caught.  You should not base your tax decisions on the likelihood of being caught, but even without a 1099, your Kickstarter project is out there on the internet, so your income is not a secret.

Finally, there are other tax considerations depending on what your project is.  Examples include the Research and Development Tax Credit and the Domestic Production Activities Deduction. These would mostly apply to software projects, but again, it may be worth talking to a tax professional to avoid missing out on tax benefits you are entitled to.

S Corp Status for Tennessee businesses? Not so fast.

A very popular tax planning strategy is to elect S Corporation (S Corp) status for an LLC or Corporation. The LLC route is more common, but the reason why is a discussion for another blog post.

The reason this saves taxes is that in an S Corporation the owners can pay themselves a salary which is subject to employment taxes, but then any other distributions taken from the S Corporation are subject only to their ordinary income tax rate. This is often a savings of 15.3% on the non-salary portion.  The savings goes down significantly as your income goes up because the Social Security portion of the tax (12.4%) is limited to your first $113,700 of earnings for 2013.

In most of the country this is a smart move, but it is much more complicated in Tennessee.

First, even outside Tennessee, legally and ethically achieving the tax savings is not as easy as some tax professionals make it seem.  The owners have to be paid a reasonable salary, reasonable of course is open to some interpretation, but a general rule is asking, “What would it take to hire someone with my qualifications to do my job?” It is important to show you researched this and document your findings.

Once we get past that, why are the savings not as great in Tennessee? There are two reasons.  First is the Excise Tax which is a part of the Tennessee Franchise & Excise Tax Return (Form FAE-170).  This tax is 6.5% of the business’s  income.  Income subject to self-employment tax on the owner’s individual federal returns is a deduction for this tax.  Therefore, for the portion you save the 15.3% federal  self-employment taxes, you now have to pay the 6.5% state excise tax.  A huge chunk of the savings is already gone.

It does not stop there though.  Tennessee is frequently referred to as having no individual income tax.  This is not 100% true.  Tennessee does have what is commonly referred to the Hall Tax.  The Hall Tax is frequently explained as a tax on interest and dividends, but there are a few other items, including S Corporation distributions, that are subject to the tax.  There is an exemption amount of $1,250 if single and $2,500 if married.  After that a 6% tax applies.  Now almost all the self-employment tax savings are gone, and if your income is above the Social Security tax maximum, the savings will have started to reverse to the point you may end up paying more tax than if you had not elected S Corporation status.

At this point, even if a tax savings still exists, it is not impressive.  There is no way to know for sure if you will save money by electing S Corporation status without actually running the numbers, but rarely do business owners in Tennessee want to deal with the extra complication when they see what the actual savings will be.

This entire discussion is an example of why hiring a competent local tax professional can be so important.  Very little of the information available on the internet is going to discuss state and local consequences of decisions.

Please contact us if you need more help with this decision for your business.

Should I open an HSA?

In general, if you have the ability to open an HSA (Health Savings Account), you should be taking advantage of that opportunity. In order to open an HSA you just first be on a high-deductible health plan (HDHP).  These plans have lower premiums than traditional health plans, but come with higher deductibles.

When you put money into an HSA you do not get taxed on that money – you get an immediate tax savings.  Then, if you take that money out of the HSA to pay for qualified medical expenses, you are not taxed on it then either.  If you take the money out to pay for something other than qualified medical expenses before you turn 65 you are not only taxed on the money but also pay a 10% penalty. Once you turn 65, you can take the money out for any reason and only pay your regular income tax, no penalty.

HSAs do not work like the FSAs (flexible savings accounts) that were popular in the past, with an FSA money is lost if you do not use it that year. With an HSA the money rolls over every year, it is never lost.

Even if you are healthy and have few out of pocket health care costs, it still makes sense to go ahead and start building up money in your HSA.  Odds are you will eventually have a major medical expense you can use that money for.  If you are lucky and never need the money for medical expenses you just have another retirement account like a traditional IRA.

If you are interested in using the HSA as an additional retirement savings vehicle you will want to make sure that the HAS you open up has good investment options – some companies you may open the HSA with only allow money market accounts while others offer the ability to invest in mutual funds.

Please contact Patrick Cooper at 615-257-0646 or patrick.cooper@aullcooper.com if you would like additional help in determining if an HSA is right for you.  Advice on issues such as this is free to our clients.

New IRS Safe-Harbor for Home-Office Deduction

On January 15, 2013 the IRS announced a new optional safe-harbor method to calculate the home-office deduction for the business use of a home.  This is great news for many taxpayers as the home-office deduction has always been one of the more difficult deductions to properly document.

It is important to note that these changes do not change the basic requirements to qualify for the home-office deduction.  The space in the home being claimed for the deduction must be used exclusively for business purposes, and for someone who is an employee to claim the deduction the home-office must be for the convenience of the employer, not the employee.

The safe-harbor deduction is $5 per square foot, not to exceed 300 square feet ($1,500).  The IRS may adjust the $5 rate as it deems necessary. No depreciation can be taken for the business use of the home when the safe-harbor is used, but can be taken in years actual expenses are taken instead of the safe-harbor.

Should you hire a CPA, EA, RTRP or tax attorney?

You probably think I am going to say you should never use anyone but a CPA, but I’m not, because that isn’t true.  When it comes to tax preparers, there are many choices, and it is the person, not the credential that matters.

Here is what the credentials mean:

Certified Public Accountant (CPA) – A CPA is going to have at least a bachelor’s degree, usually in accounting, and has passed a rigorous series of examinations to obtain the CPA designation.  Before receiving the designation, most states require at least 1 year of experience. In Tennessee, where I am licensed, 80 hours of education is required every two years, essentially the same thing.

