Business Accounting Blog

Show me the money!! Does Uncle Sam get a cut?

admin — Mon, 19 Jul 2010 00:18:42 +0000

If you come into a lump sum of cash, you may be wondering whether it is taxed. Follow these general guidelines, and discuss them with your tax consultant.

Gambling:

If you happen to win money while gambling (this includes raffles and lottery winnings) that income is taxable as “other income”.
If you happen to lose money while gambling, you are allowed to deduct those losses up to the amount of your winnings, as a miscellaneous itemized deduction.
If you can prove that your gambling activity was conducted as a “trade or business” your losses (and/or winnings) would be reported on Schedule C (instead of as an itemized deduction for losses), but be careful here….your gambling losses are still limited to the extent of your gambling gains. Also, you should be very careful when completing your return as a professional gambler as the courts have a hard time envisioning gambling as not being pure recreation.

Prizes:

If you win cash (or a cash equivalent like a shopping card or gift certificate) from a drawing or contest it is considered taxable income and must be reported on your return as “other income”.
If you win something that is not cash, like a TV (or car, boat, a trip, etc.) then the fair market value of your winnings needs to be reported on your return as “other income”. You are allowed to report a value lower than the FMV reported on Form 1099 if you can substantiate the lower value.

Finder’s Keepers:

If you happen to find a briefcase full of money and the police was not able to find it’s prior owner, the money is yours and it’s taxable as other income.
If you happen to find any non-cash item and the police are not able to find it’s prior owner, the item is yours and the FMV is taxable as other income.

Gifts:

When someone gives you a gift of cash it is NOT taxable to you.
When someone gives you a non-cash gift, it is NOT taxable to you.
The sale of a gift may produce a capital gain, which would be taxable.

Inheritances:

Inheritances are usually not taxable to you.
Inheritances that would have been taxable income to the decedent is taxable to you.
Income earned from the inherited property is taxable to you after transfer to you.
The sale of inherited property may produce a capital gain, which would be taxable to you.

Unemployed? Think before you cash out!

admin — Mon, 19 Jul 2010 00:04:56 +0000

If you’re suddenly unemployed, you have a number of unpleasant choices to make. Can you keep your car? Your house? If so, for how long? Probably the most unpleasant choice: Which assets do you sell first to make ends meet? And how do you go about liquidating the savings you’d hoped to spend on something else? Financial planners generally say you should have three to six months’ expenses in an easily accessible account in case of an emergency. And getting laid off is a financial emergency if there ever was one, particularly if you only have one income.

This is a rule of thumb that’s probably more often said than done, however. Let’s say that you make $80,000 a year and that your expenses are about 60% of your gross pay. We’re just talking about the money you need to pay the bills, here. You won’t be contributing to your 401(k) plan, and, since you don’t have income, you can pass on tax withholding, too.

Nevertheless, we’re talking about salting away $12,000 to $24,000 in a low-interest savings account, and for many families, that’s a tough amount to save.

After you’ve exhausted your emergency fund, your next candidate should be any taxable investments you have: stocks, bonds and mutual funds. If you’re at this point, you should also consider selling some of your stock funds. Your risk tolerance is obviously different now. After all, this money is no longer being saved for a far-off goal: It’s being used now, which means you should be careful with it.

True, stock funds have gotten clobbered recently, and you can argue that stocks are cheap. On the other hand, by looking at it that way, you’re making a market-timing decision, not a cash-flow decision. By moving to less risky investments, you’ll give up some potential gains, but you’ll also sidestep some potential losses. And you’ll have a better idea of how much cash you have to use in the coming months.

You can also use your taxable losses to offset any amount of taxable gains this year. Stop laughing. It could happen. You can also deduct $3,000 of losses from your taxable income — a fact that’s less interesting if you have no income. If you have run out of taxable investments, you’ll have to start tapping funds in retirement accounts. Your first stop should be a Roth IRA, if you have one. You can take your contributions from a Roth IRA at any time with no tax implications.

