Tighten up billing and collections to mitigate economic uncertainties
The U.S. economy is giving business owners plenty to think about. Although rising inflation and supply chain problems are beyond your control, you can tighten up your own operations. One area to look at is billing and collections. Ensure your order fulfillment and distribution processes are as efficient as possible. Resolve billing mistakes or confusion quickly, asking customers to pay any portion of a bill they’re not disputing. Familiarize yourself with industry norms for payment schedules. Use the latest invoicing and payment technology to your advantage. Regularly verify account information to make sure invoices and statements are going to the right place. Contact us for help.
Businesses may receive notices about information returns that don’t match IRS records
The IRS has begun mailing notices to businesses and other payers that filed certain returns with information that doesn’t match the agency’s records. These CP2100 and CP2100A notices are sent by the IRS twice a year to payers who filed information returns that are missing a Taxpayer Identification Number, have an incorrect name or have a combination of both. Payers are required to file with the IRS various information returns reporting payments they make to independent contractors, customers and others. These include Form 1099-MISC (Miscellaneous Income) and Form 1099-NEC (Nonemployee Compensation). Contact us if you have questions about filing information returns.
Valuable gifts to charity may require an appraisal
If you donate valuable items to charity, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply certain information to prove their right to deduct charitable contributions. If you donate an item of property (or a group of similar items) worth more than $5,000, certain appraisal requirements apply. You must: get a “qualified appraisal;” attach an “appraisal summary” to the first tax return on which the deduction is claimed; include other information with the return; receive the qualified appraisal before your tax return is due; and maintain certain records. Other rules apply to larger gifts and there are exceptions. Contact us with questions.
No parking: Unused compensation reductions can’t go to health FSA
The pandemic’s impact is raising some interesting fringe-benefit questions. In an information letter, the IRS recently answered an inquiry involving a qualified transportation plan participant who now works from home rather than in the office. The participant asked whether he could transfer unused compensation reductions for parking to his health Flexible Spending Account (FSA) offered through a cafeteria plan. The IRS said no, explaining: 1) the U.S. Code prohibits cafeteria plans from offering qualified transportation fringe benefits, and 2) tax rules don’t allow unused compensation reduction amounts under a transportation plan to be transferred to a health FSA. Contact us for more info.
Want to turn a hobby into a business? Watch out for the tax rules
You may dream of turning a hobby into a business. You won’t have any tax headaches if your new business is profitable. But what if the enterprise consistently generates losses (deductions exceed income) and you claim them on your tax return? The IRS may step in and say it’s a hobby (an activity not engaged in for profit) rather than a business. Then you’ll be unable to deduct losses. There are 2 ways to avoid the hobby loss rules: 1) Show a profit in at least 3 out of 5 consecutive years (2 out of 7 years for certain horse businesses). 2) Run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a hobby. Contact us for more details.
The tax mechanics involved in the sale of trade or business property
What are the tax consequences of selling property used in your business? Many rules may apply. Let’s assume the property you want to sell is land or depreciable property used in your business and has been held by you for more than a year. Gains and losses from sales of business property are netted against each other. The net gain or loss qualifies for tax treatment as follows: 1) If the netting of gains and losses results in a net gain, long-term capital gain treatment results, subject to “recapture” rules. Long-term capital gain is generally more favorable than ordinary income. 2) If the netting of gains and losses results in a net loss, the loss is fully deductible against ordinary income.
Businesses looking for outside investors need a sturdy pitch deck
Does your company need funding from outside investors? If so, you need to wow them with your vision, financials and business plan. Many companies produce a digital presentation called a “pitch deck” that describes the business, its primary product or service, and the upside of the investment opportunity. Some general guidelines: 1) Keep it brief, concise and comprehensive, 2) Identify the problem you’re solving and target market, 3) Outline your business plan, 4) Sell investors on your leadership team’s strengths, 5) Summarize your marketing and sales plans, and 6) Provide a snapshot of your financials, both historical results and projections. Contact us for help with your pitch deck.
Thinking about converting your home into a rental property?
Some taxpayers move to new homes but rent out their present homes. Renting out a home carries potential tax benefits and pitfalls. You’re generally treated as a landlord once you begin renting your home. That means you must report rental income on your tax return but are entitled to deductions for utilities, incidental repairs, depreciation and other expenses. However, you could forfeit a big tax break if you sell the home at a profit. You can generally escape tax on up to $250,000 ($500,000 for married joint filers) of gain on the sale of a principal home. However, this treatment is conditioned on using the home as your principal residence for at least 2 of the 5 years preceding the sale.
Tax considerations when adding a new partner at your business
Adding a partner in a partnership has several financial and legal implications. Although the entry of a new partner may appear simple, you should plan properly in order to avoid tax problems. For example, if there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change is treated as a sale of the items. The result: The current partners will recognize gain. For this purpose, unrealized receivables include accounts receivable, depreciation recapture and certain other ordinary income items. In order to avoid gain recognition on those items, they must be allocated to the current partners even after the entry of a new partner.
Offering summer job opportunities? Double-check child labor laws
In News Release No. 22-546-DEN, the U.S. Department of Labor’s Wage and Hour Division recently announced that it’s stepping up efforts to identify child labor violations in the Salt Lake City area. But the news release is a good reminder for companies nationwide. The Fair Labor Standards Act restricts the hours that children under 16 years of age can work and lists hazardous occupations too dangerous for them to perform. The law allows children 14 to 15 years old to work outside of school hours in various non-hazardous jobs, but only under certain conditions and during permissible work hours. The news release describes one case in which an employer was fined $17,159 for violations.