Corporate Tax

Lifetime Learning Credit at a Glance

Due to the rising cost of further education, there are taxpayers who wish that it is possible to offset their school expenses. There is also the option to get the LLC on the federal income tax return. This credit can reduce the tax bill on the dollar-for-dollar basis is the portion of the fees and tuition that the individual pays for themselves.

Lifetime Learning Credit is the qualified tuition as well as related expenses that have been paid for the benefit of eligible students who are enrolled in an educational institution that is deemed eligible. This credit assists students in paying for professional degree courses along with graduate and undergraduate programs. These courses once acquired can improve the job skills of the individual. It is important to take note that there is no limit on the duration of the study and claiming the credit. It amounts to $2,000 for every tax return.

The LLC is provided and made available to tax payers. This credit can be claimed by any student or a family who pays taxes, as long as the student is attending classes at least on a part time basis. The credit is then claimed for the educational costs that have been incurred by the student.

Critics often complained that there are restrictions and complexity when it comes to the eligibility and qualifications. It makes the actual benefits for every student pursuing their post-secondary studies much lower than what is regarded as the theoretical maximum. Even with higher education and tax credits, there is still a remainder of tax-disadvantaged individuals compared to those who turn to these investments.

Who claims the LLC?

 In order to claim LLC, there are three requirements:

The dependent is willing to pay for the qualified education expenses toward higher learning.

  1. The dependent can pay the education expenses for a student who is eligible and is enrolled at an educational institution that is also qualified.
  2. The dependent is listed on a tax return.

 Who are the eligible students for the Lifetime Learning Credit?

 In order for the student to qualify for the LLC, he or she must:

  • Be listed, signed up on enrolled in taking courses at an educational institution that is deemed eligible.
  • Taking higher education classes or courses in order to get a degree or an education that is recognized in order for the individual to learn more and also improve the skills required for the job.
  • Be enrolled for one academic period at least and in the commencement of the current tax year.

Take note that academic period means semesters, quarters or trimesters, depending on the school session of the eligible educational institution. The school determines how the academic periods would be. Schools that resort to credit hours and not academic terms, the payment process is treated as if it were an academic period.

Calculating Lifetime Learning Credit

 The individual can include the fees, tuition and any supplies or books that are a requirement in purchasing directly from the educational institution. This also depends if this is an enrollment or a condition. If the professor suggests and recommends that they purchase textbooks and can enroll in the class even without this, this is not included in the credit.

Filling Out Form 8863

 By the end of the tax year, educational institutions must send them Form 1098-T that also includes the eligible costs. In order for individuals to claim this Lifetime Learning Credit, then these figures must be entered on Form 8863. When this form is prepared, the individual must only complete parts 3 along with parts 6 and then calculate this credit amount that they are eligible for. By transferring this credit amount to the income tax return then make sure that this is attached to Form 8863 before this is sent to the IRS.

TurboTax prepares the calculation for individuals to make filling up the form easier. By answering simple questions regarding the individual’s education expenses, the form can be completed in no time.

No Double Benefits Allowed

 It is not possible for the taxpayer to claim the Lifetime Learning Credit as well as a tuition deduction when he or she has already claimed the American Opportunity credit. The IRS only lets tax reduction for every student every year. However, before the individual can claim the LLC, they should also determine whether they are qualified and eligible enough for the American Opportunity Credit.

For a number of students who are taking four years of further studies, the American Opportunity credit offers more tax savings because the minimum credit that they can get is $2,500. TurboTax is also another tool that can be used to calculate this. It can also determine which credit would give the individual the biggest benefit.

What are the Income Limits for LLC?

 In order to claim the complete credit, the modified adjusted gross income or the MAGI must also be around $65,000 or the below. It can also be $131,000 or less if the individual is married and is also filing jointly.

  • If the MAGI ranges between $55,000 and $65,000. This is between $111,000 but also below $131,000 for couples who are married and filing jointly).
  • If the MAGI is beyond $65,000, the individual is not eligible for Lifetime Learning Credit.

The Modified Adjust Gross Income is the amount of the Adjusted Gross Income that appears on the tax return. This is located on Form 1040A which is the AGI on line 22. This is similar to MAGI. IF the individual files the Form 1040, then the AGI can be found on line 38. It also includes the following:

  • Foreign housing exclusion
  • Income that is excluded from the official residents from Puerto Rico or American Samoa
  • Foreign earned income that is excluded
  • Foreign housing deduction

If the adjusted gross income must be adjusted further in order to locate the MAGI, there are worksheets that can assist the individual to do so.

How to Claim Lifetime Learning Credit

 Usually, students receive the Tuition Statement or what is called Form 1098-T by January 31. This very statement helps in figuring out how much the student gets credit from LLC. The form then has the amount listed on either Box 1 or Box 2 to show that the amounts have been billed or received for the duration of that tax year. However, this amount cannot be the very amount that the individual has access to or can claim.

How Much Is Lifetime Learning Credit Worth?

 The usual amount of the LLC is 20% of $10,000 that is first earned is directed to the qualified education costs. It can also be the maximum of every $2,000 for each return. Take note that Lifetime Learning Credit cannot be refunded. Individuals can also turn to the credit to use this as a form of tax payment that they owe. However, they cannot receive the credit as a form of refund.

Qualifying Expenses

 The qualified tuition as well as the related expenses is also defined as the fees and tuitions that have been paid by the individual at most universities and colleges for the enrollment and attendance of the taxpayer. These expenses that qualify do not include athletic fees, room and board expenses, insurance costs and student activity fees.

Limitations

 The LLC has limitations. A taxpayer cannot have both the Lifetime Learning Credit and the Hope Credit for one student in a given year. The credit is also subject to limitations that have been designed and reserved in order to benefit the low to moderate income taxpayers. The credit is also gradually phased out when the taxpayer’s MAGI or modified adjusted gross income goes beyond $55,000. Those numbers also exceed $65,000. These numbers are also increased for those who file and amount between $110,000 and $130,000.

Tax Credits and Tax Deductions

 As a form of quick refresher, tax credits have a tendency to gain more benefit than deductions because it also reduces that tax liability on a dollar to dollar basis. Deductions, as opposed to tax credits, can reduce the amount of the individual’s income that is subjected to taxes.