Finally, there’s your 401(k). If you’re laid off, you can request to have the company write you a check for your 401(k) balances. Your company will do that, but it will withhold 20% of your 401(k) for taxes, because your entire withdrawal is taxable. You may also owe 10% of the entire amount for the early-withdrawal tax penalty. You can dodge the 10% penalty if you have lost your job and you’re 55 or older. (Normally, you have to wait until you’re 59½.) You still have to pay taxes on the distribution, however. If you want to be philosophical, you’ll at least be pulling money out of your retirement account when you’re in a very low tax bracket. For what it’s worth, you probably made your contributions when you were in a higher tax bracket.

If you’re still working, then the recent drumbeat of layoff announcements should spur you to start an emergency fund. Consider investing in some of the high-yielding money market funds and bank Cds. If you want something that’s more of an investment, consider one of the high-grade corporate bond funds in the chart. These funds invest in long-term IOUs issued by top-rated companies, and current yields are extremely tempting.

Finally, remember that sooner or later, the economy will turn around, companies will start hiring, and you’ll find another job — quite possibly, one that’s far better than the one you left. Remain positive, and consult your tax professional on what you should cash out first to reduce any negative tax implications.

Maximize Your Tax Benefits on Rental Property

admin — Sat, 26 Jun 2010 10:41:44 +0000

With the number of homes up for foreclosure, government incentives to purchase homes, and great interest rates, many of you might be considering a second property for investment purposes. Although being a landlord has its pros and cons, from a tax perspective, there are some simple steps you can take to make the filing process much easier on you and your accountant.

Keep a separate bank account for business. Even if you are just going to report the activity on Schedule E of your 1040, having the activity of the business separate will make book keeping and question answering much easier. If the property will be held by an LLC, this is necessary to help maintain the liability shield to show the distinction between the business entity and your personal assets.

Establish a capital expenses account separate from the repairs and maintenance account. In the capital expenses account keep track of larger improvement or repair projects, remodeling, or asset purchases (computers, telephones, HVAC units, etc). At the end of the year, the capital expenses account can be easily adjusted to the balance sheet to capitalize and depreciate these assets.

Only the interest on mortgage loans is deductible, not the whole payment.Additionally points paid on a mortgage are deductible ratably over the life of the loan.

Deduct insurance premiums, as well as other business expenses (the ordinary and necessary expenses of carrying on a trade or business that are paid or incurred in the tax year.) These are not deductible as a homeowner, but they are as a real estate business owner.

Miscellaneous closing costs are deductible in the year of purchase. For example, title and escrow fees, title insurance, appraisal fees, loan application fees, and recording fees are all deductible in the year of purchase.

Depreciation considerations. Make certain to allocate part of the property purchase price to land. Look to guidance from the valuation or tax valuation as to a reasonable proration of these amounts.

Real estate income is passive income. Losses reflected on Schedule E will be carried forward to offset other passive income in future years. The exception to this rule is if you are materially participating real estate professional. To meet this exception more than half of all working hours performed during the year must involve property trades or businesses in which the taxpayer materially participates and these working hours need to be more than 750 hours.

As always, consult your tax professional to ensure that you are keeping proper records to maximize your beneift.

New Homebuyer Tax Credit – Must close by June 30!!

admin — Sat, 26 Jun 2010 10:07:21 +0000

In the midst of a struggling economy and high unemployment rates, those who have positioned themselves to survive this economic crunch can take full advantage of the programs implemented in efforts to stimulate a lagging economy. The mortgage and housing industry is expecting to benefit greatly from the Homebuyer Tax Credit offered through April 30 of this year.

So what was the big hoopla? A healthy tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. Even qualified repeat home buyers can receive a tax credit of up to $6,500. So I’m sure you next question is… “what do I need to qualify?” Here are a few tips and key points you should be aware of. You have only a short time to make this happen, so carefully review these points and contact your real estate professional immediately! You will reap the rewards and your tax professional can maximize this and other deductions and credits you will qualify for as a homeowner.

So here’s what you need to know:

·   A tax credit of up to $8,000 is available for first-time home buyers purchasing on or after January 1, 2009 and on or before April 30, 2010. In cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify. The key here is April 30 to lock in the contract, and June 30 to close. Don’t forget these dates!!!

·   A tax credit of up to $6,500 is available for repeat home buyers who have owned a home for five consecutive years out of the prior eight years. The repeat home buyer tax credit applies to houses sold after November 6, 2009 and on or before April 30, 2010. In cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.

