Take steps to boost your business profits

Keeping your company profitable when the economy slows down is a challenge for every business. You may be able to boost your bottom line with the following financial controls.

* Watch your customer credit. Use an accounts receivable aging report to flag past due accounts. Follow up with a customer immediately when you spot a delinquent bill. Don't extend any more credit until the customer brings the account up to date.

* Don't pay too quickly. Use an accounts payable aging report to keep money in your account as long as possible. Take advantage of early payment discounts if it makes sense. Otherwise consider using the full grace period to pay your bills.

* Invest surplus funds. Keep most of your money in a business savings or money market account where it will earn interest until you need it.

* Reserve cash for your short-term needs. Prepare a quarterly cash forecast report so you can anticipate cash shortfalls in time to carefully weigh your financing options. Establish a line of credit before you need it.

 

* Reduce inventory. Create a tax deduction and free up valuable shelf space by donating obsolete inventory to your favorite charity. If your inventory includes slow-selling or high-cost items, consider making them special order items.

* Control your labor expense. Provide adequate training for your employees. Cross-train every employee to do another's job. Ask your employees to make a list of their assigned tasks. These steps may help you eliminate paying for unnecessary work and create more efficient processes for getting a job done.

* Resist the temptation to lower prices. Instead, look for ways to improve your product or your customer service to attract new customers and retain the ones you already have.

Please give us a call to discuss these and other profit-boosting ideas for your business.

Unemployment benefits are taxable

Unemployment compensation can provide a welcome buffer while you're transitioning to a new job. But with the help comes a tax effect, because the benefits provided under federal or state laws are usually includable in your income in the year you receive them.

As a result, depending on the amount of unemployment you expect to receive, you may want to complete "Form W-4V, Voluntary Withholding Request," to have federal income tax withheld from your benefits.

Alternatively, you can adjust or begin making quarterly estimated tax payments.

The amount of unemployment compensation you report on your income tax return is also affected by benefits you have to repay. If you receive and repay benefits in the same year, you can subtract the repayment from the total you received.

However, if you make repayments in a year following the receipt of the benefits, the tax treatment depends on how much you repay, and can be claimed either as an itemized deduction or a credit against your current-year tax.

Please contact us if your employment situation changes. We can help with tax and benefit related issues such as severance pay, retirement account rollovers, and deductions related to job hunting.

Who owes self-employment tax?

If you earned $400 or more of net profit during 2013 from work as a sole proprietor or independent contractor, you may owe self-employment tax. That's true no matter what your age – even if you're receiving social security benefits.

The tax is assessed on your net earnings from self-employment, which can include income from qualified joint ventures and partnerships, as well as fees you earn working as a director for a corporation. In this context, "earnings" generally means your income after deducting expenses incurred while operating your business. If you have multiple businesses, you combine the net income and losses.

For your 2013 return, the self-employment tax rate is 15.3% of the first $113,700 that you earned. For 2014, the taxable base rises to $117,000. Income above the base is still subject to Medicare tax at a 2.9% rate. In addition, a 0.9% Medicare surtax is assessed on all self-employment income in excess of $200,000 for singles and $250,000 for couples.

What happens when you earn social security wages or tips from an employer and also have a side business? Your wages count toward the taxable base. Depending on how much you earn as an employee, your self-employment income may be subject to part or all of the tax.

You pay self-employment tax on a quarterly basis as part of your estimated tax payments. One half of the total self-employment tax that you pay during the year is deductible on your income tax return, and you don't have to itemize to claim the deduction.

Are you new to self-employment? Give us a call. We're happy to offer guidance and help you make smart tax decisions.

Do you need life insurance on your children?

Ask whether you should carry life insurance on your children and you'll receive a variety of answers. Here's a look at the arguments for and against.

* Financial security. Traditionally, you take out life insurance to provide for the financial security of dependents. The policy should provide funds to replace the insured's income and to pay off debts. Neither of these reasons applies to young children. They don't generally have any significant income, and they don't usually have any debts. Some parents might want to carry a modest amount of insurance to cover funeral costs for their children in case the unthinkable happens.

* Insurability. Another argument is that by taking out a policy at a young age, you help to guarantee insurability as the child grows older. This could be important if the child develops a major illness later in life. The problem is that if the child does develop a serious illness, insurance could then become very expensive or limited in amount.

* Insurance as an investment. Some advisors suggest that parents should take out a whole life policy on their children. These policies include a savings component to build up cash value in the policy. You could then use that value for education expenses or other needs. But others say that there are cheaper and more efficient ways to save than by using life insurance. For example, putting money into a tax-advantaged Section 529 plan might be a better way to save for college tuition costs.

* The bottom line. Although a majority of financial advisors might argue against life insurance for children, there may be some situations when it makes sense. One thing is clear. You shouldn't take out a policy just because it is offered to you or because others are doing it. Insure your kids only if you've done your homework and know exactly why you need the insurance.

Please contact our office if you'd like help reviewing the advantages and disadvantages as they apply to your particular situation.

Deductions for business travel expenses need support

If you intend to deduct business travel expenses on your income tax return, keep adequate records. If you are later audited, you will be able to substantiate your deductions. Your oral summary of your business expenses will not hold up to an IRS audit. Besides, audits are often a year or so after the events which make it more difficult to recall what took place if you don't have proper documentation.