Here is a situation. If the individual is eligible for $2,000 tax, then there is a deduction to a $2,000 from what the individual owes the IRS. This then saves the individual $2,000. If the student gets a deduction, he or she can also get an exempt in the amount from the income that is generated in the taxes. If the tax rate is effective at 25%, then the deduction can also translate to $500 as a form of tax savings. It is also possible for the individual to claim the deductions and the credits as long as they are eligible. The more rack up, then the less tax that they can pay.

 

Breaking Down the Lifetime Learning Credit

 

The IRS also provides tax breaks for students. An example is the Lifetime Learning Credit. If the individual claims this, then he or she can get it to $2,000 that is on the taxes for that year. Specifically, credits are calculated to 20%. This is from the first $10,000 that they incur in related expenses along with the qualified tuition. These related expenses incur supplies, books, equipment for studies and mandatory student fees.

 

Make the Most out of the Lifetime Learning Credit

 Any taxpayer who has already paid for the educational expenses for the duration of the year can get a breakthrough the LLC. There may be some strict guidelines as well as rules on how to go about it, but the individual can definitely explore this in order to get the best deal out of his money. It also means that it is possible to reduce the amount that is owed on taxes and even amount to $2,000 in the process.

We recommend consulting with a professional to check all the options and then choose the best that fits the situation of the taxpayer. These offerings from the government definitely cushion the blow of all the tuition costs and can also assist in paying the individual for their education or that of their child’s.

Lifetime Learning Credit Facts

Remember that when calculating the amount of the Lifetime Learning Credit, grants, employer reimbursements and scholarships are deducted from the amount, and then whatever is left is calculated. This is done in order for the IRS to know how much to give to the individual.

Paying for 2 or More Post Secondary Students

 The LLC has a strict rule of one for every household tax credit. If the individual pays for more than a single student who is attending post-secondary education, then the maximum amount for this calculation remains at $10,000 despite the total cost. If the taxpayer is paying for the education of the dependent, then he or she cannot claim the expenses under that particular tax credit.

Income Phaseouts

 The LLC sometimes go through what is regarded as the phase-out range. This means that the taxpayer has a MAGI or what is known as the Modified Adjusted Gross Income. The IRS tool can also confirm the eligibility of this amount. If it is minimum or in excess of the phase out amount, then the taxpayer cannot claim the tax credit.

Forms Needed to File for Tax Credit

 In order to claim the tax credit, the individual must have a Form 1098-T. This shows the amount that is billed and also received for the tuition. This is the form that must be filled out in order for the individual to claim the credit and then also attach the tax forms that the individual files.

Other educational tax credits to consider

 If the individual is not eligible to claim Lifetime Learning Credit on taxes, he or she can still check if she is eligible for the other educational tax credits such as Fees Deduction and American Opportunity Credit. The individual must do as much research as possible in order to lessen the fee that they would have to shoulder and take out of their own pockets. As long as they are eligible for that scholarship, grant or loan, they should go for it.

How to Request for Employer Paid Courses

It is possible to convince employers to pay for the employee’s education. This is a long-term goal that a company should aspire for because the employee can receive new skills which will benefit the business. There are various direct benefits to employer-funded education and HR managers are knowledgeable of these. By providing employees paid courses, there is an increase in loyalty, a deduction in employee turn-over, an increase in productivity and the ability to take new projects and opportunities to showcase their skills in leading.

Higher education increases the productivity of the company. HR managers must explain to employees that when they successfully complete their further education that the company paid for, then they can take on additional projects. This enables both the employee and the employer to take on more work and incur additional revenue.

At least half of American workers receive educational benefits from jobs. Most employers also pay for the courses that are considered work-related. But not a lot of employers pay for practically every course. A way to maximize your chances of getting the employer to help pay their school fees.

Check out the details of the employer’s school benefits before they even sign up for any classes.  They must also make sure that the course they sign up for is qualified. They should also check with HR if there is a grade requirement that they have to maintain. There are employers that will not pay the tuition of the employee’s grades are low.

These education benefits assist the workers – whether they are full time or part time – to get further in their careers. Research shows that the more employers invest in their employees, the more loyal the employees are to stay in the business.

How Companies Pay for their Courses

 Many large enterprises have partnered with universities and local colleges. This lets them have a company-specific training that can benefit the company as well as the student. There are companies that offer scholarships to employees as well as their families and assist them in the costs of higher education. This is usually a benefit included in the employee compensation package, which is quite attractive. This is the special payment that is offered to the employee as long as he or she does enroll to that college or university.

The company can also take additional tax credits and deductions that are rooted from the employee education funds. As long as the education qualifies for the IRS guidelines and is within the confines of the industry or trade, then there is no problem. Naturally, employees must check with the tax preparer so that the extent of the eligibility can be determined before a claim is made.

The most common form of education assistance is the tuition reimbursement plan. This means that upon enrollment or completion of the education and the employee shows proof of both, the company then supplies the funds to support the former’s educational endeavors.

How to Discuss Employer Paid Courses

  •  Pick a degree or a diploma or a designation or certification.
  • Pick a course and a school or college.
  • Create a list on how the company will benefit from the employee’s education.

Here are examples:

  • The employee adds new skills to the existing workforce.
  • The employee is more productive and can also increase the company revenue.
  • The employee takes on new projects to generate more revenue.
  • The employee can take on leadership and management roles in the company.
  • The diploma and degree of the employee will add give prestige and add more professional image for the business.
  • The employee can mentor the incoming employees and also spread his or her newly gained sills to the employees.

The employee must anticipate the concerns or questions that the HR manager presents. He or she must answer these in a style that concludes the higher education can benefit the business. If the concern is that the education will take the employee away from work, the proper response is that the employee can take on online classes or night classes and make this fit into his free time. This already adds the skill of time management as well as an increase in productivity.

If the concern is that the education is an additional expense for the company, the proper response is that tuition cost less as opposed to training or even hiring new employees who have the certification, diploma or degree that the business requires. The employee’s education can make money for the business.

If the employee refuses, do not give up. It is possible to try again after three or four months or even next quarter.

Contract on Employer Paid Courses

If the employer agrees to reimburse the employee’s tuition, then there must be an education contract. This must be read carefully and meticulously and also discussed with the HR manager. If there are any clauses that are not understood or deemed agreeable, then it must be brought up. The employee has the right to not sign the contract if he or she does not agree with the terms.