·   Income limits of $125,000 for individuals and $225,000 for married couples filing jointly apply to all sales occurring after Nov. 6, 2009. The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for individual taxpayers and $150,000 for married couples filing jointly. Given the current state of the economy, this should fit most Americans. If you’re making more than that, you probably don’t need the credit as much as others.

·   Homes priced above $800,000 are not eligible for either the first-time home buyer tax credit or the repeat home buyer tax credit. I think most of us can live with a $750,000 home if necessary to qualify for the credit!

·   Expanded tax credit benefits apply to members of the military, the foreign service and the intelligence community.

·   Home purchases in 2010 may be claimed on an amended 2009 income tax return. This is important! Contact your tax professional with your intentions to make a purchase this year to see the impact THIS YEAR!

·   Persons who are claimed as dependents by a taxpayer or who are under age 18 do not qualify for a tax credit.

·   Home purchases from relatives of the taxpayer or the taxpayer’s spouse do not qualify for the tax credit. The IRS defines relatives as ancestors (parent, grandparent, etc.), lineal descendants (child, grandchildren, etc.) and spouses.

·   Married couples are not eligible to claim the first-time home buyer tax credit if either spouse has previously owned a home. They may, however, qualify for the repeat home buyer tax credit.

· Neither the first-time home buyer tax credit nor the repeat home buyer tax credit have to be repaid unless the home is sold or ceases to be used as the buyer’s principal residence within three years after the initial purchase.

· Taxpayers must submit a copy of the HUD-1 settlement statement and IRS Form 5405 to claim either the first-time home buyer tax credit or the repeat home buyer tax credit.

So you’re ready to rock and roll! You can now apply for your first time homebuyer tax credit with the new and improved form 5405. With the new form 5405, the IRS is asking you to attach proof that you actually bought the house to help deter fraudulent claims. Examples of what they consider proof:

A copy of the settlement statement, preferably form HUD-1
A copy of the executed retail sales contract for mobile home purchases
For a newly constructed home, a copy of the certificate of occupancy

If you find you need additional help, please consult a licensed tax professional regarding the best decision for your specific situation.

Cancelled Debt and the Tax Implications

donald — Thu, 07 Jan 2010 10:12:03 +0000

“Mr. Williams, I just received a Form 1099-C in the amount of $3,000 from my old credit card company. What am I to do about this? Do I have to include this as income on my tax return? I do not have the money to pay taxes on this income. Is there anything that you can do to help me?”

This conversation will take place millions of times between individuals and their tax advisors this tax season. The rising number of debt cancellations, foreclosures, repossessions and abandonments has placed this tax issue in the households of countless taxpayers. Current economic conditions, not experienced since the Great Depression, have forced many individuals to make financial decisions regarding burdensome debt obligations that, unknown to them, have severe tax consequences. The IRS predicts that there will be an estimated 2 million 1099-C filings, resulting from debt forgiveness settlements.

Any individual that has received debt forgiveness in the amount of $600 or more as a result of debt cancellations, foreclosures, repossessions and abandonments must include the value of the debt forgiveness as other income on their tax return. These determinations should be thoroughly discussed with one’s tax expert before, during and after any discussions with creditors, debt collectors and debt buyers regarding the settlement of personal debt. Loan modifications programs enter into one’s mortgage company are also covered under these tax regulations and should be discussed with one’s tax advisor.

The tax implications of theses financial decisions are real dollars and cents and, therefore, should be fully evaluated with a tax expert. There are a few exceptions that we want our clients to be aware of in their efforts to reduce or eliminate the tax burden of these critical financial decisions. As the year ends and many financial institutions are required to make decisions about the status of certain obligations, it is to your advantage that you are equipped to engage in knowledgeable negotiations to resolve matters. We want our clients to be in a win/win situation, with full understanding of their choices.

If you have had a vehicle reposed, mortgage modified, debt cancelled or abandoned real property, call us immediately at 1(866) 278-4266 for a consultation. We are expecting lots of volume in this area, so please do not hesitate to give us a call. A few minutes of your time could save you hundreds of dollars in taxes. For more information regarding cancelled debt, read Publication #4681 available at www.irs.gov.