The easiest way to keep good records is to do so near the time the expense was incurred. Consider using a large envelope for each trip to keep all receipts and other trip information. Take a few seconds to write the business purpose and/or customer names on the back of appropriate receipts. If you are lacking a specific receipt, write your account of the event, the date, and the money paid out and save it along with your other travel documentation. Take time also to document the business miles travelled.

If you maintain an expense report on a weekly basis for the expenses of that week, it will be considered a timely kept record for IRS purposes. If you account to your employer under an accountable plan, the rules are different.

For assistance in setting up a record system for your business travel, please contact us.

Don't pay tax on nontaxable income

There are several sources of revenue that are not subject to income tax.

Here are the most common sources of money that are not taxed on your federal income tax return:

* Borrowed money, such as from banks or personal loans.

* Money received as a gift or inheritance from family or friends.

* Money paid on your behalf directly to a school or medical facility.

* Most life insurance proceeds.

* Cash rebates from businesses when you buy an item.

* Child support payments.

* Money you receive for sustaining an injury.

* Scholarships for tuition and books.

* Disability insurance proceeds from a policy purchased with after-tax dollars.

* Up to $500,000 of profit for a married couple selling their personal residence.

* Interest received on municipal bonds.

If you have included any of these as taxable income on your income tax return for the past three years, you can amend your return for a tax refund.

If you would like assistance in determining what to include on your income tax return, please contact us. We are here to help you.

Be aware of tax season scams

The IRS is urging taxpayers to be aware that tax-related scams using the IRS's name become more frequent at this time of year. Here are the suggestions the IRS offers that can help protect against scams and identity theft.

* Don't carry your social security card or any documents that include your social security or taxpayer identification number.

* Don't give a business these numbers just because they ask for them. Give them only when required.

* Protect your financial information.

 

* Check your credit report every 12 months.

* Secure personal information in your home.

* Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches, and changing passwords for Internet accounts.

* Don't give personal information over the phone, through the mail, or on the Internet unless you initiated the contact and are sure of the recipient.

myRA pilot program announced

Watch for details on a new retirement savings account called the myRA. The Treasury Department has been instructed to begin a pilot program for this new savings vehicle by the end of 2014. The myRA (my retirement account), would let workers open individual retirement accounts with as little as $25 that invest in government bonds. Contributions would not be tax-deductible and could be withdrawn at any time without penalty.

You have options for tax refunds

You can receive your income tax refund in several ways: (1) direct deposit into a single checking or savings account, (2) direct deposit split into up to three different accounts in up to three different U.S. financial institutions, (3) via a paper check, or (4) purchasing up to $5,000 U.S. Series I savings bonds. Split deposits need not be in equal amounts, though buying savings bonds must be done in multiples of $50. You can't split your refund between a direct deposit and a paper check. For direct deposits, verify that your financial institution accepts such deposits, and verify account and routing numbers.

Notify the IRS about name changes

If you or a dependent had a name change last year, notify the Social Security Administration before you file your 2013 tax return with the IRS. Why? If the name on your tax return does not match SSA records, the IRS is likely to notify you about the mismatch. Any refund you expected could be delayed. So if marriage, divorce, or child adoption resulted in a name change, file "Form SS-5, Application for a Social Security Card" with the SSA to inform them of the change.

Health care mandate extended

Rules just issued by the Treasury Department give a one-year extension to the health insurance mandate for mid-sized businesses. Companies with 50 to 99 employees will now have until January 1, 2016, to provide health insurance for employees or face penalties. Employers must certify that they have not cut workers in order to come under the 100 employee threshold. Companies with 100 or more employees must still meet the January 1, 2015, deadline for providing health insurance coverage.

Emergency savings: How much is enough?

We all need an emergency fund, but what's considered "an emergency?" Any unexpected hit to your finances, including layoffs, unanticipated illnesses, and natural disasters. Car insurance premiums and regular home maintenance are (or should be) anticipated, so they're not emergencies. The same is true of credit card bills for vacations and visits to the dentist's office. An emergency fund is designed to keep your life intact during temporary setbacks and to help you avoid unnecessary debt.

How much emergency savings is enough? In general, your emergency fund should cover three to six months of expenses. How much you'll need will vary based on your financial situation, including the vulnerability of your income. For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks. So the one-earner family generally should set aside more for emergencies. Or if you don't have disability insurance, you might consider setting aside a bigger balance in an emergency account. Some companies provide payment for accrued vacation and/or sick leave to laid off employees. If your company provides such benefits and you maintain significant balances in these accounts, you may not need as much in an emergency fund (at least to help you weather an unexpected layoff).

Another factor to consider is your ongoing debt payments. Putting excess cash toward high interest credit card balances might make more sense than funding a savings account that earns four percent interest. Also, in a true emergency some spending can be reduced and postponed, such as retirement plan contributions, vacations, and entertainment. Ask yourself, "How much will I need to cover my minimum monthly expenses without resorting to credit cards or lines of credit?" That's a good starting point for determining how much to set aside in an emergency fund.

Once you have a savings goal in mind, don't wait. You can start small and increase contributions as you receive pay increases or windfalls. The money should be liquid – easy to get at – so don't put it in investments with withdrawal penalties. A savings or money market account is a great place to set aside cash for a rainy day.

Then post a sign on the account: "Use only in case of emergency."