Example of term is that the employee agrees to stay with the business for a certain duration. The business requires this because they do not fund the training for the employee only to have him or her go to another. The employee must be sure of what he or she wants and if it is the right time to do this, then he or she can sign the agreement.

The employee must also know how to refund the tuition. Either the company directly pays the university or the college or the money is given to the employee. Other concerns include: will the company immediately pay once the employee completes the studies? Will the employee be required to achieve and maintain a specific grade point average? What happens if the employee fails to do this?

Another important concern for the business is what is the consequence if the employee does not attend classes? This can be because there are problems due to health issues, personal nature or family matters. There are other circumstances that can also take place and prevent the employee from completing their degree or course. If that is the case, do they have to repay what the company has paid?

Four Steps to Using Employer Paid Courses

 Earning a college degree and working at the same time is a smart professional move. It increases the employee’s value to the employer and also secures the former’s job. It also improves and heightens the career trajectory. As the employer works and studies to get a degree, he or she maintains the flow of income and also reduces the reliance on student loans. If the employer then offers the Tuition Assistance Program, the employee can also come out on top.

Definition of a Tuition Assistance Program

 A Tuition Assistance Program is run through the employer’s HR Department. This is where employees can also take the courses and the degree that has already been paid by the employer. According to the IRS, companies can allot up to $5,250 for educational assistance every year. This results to the employer not including the benefits with the employee’s tips, wages and compensation that is shown on W-2. This also means that the employee does not have to list these benefits down on their ITR.

First Step: Research

 Before the employee takes advantage of the employer paid courses, they must research is there is a program that is they are qualified to take in their work setting. The HR Department is the best place to ask. If the employer provides paid courses then the employee must make sure that there is a written policy.

Here are key questions that should be asked to HR:

  1. What are the available and eligible college courses? Does the employer pay for undergraduate or graduate classes? Is it credit bearing? Is it non-credit bearing? Do they accept online college classes?
  2. How will the courses be reimbursed? Does the company pay for the courses that the employees required to take up front? Or does the employee pay the tuition then just request to be reimbursed upon completing the course? Who should they submit the request to? Is this on a semester basis? Is this on a per course basis?
  3. Should the employee meet and maintain a certain GPA requirement? What are the consequences if he or she fails a class or has no choice but to drop out?

Second Step: Sign Up for Courses

A multitude of businesses offer education benefits that have increased in terms of revenue over the last 10 years. There is a high possibility that even if the employer did not offer a tuition reimbursement plan prior, they do so right now. It is worth checking out. 

Before employees sign up for the courses, they should know the following:

  • Which of the courses are considered eligible? There are some employers that require the courses be taken directly because it is associated with the job. Then there are others that the courses and there are still that require the classes that is strictly business in nature. It really depends on the employer and the policy of the company.
  • Are there providers that have been approved to assist financially? Employers have partnerships with approved colleges and universities and specific courses regarding employer sponsored educational program.
  • Does the employee have to be approved by the manager? There are employers that require sign-off from the supervisor or the manager. If this is a requirement, then he or she must determine which courses and classes are connected to the job and eligible to be reimbursed.
  • What is the process for enrollment? In most situations, the employer’s tuition reimbursement program must be notified and the employee must sign up here before he or she can enroll at the preferred university, college or institution for higher learning.

 Third Step: Maximize Your Benefits

Once the employee has gained approval for the educational plan from the employer, the next step is to maximize every dollar obtained from the benefit.  Here are some ways to do so:

  1. Take classes and courses that are eligible for credit. Upgrade skills and obtain college credit that is eligible to transfer into the accredited degree programs.
  2. Consider options of low-cost. Employees must research on the lowest possible cost for their education so when combined with the benefits that they would get from their employer, then they would completely have a full year of college at a minimum amount.
  3. Reduce the risk. If the employee is unsure regarding the feasibility of returning to school, then he or she must take a free trial and gauge whether they can fit school in their work life. Starting college when you are already working full time can mitigate risks when it comes to time and money.

When making the most out of the employer paid courses program, the employee must always pay close attention to what is written. According to IRS, there are services that can use educational benefits. There are also some benefits that cannot do this. Employers may also have additional requirements that is not written on the fine print.
Fourth Step: Measuring Progress

 

Whether the employee is pursuing the undergraduate or a graduate degree, then he or she must evaluate the direction that the employee will head. The employee may find that he or she is ready to lead new projects in the work place and even apply the skills that have been acquired in the further studies program. After training, these employees may even be considered for promotions.
Making the Most of Employer Paid Courses

 

If the employer offers paid courses through a tuition assistance reimbursement program, then the employees who wish to pursue further studies are definitely fortunate. They have to make sure that they make the most out of this once in a life time opportunity so that they can invest in themselves. They shouldn’t take this granted as well.

The Basics of Health Savings Account

An HAS is a kind of savings that lets the employer and the employee put aside some money as a pre-tax in order to pay for eligible medical expenses. It is important to note that an HAS can only be used if the employee has a HDHP or what is also known as the High Deductible Plan.

The HAS is also a medical savings that has a tax-advantaged made available to all taxpayers in the US. The over-all funds that are in the account may not be subjected to federal tax especially during the time of the deposit. The difference between the FSA or what is known as the Flexible Spending Account, is that the HAS can carry over and also accumulate every year if this has not been spent. The reason for this is because the HAS is owned by the employee, therefore setting it apart from the HRA or the Health Reimbursement Arrangement which is owned by the company. This is also an alternate source for tax-deductible funds. Both, however, are paired with standard health plans or the HDHPs.

HSA funds can also be used for eligible medical costs that have no liability or even penalty on federal taxes. Starting early 2011, the medications that are purchased over the counter can no longer be paid using the HSA if there is no prescription from the doctors. The withdrawals for these non-medical costs are also regarded in the same way as those of the IRA or the individual retirement accounts. This is because they can provide the tax advantages if these are taken after they retire. They can also incur penalties when these are taken earlier. These accounts are components of health care that is specifically targeted to consumers.

The HSAs and its proponents believe that these are necessary reforms that can reduce the increase in expenses regarding health care as well as the effectivity of the system. According to these proponents, the HSA can encourage people to save for their unexpected future health care as well as the expenses that go along with it. This allows patients to obtain the necessary care and there is no gatekeeper involved. Usually the gatekeepers determine what the individual can receive as benefits. Consumers are now more responsible when it comes to their own choices in their health care all because of the HDHP.