The Law and Accounting Requirements Go Hand-in-Hand for Contractors

admin — Wed, 09 Dec 2009 11:59:25 +0000

This is a guest post by construction attorney Scott G. Wolfe Jr. Scott is a construction attorney licensed to practice in Louisiana, Oregon and Washington. He is a founder of the law firm, Wolfe Law Group, L.L.C.

Perhaps more than in any other industry, the construction industry is constantly dancing with legal requirements. Whether it is because they are required to abide by a lengthy contract on a project, or because they’re working on a state or federal construction project and must comply with Bacon-Davis prevailing wage laws, contractors are always walking the fine line within every regulatory law.

While many contractors retain counsel to help explain the applicable laws and represent them in disputes or concerns, contractors too frequently overlook another professional: the accountant.

Quality and competent accounting advice and assistance is extremely important for those in the construction industry. This is not only to help maintain your vulnerable bottom line, but also to avoid making mistakes with costly regulatory consequences.

Think about it.

A construction project can have a price tag worth hundreds of thousands or millions of dollars, and a contractor or supplier may have hundreds of workers, suppliers, invoices, subcontractors and other parties or items slowing taking pieces of contract price. The contract price itself is based upon a bid that is vulnerable to unforeseen conditions, and increases in material or labor prices. Many projects require payment applications that request specific accounting information, and require that parties withhold retainage amounts. This is not even to mention prevailing wage requirements, and public reporting requirements.

And the complexities go on (complexities often discussed on our blog, Construction Law Monitor).

When its time to get paid, do you know what is one of the most important pieces of “evidence” to have on your side? A clean accounting of the project’s costs.

Too many times our clients have great legal cases, but just sloppy books. If you encounter a payment dispute on a construction project, it will be nearly as important to clearly show (through good accounting) what was spent on the project and what you’re owed, as it will be to have good representation.

When entering construction contracts in the year 2010, of course think about legal issues that might arise. But don’t forget to keep your books clean, and to clearly track the money in and the money out on the project. And grab yourself a great accountant to keep your company on top of each project.

Did You Know Quickbooks Has An Online Version?

donald — Wed, 09 Dec 2009 11:45:05 +0000

Most small businesses know Intuit’s Quickbooks package quite well, as its by far the most popular small business accounting software package in the country. But did you know that Quickbooks now offers as web-based accounting product – QuickBooks Online?

The benefits of an online accounting package are numerous:

Everyone can log in and see the most update information from anywhere, without the need to set up servers, permissions or other complex networking items.
Your information is backed up by Intuit, so it’s always accessible and safe.
You can access it on any type of computer: PC, Mac, Linux, etc. All you need is the proper browser
You can process credit cards, payroll, invoices, and more, all from one web-login.

Intuit just updated its blog with a discussion of Quickbooks Online’s newly released features. Of course, since the program is web-based, the new features are available to all users instantly, without the need for any upgrades.

An online accounting application may be right for your business…or, you may want to stick with a software version of the QB product, or some other product. In any case, you probably want to bookmark or subscribe to the Quickbooks small business blog. It’s in our blog roll.

Hello world!

admin — Wed, 09 Dec 2009 10:09:16 +0000

We’re very happy to formally announce the launch of the Business Accounting Blog. Over the coming weeks and months, we’ll continually publish articles on this blog to provide you with free, current and relevant information about accounting for your small business.

The Business Accounting Blog is brought to you by Williams Accounting & Consulting, L.L.C., a full-service accounting firm that prides itself on providing Accounting With Integrity. The firm is headed by Donald Williams, who has a Masters Degree in Accounting. You can learn more about Donald and Williams Accounting & Consulting on our About Us page. Be sure to also click on the Services page to learn more about the services we offer.

A focus of our business is on the construction and restaurant industries. As such, we’ve created two post categories specifically for these industries, and will post accounting and tax articles relevant to those working in construction or restaurants. We’ve created three other post categories as well, one for Everyday Accounting issues applicable to the small and mid-sized business, one for Tax issues and questions they face, and one to keep you updated on our company and website (Web Updates).

Thanks for stopping by, and we look forward to having you as a reader. Stop by anytime, leave a comment, or contact us with any questions.