Why don’t I say a CPA is the best? Although a portion of the CPA exam is on taxation, not every CPA is a tax expert.  It is certainly the case that many CPAs prepare taxes that do not have as much education or experience specifically in taxation as some non-CPA professionals.

I do feel, if you are going on nothing but certifications, a CPA is likely the best choice, but that is just my opinion.  I also believe that if you are a small business owner, you should have a relationship with a CPA for reasons beyond taxes.

Enrolled Agent (EA) – This designation is not very well known.   I feel bad for EAs because the EA credential is very good from a knowledge standpoint, but the public doesn’t know what it is.

An Enrolled Agent is a tax practitioner authorized by the Department of the Treasury to represent taxpayers before the IRS.  The test to become an EA is specifically focused on the Internal Revenue Code. Enrolled Agents are quick to point out that they are the only professionals whose certification is specific to taxation.

Registered Tax Return Preparer (RTRP) –The RTRP designation means that the preparer has passed a test of minimum competency to prepare tax returns.  Although the credential itself just establishes minimum competency, that does not mean that a preparer with that is only minimally qualified, but that is all the credential itself tells you.  The IRS intended to require that preparers MUST be an RTRP if they were not a CPA, EA, or attorney.  Due to a lawsuit, that requirement is currently on hold.  I personally would not hire anyone who was not at least an RTRP.

Attorney – An attorney can prepare tax returns.  There is nothing about becoming an attorney that means you know anything about taxes.  If you are hiring an attorney to complete your tax returns, do make sure they practice heavily in tax. If you are hiring an attorney who does not also have one of the other credentials, look for them to have an LLM in Tax.  An LLM is an advanced law degree. Tax attorneys are generally hired to prepare estate tax returns, gift tax returns, and do complex tax planning.  As you may know, I am also licensed as an attorney in addition to being a CPA, but at Aull & Cooper CPAs I work only in the capacity of a CPA!

Unlicensed Preparers – If a preparer is not a CPA, EA, RTRP, or attorney, I would stay away regardless of any other factors.

Do I have to issue __________ a 1099?

If you have a business or rental property, you have probably asked this question. A lot of people have trouble figuring out to whom they need to issue a Form 1099-MISC. It should not be hard. My advice to clients is to request a Form W-9 from everyone they pay for services. The W-9 gives you all the information you need to issue a 1099, or to know that you do not have to. If a company does not need to receive a 1099, let them check “Exempt” on the Form W-9.

Any person or company you pay over $600 for services in a calendar year should receive a 1099, unless they are a corporation. An LLC is not a corporation and neither is a partnership. You cannot necessarily tell though without getting a W-9 because an LLC can be treated by the IRS as a corporation. Therefore, you request the W-9 and let the company tell you.

What is a service?

- Your painter
- Your web designer
- Your lawyer
- Your accountant
- Your marketing consultant
- Your janitorial service
- And many many more you may not think of requiring a 1099

What are the consequences for not issuing 1099s?

The penalty for failing to issue Form 1099 is up to $100 per form depending on how long ago the form was due. Additionally, upon an audit the IRS may deny an expense if the 1099 was not issued even if you can otherwise document the expense was incurred.

It is also now harder than ever to claim you accidentally forgot. Both Schedule C (business profit for sole-proprietorships and single member LLCs) and Schedule E (rental properties) of the 1040 now ask the following:

Did you make any payments that would require you to file Form(s) 1099?

If yes, did you or will you file all required Form(s) 1099?

All business returns, such as Form 1065 (Partnerships) and Form 1120S (S Corporations) also ask these questions.

The forms are certainly frustrating to deal with and smaller vendors who did not intend to report the income are often annoyed to receive them, but they are not that hard or expensive to issue. There is no harm in issuing a 1099 that did not need to be issued.

The question is, why should you risk fines, and your legitimate deductions, to facilitate someone else not paying their taxes when you are? Ask for the W-9 before you pay someone, and send them a Form 1099-MISC in January.

 

Deducting Business Mileage

If you are using your car for business purposes, there are two options for deducting automobile expenses: actual expenses of owning and operating the vehicle or the standard mileage rate. The best method for you depends on your individual circumstances, but using either method, unless the vehicle is 100% dedicated to business use, keeping accurate mileage records is critical.

Deducting mileage is a great tax deduction you can have if you have a small business or rental property. At 55.5 cents per mile in 2012 and 56.5 cents per mile in 2013 you do not want to miss out on any miles that you can legitimately claim.

With the deduction being so generous, the IRS can be strict with its documentation requirements to prove the mileage claimed in the event you are audited, thus, it is important to keep this in mind throughout the year.

The IRS wants to see both a written mileage log and additional proof that you traveled those miles. Examples of the additional evidence would be gas station fuel receipts, toll booth receipts, or even e-mails scheduling appointments at your destination.

Everyone claiming business mileage should have a notebook in their car that records the miles on the odometer at the beginning of the year, the date, destination, and miles for each trip being claimed, and ending miles on the odometer for the year. Additional evidence, such as fuel receipts, could also be kept with the notebook.

In place of a notebook, there are many new tools available, such as phone apps and GPS devices meant to make this task easier.

If you have any questions about how you should be documenting your business mileage, please contact us.

 

What are the final 2013 tax rates?

In December I posted what the tax rates were going to be if there was no fiscal cliff deal.  Of course, there was a deal.  Here are the rates that are now in place for 2013.  Remember, these are not the rates you will be paying when you file your return on or before April 15, 2013.  That tax return is for your 2012 taxes.

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,925 $0 to $17,850 $0 to $12,750
15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $398,350 $223,050 to $398,350 $198,051 to $398,350
35% $400,000 and up $450,000 and up $425,000 and up