As for those who do not find the HSA necessary and are opponents of this, they believe that it makes the medical system worse. Health care in the US cannot improve through the HSA because individuals may even hold back on their expenses. They may also spend it in unnecessary circumstances simply because it has already accumulated the penalty taxes just by withdrawing it. Those who have problems in their health have annual costs that are predictable and choose to avoid the HSA so that the costs can be paid by their insurance. There is a current ongoing debate about the satisfaction of the customers who hold these plans.

These usually have lower monthly premiums than most plans that have low deductibles. Using the untaxed funds in the Health Savings Account allows the employee to pay for the medical costs even before the deductible has been reached. This also includes other deductibles such as copayments which are usually payments done from the employee’s pockets. This eventually reduces the over-all value of health care expenses.

The funds from the employee’s HSA carries or rolls over to the next year if it has not been spent in the year it was allocated. The HAS can also earn interest. It is possible for employees to open the HSA through their banks or financial institutions that they have access to.

History of the HSAs

 The Health Savings Accounts were established in compliance with the Medicare Prescription Drug, Improvement and Modernization Act. This is also the enactment of the Section 223 of Internal Revenue Code. This was signed on December 8, 2003 by President George Bush. They were also developed so that it can replace the account system for the medical savings.

Deposits of the HAS

 Deposits to the HSA fund can be made by any individual who holds the policy, as long as this also comes with a HDHP or the high deductible health plan care of the individual’s employer. If the employer makes the deposit to the plan for all his employees then everyone must be regarded equally. This is covered in the non-discrimination rules that is also stated in the act. If the contributions have been made via the plan stated in Section 125 then the rules for non-discrimination also do not apply. Employers have to treat the part time and the full time employees differently. Employers can also treat the family and individual participants n different manner. The treatment of the employees who have not been enrolled in the eligible and high deductible health plan covered by the HAS is not also considered solely for non-discrimination purposes. Employers can also contribute more than usual for the employees who have not been compensated as highly as the others.

The contributions from the employer and to the employee’s HSA can also be made on the pre-tax basis, depending on the preference of the employer. If the said option is not considered by the employer then these contributions are made on post-tax basis and also used to reduce the GTI or gross taxable income on the Form 1040 of the following year. The pre-tax contributions of the employer are also not subject to the Medicare Taxes as well as Federal Insurance Contributions Tax Act. It is important to note that the pre-tax contributions of the employee that were not made via the cafeteria plans cannot be subject to Medicare and FICA taxes. No matter what the method used or tax savings associated regarding the deposit, these can be made by persons that cover the HAS-eligible and high deductible plan that does not include coverage way beyond what is qualified and eligible for the health care coverage.

The maximum deposit on the annual HAS is also the lesser compared to the deductible or what is specified in the limitations of the Internal Revenue Service. Over time, Congress has then abolished this particular limit, basing this on the set statutory and deductible that limits the contributions to its maximum amount. Every contribution that is sent to the HAS, no matter the source, can also be included in the maximum annual amount.

The catch up and statute provision can also apply for the participants of the plan who are aged 55 and older. This allows the IRS to limit the increase. In the income tax year 2015, the limit to the contribution is $3,350 for single individuals and it is $6,650 for married individuals. There is an additional $1,000 increase for those who are older than 55.

Every deposit that is made to HSA can ultimately become the possession of the plan holder, no matter where the deposit comes from. The funds that have been deposited and are not withdrawn can be carried over to next year. Plan holders who also discontinue their qualified insurance coverage from the HSA can deposit even more funds, and the funds that are already placed in the individual’s HSA can still be used.

On December 20, 2006, the Tax Relief and Health Care Act was signed and put into law. It also added another provision that allowed the roll-over of all IRA assets for just one time so that it can equally fund up and amount to a maximum contribution for the HSA that is set for a year. However, the tax treatments on the HSA for every state varies. There are three states that do not let HAS contributions be deducted from the tax earnings or the state income taxes. These are Alabama, New Jersey and California.

Investments on the HAS

 The funds in the HSA can also be invested in the same manner as that of investments that have been done for the IRA or the individual retirement account. The investment earnings that have been sheltered from the taxation until the point that the money has been withdrawn can also be sheltered at that time.

Similar to the IRA that is self-directed, the account for health savings can also be treated as such. A usual HSA custodian offers investments like stocks, mutual funds, bonds, financial institutions and CDs. These also provide the accounts that offer alternatives on investments which can also be made through the HAS. The Section 408 of Internal Revenue Code does not prohibit the investment in collectibles and life insurance but HSAs can also be used to invest in various assets which also include precious metals, real estate notes, private and public stocks and more.

HSAs can roll over from one fund to another and HAS cannot roll into the IRA or the 401k. Funds from these investment vehicles can also be rolled into the HAS, except for the IRA transfer that is done one time as mentioned in the previous paragraph. Unlike the contributions to the 401k plan, the HAS contributions that belong to the plan holder, no matter the deposit source, is already his or her possession. An individual that is contributing to the HSA has no obligation whatsoever to contribute to the HSA that is sponsored by his or her employer. However, employers require payroll contributions be made to the HSA plan that is sponsored.

Withdrawals for HSA

 Policy holders of the HSA do not have to get the advance approval are of the trustee of the HSA or the medical insurer for them to withdraw their funds. Funds are not also subject to taxes if these are for eligible medical costs. The costs include expenses for items and services that have been covered by the plan but is also subject to the cost-sharing of the company like coinsurance, copayments and deductible. This can also over the expenses that are not included in the medical policies. These are vision, dental, chiropractic care as well as the medical equipment that should last for a long time, specifically hearing aids and eyeglasses. Transportation that is connected to medical care are also included in this health plan.

There are many ways to fund the HSA can be obtained. There are HSAs that come with a debit card. There are others that give the policy holders checks so that this can be used. Some have reimbursement processes that is close to having a medical insurance. A number of HSAs also have a number of possible methods for withdrawal of the HSA. The methods that are available vary from one HSA to another. The debits and checks cannot be made payable to provider of the health plan. The funds can also be withdrawn for this reason. Withdrawals are not documents when it is not a qualified and eligible medical costs. These are subject to taxes with a penalty of 20%. This is waived for individuals who are aged 65 and older and have unfortunately become disabled during the time when the withdrawal is done. The only tax that is paid in this situation is taken into effect when the account has already become tax-deferred, somehow similar to the IRA. Medical expenses remain to free of taxes.

The account holders are also required to retain their documentation to show the qualified medical costs. The failure to do this and to show documentation can also cause Internal Revenue to rule out the withdrawals that have not been qualified for the medical expenses along with the over-all costs and subject to the additional penalties of the taxpayer.

Self-reimbursements have no deadline for qualified medical costs that are incurred after HSA has been established. The participants can also make the most of paying for these medical costs fresh from their pockets and also retain the receipts as long as their accounts are tax-free. Money can also be withdrawn for reasons to the value of the recipients.

COBRA – Continuation Health Coverage

Are You Covered?

Congress passed the Consolidated Omnibus Budget Reconciliation Act that has health benefit provisions since 1986. This law amends Employee Retirement Income Security Act, Public Health Service Act and Internal Revenue Code. The goal of COBRA is to continue health coverage for groups that must be terminated otherwise.

COBRA has provisions giving former retirees, employees, dependent children and former spouses the right for temporary continuation of coverage on health insurance plans in terms of group rates. However, the coverage can only be made available when this is lost because of specific needs. The Group health plan coverage for participants in COBRA is more expensive than the health coverage of employees who are currently active. Usually, it is the employer that pays the portion of the premium for the employees who are currently working while the COBRA participants pay the full premium themselves. Surprisingly, it is less expensive than the usual health policies.

Employers who have 20 or more individuals in their company are required to provide COBRA coverage for them. It is also their responsibility to notify the employees that this coverage is available. COBRA also applies to the health plans that have been maintained by the employers in the private sector as well as those that are sponsored by local governments and most state.

Who are entitled to COBRA benefits?

There are three qualifications for COBRA benefits. In fact, COBRA has already established specific and clear data for the policy plans, qualifying events and qualified beneficiaries.

Plan Coverage: Employers who have 20 employees under their wing for more than half of the typical business days in the year before are required to be under COBRA. Both the part time and full-time employees are included in the tally of determining whether the health plan is more suitable for COBRA> Every part-time employee is a fraction of the other employee, therefore what one gets is equal to what the others guest, if they share the same number of rendered hours. The calculation is the hours that part time employee rendered divided by hours that the employee will work if he will be rendering full time hours in the future.

Qualified Beneficiaries: To be considered as a qualified beneficiary, the individual must be covered by a health plan for groups on the very day before an even that is considered to be qualifying by either the employee, the spouse of the employee or the dependent child of the employee. There are cases wherein the retired employee or the spouse of retired employee and dependent children of retired employee are also qualified beneficiaries. Aside from this, a child that was born or placed through adoption with an employee who is covered during COBRA coverage is also regarded as a beneficiary that is qualified. Independent contractors, agents and directors who are part of the health care for groups can also be eligible beneficiaries.

Qualifying Events: As mentioned earlier, these are events that cause the employee to lose or discontinue his health coverage plan This kind of qualifying event can also determine who among them will be qualified beneficiaries as well as the time duration that the plan will be offered to cover them through COBRA. The plan, using its discretion, can also provide a longer period of coverage that will continue for a long time.

These are qualifying events specifically for employees:

  • Voluntary termination as well as involuntary termination of the individual’s employment due to reasons aside from gross misconduct.
  • Reducing the total hours of the individual’s employment.

These are qualifying events specifically for the spouses of the employees:

  • Voluntary termination as well as involuntary termination of the individual’s employment due to reasons aside from gross misconduct
  • Reducing the total hours that are worked by the employee who is covered by the plan
  • The individual who is covered by COBRA is entitled to get Medicare
  • The legal separation or divorce of the individual who is covered
  • The death of the individual who is covered

Qualifying events for the dependent children of the individuals who are covered are similar to that of the spouse but has this addition:

  • Losing the status of being a dependent child as listed in the rules of the specific plan.

 What are the Benefits Covered Under Cobra?

 The qualified individuals and beneficiaries must also receive a coverage that is similar and available to those who are situated in the same beneficiary as those not receiving the coverage of COBRA. In general, this is the similar coverage that an eligible beneficiary has as immediately as possible before he or she has qualified for a coverage that continues. If there is a change in benefits due to the specifics of the plan for an employee who is currently working, this will still apply to the beneficiaries who qualify. Qualified beneficiaries can also make similar choices that are offered to the individuals who are not under COBRA, like periods of enrollment in the plan in an open setting.

Who is charged for the COBRA coverage?

The beneficiaries are required to pay for the coverage under COBRA. This premium may not go beyond the 102% of the total cost of the plan especially for individuals who are similarly situated but have no incurred the qualifying events as specified. This also includes the portion that is covered by the employees as well as the portion that the employer has already paid for even before the event that qualifies, atop the 2% rendered to cover the administrative costs.

For beneficiaries who qualify, they receive the 11-month disability that is the extended duration of the coverage. This is also the premium targeted for the additional months that can also increase to as much as 150% for the total cost and coverage of the health plan.

COBRA premiums can also increase if there are costs to the said plan that also increases but these can also be fixed when set in advance for every premium cycle of 12 months. The plan can also let the qualified beneficiaries pay the premiums indicated on monthly basis if they requested for this. The plan can also let them make the payments in other intervals, the choices are weekly basis and quarterly basis.

The initial payment of the premium can also be made during the 45 days after the COBRA election date of the qualified beneficiary. The payment can also cover the coverage period after the COBRA election date that is retroactive to the loss of coverage date because of the event that is considered to be qualifying. The premiums for successive coverage periods are due and set on the date that is stated and mentioned in the plan coverage with 30-day minimum for grace period payments. Payment is also considered to be made accordingly on the specific date that is directly sent to the plan coverage.

If the premiums have not been paid on the first day of the coverage period, then the plan can opt to cancel the coverage until the payment for this has been received and immediately reinstate the coverage as retroactive to the start of the coverage period.

If the amount of payment that was made to the coverage was conducted in error but not significantly lower than the amount due, then the plan requires to be notified by the beneficiary that is qualified and report it as a deficiency. The individual will then be granted a period that is reasonable, which is usually 30 days, to pay for the difference. The plan coverage is also not required to send the individual monthly notices of the premium.

The COBRA beneficiaries stay as subject to the rules especially to the plan and must also satisfy the costs that are related to deductibles and co-payments. These are also subject to benefit limits.

The Federal Government and COBRA

The continuing coverage of COBRA as administered by the several agencies like Department of Treasury and Department of Labor have jurisdiction especially on the private-sector and health group plans. Meanwhile, Department of Health and Human Services also administers the coverage as it continues because it has an effect on the plans for the health of the public sector.

The regulatory and interpretative responsibility of the Labor Department can be limited to the notification requirements and disclosure of COBRA. If further information is needed about ERISA in general, then the individual can just write to the office of EBSA that is nearest to him or her. It is also possible to consult the US Department of Labor as well as the US Government for the listing in the phone directory of the office near them. EBSA is Employee Benefits Security Administration under US Department of Labor.

The Department of Treasury as well as the IRS has also issued regulations on the provisions of COBRA that is related to the coverage, eligibility and premiums. Both the Department of Treasury and the Department of Labor share the jurisdiction for enforcing the said provisions.

COBRA coverage and the Marketplace

When the individual loses the insurance that is received from his job, then he is also offered the continuation coverage of COBRA by his or her former employer, if the latter opts to do so.

If the individual chooses not to take the coverage of COBRA any longer, then he or she can just enroll in the Marketplace plan. Losing the coverage from the job-based health premium lets the individual qualify for the Special Enrollment Period. This is a period of 60 days that allows the individual to enroll the health plan and this can be done even if it is outside the Open Enrollment Period.

Is it possible to change from COBRA to a Marketplace Plan?

If the individual’s COBRA is running out, he or she can still change during Open Enrollment. It is also possible to change outside Open Enrollment as long as the individual qualifies for the Special Enrollment Period.

If the individual is ending his or her COBRA coverage earlier than expected, he or she can still change to the Marketplace plan during Open Enrollment. It is however a different case outside Open Enrollment. The individual can no longer change from Cobra to Marketplace in this scenario. He or she has to wait for the COBRA to run out and for him or her to qualify for the Special Enrollment Period in one way or another.

If the COBRA costs have changed because the individual’s former employer have also stopped contributing and is required to pay the full cost of the coverage, the individual can still change to the Marketplace Plan during Open Enrollment. It is the same during outside Open Enrollment. He or she can still change especially when he qualifies for the Special Enrollment Period.

More information on COBRA

COBRA also qualifies as the health coverage or what is also regarded as the minimum essential coverage. That being said, if the individual has the COBRA coverage, then he or she does not have to pay the complete fee that other people who are not covered by COBRA are required to pay.

If the individual has already signed for COBRA coverage but then eventually finds the premium and payments to be too expensive, his or her options depend entirely on whether it is the Open Enrollment Period. He or she can change to the Marketplace but that can cost him or her more than usual because he or she has to opt out of the coverage.

As for people who are wondering if it is possible to switch to Medicaid from their COBRA coverage but outside the period of Open Enrollment, it is important to note that it is also possible to apply for as well as enroll to be covered by Medicaid at any time. The process is to drop the COBRA coverage earlier than expected and to check if the individual qualifies for both Medicaid and CHIP. This is done by people who leave the employers and those who find the COBRA coverage more expensive than expected.

Treatment of Transportation Expenses When Not Traveling Away from Tax Home

When you ride a cab or get in your own car to do business somewhere, have you ever thought of your transportation costs and how much of it you can actually write off? So many materials have been written about deductible expenses when people travel away from their tax homes for business, but those that tackle deductible expenses when not traveling away from home are scarce.

Here, let’s focus on your transportation costs when you are technically not traveling away from home. But before we go to your expenses, remember first that you are considered traveling away from home if you meet the following criteria:

  • Your business or job requires you to be away from your tax home considerably longer than your ordinary day at work.
  • You need to sleep to meet the demands of your work.

If you don’t meet the above mentioned criteria, then you are not traveling away from home so this chapter is for you.

You probably know that the law mostly does not allow deductions for personal expenses, so we’re talking about business expenses here.

Transportation Expenses

By definition, transportation expenses cover your cost of transportation– may it be by rail, bus, taxi or air, as well as the cost of maintaining and driving your own car.

According to the IRS rule, these expenses include all ordinary and necessary costs of the following:

  • Going from one location to another while conducting business or performing your profession, as long as you are traveling within the general area of your tax home.
  • Visiting your customers or clients.
  • Going to a business meeting that is not within the area of your regular workplace.
  • Temporarily going from your home to a workplace when your business or job requires you to have more than one regular place of work. Here, it doesn’t matter whether your temporary workplaces are within the general area of your tax home or not.

Remember that generally, the transportation expenses that will be discussed in this chapter do not include those that you incur when you travel away from your tax home overnight, though the rules here apply when you use your own car to travel away from home overnight as this will cover car expense deductions.

Basically, the transportation expenses that you incur daily when traveling from your home to one or more of your regular workplaces are considered nondeductible. That means that if you ride a bus to travel from your home to one of your regular workplaces, you are generally not allowed to write off the commuting expenses that you incur. However, there are certain exceptions to this rule.

If you go between your home and your temporary workplace outside the general area of your residence, you are allowed to deduct the transportation expenses that you incur. You can also deduct your daily transportation expenses in the following situations:

  • If you have at least one regular work location away from your home.
  • If your home is your regular workplace or place of business and you incur transportation expenses when you go to your home and another work location. However, that work location should fall in the same industry or business, regardless of the distance and regardless of whether the work you do there is permanent or temporary.

When Transportation Expenses are Deductible

Before we go into the finest details, here is a summary of the key locations you should consider and the instances when you can and cannot deduct your transportation expenses:

  • This home is not necessarily your tax home but the place where you live. The transportation expenses that you incur when you travel to and from your regular or main place of work are considered personal commuting expenses and are therefore nondeductible.
  • Regular or Main Job. This refers to your main place of work or business. In the event that you have more than one job, you can determine which of your workplaces your main workplace is by considering the time you spend at each, as well as the activities you have at each and the income you earn at each. While your transportation expense from your main job to your home are nondeductible, your expenses from your main work location to your temporary work location or second job and vice-versa are always deductible.
  • Temporary Work Location. Your temporary work location is any place where you are expected to perform your job in a year or less. You can only write off your transportation expenses to your temporary work location if it is not within your metropolitan area, unless you have a regular workplace or place of business.
  • Second Job. You are allowed to deduct your transportation expenses when you get from one workplace to another if you have more than one job and are required to regularly work in more than one place in a day. Whether or not your two or more jobs are for the same employer, your transportation expenses are always deductible. However, you cannot deduct your transportation expenses if you’re coming from your home going to your second job. Remember that you have to go directly from your first job to your second job for your transportation expenses to be deductible. If you go somewhere else after leaving your first job, the amount you spend for your transportation going to that place is nondeductible.

The above-mentioned rules apply when you incur transportation expenses since you have a regular job away from your home. If your main workplace or place of business is your home, do not use the rules for reference.

How to Know if Your Work Location is Temporary

 If your regularly incur commuting expenses because you have more than one regular work location in the same business away from your residence, you can write off the transportation expenses that you incur for your daily round trip between your home and your temporary workplace, regardless of how near or far that workplace is from your home.

In case you are expected to complete your employment at a particular workplace in a year or less, then your employment is considered temporary. Your employment is not considered temporary if your employment at a work location is expected to last for more than a year.

But what if your employment was initially expected to last for less than a year, but due to unavoidable circumstances, you are suddenly expected to work for more than a year?

In that case, your employment will be treated as temporary and same rules on tax deductions apply. If your temporary workplace is not within the general area of your regular workplace and you stay there overnight, then you are considered traveling away from home and the treatment of your transportation expenses depends on the rules under the Traveling Away From Home section of the IRS Publication 463.

 If You Do Not Have a Regular Place of Work

 If you do not have a regular place of work but usually works in the metropolitan area of your residence, you can write off your daily transportation expenses between your home and temporary workplace that goes beyond that metropolitan area. The IRS defines this metropolitan area as the area which covers the area within the city boundaries, as well as the outskirts of the city.

Keep in mind that you cannot write off your daily transportation costs if your temporary workplace is located just within the metropolitan area because these expenses are considered nondeductible.

When You Have Two Places of Work

 Some people have more than one job in a day, and therefore have to go to two work locations in a day. If you are one of them, you are allowed to deduct your transportation expenses when you get from your first work location to the other and vice-versa. That is regardless of whether or not your two jobs are for the same employer.

But what if for some personal reason you fail to go directly from your first work location to the next?

In that case, you are not allowed to deduct your transportation expenses because the rule states that you cannot write off more than the amount it costs you to go directly from your first workplace to the next.

For instance, it’s your day off from your main job and you incur transportation expenses when you go between your home and your part-time job, such costs are considered commuting expenses and are therefore nondeductible.

When You are a Member of the Armed Forces Reserve Unit

 Specific laws are set in place for people who are members of the Armed Forces reserve unit.

Say you have a meeting in that unit. If that meeting is held on a day when you are not off from your main job, then the venue of the meeting is considered as a second place of business and the transportation expenses you incur in getting there from your main workplace are deductible.

However, if the meeting is held on a day when you don’t work at your regular job, your transportation expenses become nondeductible.

The story is different if the place where the meeting is held is temporary and you have more than one regular place of work.

Say you regularly work in a certain metropolitan area but not at any specific location in that area, and the meeting is temporarily held outside that metropolitan. In that case, you are allowed to deduct your travel expenses.

Your transportation expenses also become deductible if your being a reservist requires you to travel more than 100 miles away from your residence. If you travel that distance in connection with your performance as a reservist, you can deduct some of your costs not as itemized deductions but as an adjustment to your gross income.

Commuting Expenses

 Generally, commuting expenses are the transportation costs you incur when you commute from your home to your main place of work and vice-versa. The costs of taking a trolley, bus, taxi or subway between your home and your regular work location are nondeductible since the law sees them as personal commuting expenses.

Regardless of how far your residence is from your regular place of work, you cannot deduct your transportation expenses.

You may ask, what if you still work during the commuting trip?

Performing your job during your commuting trip does not change your commuting expenses from personal to business expenses.

Take this as an example. You use your phone to make business calls while commuting. Or you have your own car and colleague rides with you on your way home. During you travel, you engage in a business discussion. In both cases, your transportation expenses remain personal and nondeductible.

When you commute to and from work, your taxi fare usually is not the only cost covered by your transportation. Take a look at these accompanying commuting expenses:

  • Parking Fees. When you bring your own car to work and pay to park your car at the parking lot of your business location, the parking fee is nondeductible. The only parking fee that is considered deductible is that which you pay for when you visit a client.
  • Advertising Display on Car. Just because you put display material advertising your company does not necessarily mean that your car is for business use, so the expenses you incur for putting such displays on your car are all nondeductible.
  • Car Pools. When you use your car in a nonprofit car pool, you still cannot write off the cost of doing that. You should not include the payments that you receive from your passengers in your income. However, you may do otherwise if you operate a car pool for a profit. In that case, you may include their payments in your income and then deduct your car expenses.
  • Hauling Tools or Instruments. Hauling instruments in your car when you are commuting to and from work does not make your transportation expenses deductible.

 When Your Home Qualifies as a Principal Place of Business

 If you consider the place where you live as your main place of work or business, your daily transportation costs between your home and your other work location are deductible. Take note, however, that the work you do in your home and in the other workplace must be in the same business.

All things considered, it is safe to say that nothing in tax law is straightforward, no matter how easy you may find identifying deductible transportation expenses is.

Meal Expenses: How Much Can You Deduct?

Treating your customers and employees occasionally is one of the best ways to build your business. Going the extra mile to make them feel valued goes a long way, although you may not see that now. If you worry about the expenses you may incur taking them out for a meal, you shouldn’t because meals are considered a legitimate business tax deduction. In fact, even your own meals can also be deductible. But of course, there are limits on what you can write off.

Meals become a legitimate tax deduction only in these two situations:

  • You are traveling away from your tax home for your business or job and need to stop to get considerable rest somewhere so you can perform your duties well.
  • The meal is related to your business or job.

If you satisfy either of the two situations, then your meal becomes a deductible expense.

Now let us set aside business-related meals and focus on the first situation. The IRS law states that when you are traveling away from your tax home for work–may that be for your job or business—your meal expenses become deductible. Does that mean that you can eat whatever you want while on duty and completely write everything off? The answer is no.

Actually, there are meals that you can completely write off, while there are meals that are only subject to 50% deductions. You can also not eat too lavish or extravagant meals and expect them to be deductible. In that case, you purchase your meal at your own expense.

Too Lavish or Extravagant Meals

 The law states that meals that are too lavish or extravagant are never deductible. But how do you gauge the lavishness or extravagance of a meal?

Simple. As per the IRS Rule 463, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” Just because you conduct business at a high-end restaurant does not necessarily mean that you are being lavish. In fact, the law won’t disallow your meal expenses just because the meal takes place at a deluxe restaurant or hotel.

If you are treating a potential client you are trying to close a deal with, treating him to a sumptuous meal at a high-end restaurant is reasonable enough. However, if you are only conducting a business meeting with your employees to discuss your Christmas party, treating them to a buffet restaurant doesn’t seem reasonable at all. Again, it depends on the facts and circumstances.

Now it’s clear that you cannot deduct expenses for lavish and extravagant meals. However, that is not the only exception. While lavish meals are totally not subject to deductions, some meals are subject to deductions but only to a certain limit.

50% Limit on Meals

 In the law, there exists this 50% limit when it comes to meals and other entertainment expenses. Determining which of your meal expenses are subject to this limit is necessary to know how much you should write off. You use the following methods to figure your meal expenses:

  • Actual Cost.
  • The Standard Meal Allowance.

Notwithstanding the method that you use, remember that you are allowed to deduct only 50% of the unreimbursed cost of your meals. In case you are reimbursed for the cost, how you apply the limit solely depends on the reimbursement plan of your employer. Is it accountable or non-accountable? On the other hand, if you are totally not reimbursed, the limit applies regardless of what the unreimbursed meal expense is for. That means that whether your meal is for business entertainment or business travel, your unreimbursed meal expense is always subject to the limit.

Now let’s go back to the two methods that you can use to figure your meal expenses–the actual cost and the standard meal allowance.

Actual Cost

 This method is less complicated compared with the other method. You simply use the actual cost of your meals to determine the amount of your expense before reimbursing the cost and applying the 50% limit on deductions. If there is one important thing that you should remember when using this method, it’s that you should always keep your records to prove your expenses.

Standard Meal Allowance

 If you do not want to use the actual cost method, you are free to use this method in figuring your expenses for meals.

Generally, this alternative method lets you make use of a set or fixed amount for your daily meals and incidental expenses (M & IE) instead of backing up your actual costs with records, particularly receipts. Well, of course you can still keep receipts for future reference, but you won’t need them as much as you will need them when you use the actual cost method. Under this method, the set amount hugely depends on where and when you travel.

The standard meal allowance method makes mention of a fixed amount for daily meals and incidental expenses. You may probably ask, what are those incidental expenses?

Incidental Expenses

 According to the IRS Publication 463, incidental expenses refer to the fees and tips that you usually give to baggage carriers, porters, hotel staff and the likes. Since they are only incidental, they are not your main expenses. However, these incidental expenses supplement your main expenses.

While these expenses are only considered supplementary expenses, they do not include the money you spend for laundry, lodging, pressing of clothes, mailing cost and telephone or telegram charges.

Incidental-Expenses-Only

 There are days when you do not get to incur any expense for your meals. If that is the case, then you may use the incidental-expenses-only method in determining the amount of deductions you are entitled to. This method is an optional method that you can use instead of the actual cost method if you want to write off your incidental expenses only. When you use this method, you can deduct $5 a day from your expenses if you did not spend anything for your meals.

You should also note that you cannot use the incidental-expenses-only method just whenever you want, or on any day that you apply the standard meal allowance method in determining your deductions. The proration rules for partial days strictly apply to this method. However, it is not subject to the 50% limit on meal deductions.

But how will you know if your meal allowance is subject to the 50% limit? Well, this limit is a bit tricky so you have to learn the ropes.

50% Limit on Meal Deductions

Say you are not reimbursed after applying the standard meal allowance method for your meal expenses, or you used the same method but are reimbursed under a non-accountable plan. In that case, you are allowed to write off only 50% of you standard meal allowance.

This goes the same way if you are reimbursed under an accountable plan and are writing off expenses that are more than your reimbursements. In that case, you are allowed to deduct only 50% of the excess amount.

Are You Allowed to Use the Standard Meal Allowance Method?

 Whether you are an employer or an employee, you are free to use this method. It also doesn’t matter whether you are recompensed for your traveling expenses or not because either way, you can use the same method. But while the law is somewhat lenient when it comes to the use of the standard meal allowance, you should remember that there is also a limit as to where you can use it.

If you are traveling for investment or other income-generating activities, you can use this method in treating your expenses. If you travel for qualifying educational purposes, that is also acceptable. However, if you travel for charitable or medical purposes, you cannot use this method in figuring the cost of your meals.

Is There Any Standard Rate for the Standard Meal Allowance?

 The standard rate for the standard meal allowance is equivalent to the federal M & IE rate. As of 2016, the standard amount for travels in most of the small localities in the United States is set at $51 per day. This rate does not apply to the country’s major cities and localities, which are considered high-cost areas. In their case, higher standard meal allowances apply.

If you want to know the amount of standard meal allowance in the state you are in, you may visit www.gsa.gov/perdiem for the per diem rates of each state for the current fiscal year. You just have to enter the zip code of the city or state that you want to know the per diem rates of through the dropdown menu.

What if You Travel to More Than One Location in a Day?

 If that is the case, then you have to use the applicable rate in the location where you stayed longer to take a rest or sleep. However, the same rule does not apply if you are working in the transportation sector. Workers in the transportation industry are entitled to special rates and are not covered by the mentioned rate for the standard meal allowance.

But how do you know that you are working in the transportation industry? Take a look at these requirements:

  • Your job directly involves transporting goods or people by plane, bus, train, ship, barge or truck.
  • You are regularly required to travel away from your tax home and in one single trip, you become eligible for different standard meal allowance rates.

Once you confirm that you are actually working in the transportation sector, remember that you are allowed to claim a standard meal allowance of $63 a day for your travels. You become entitled to this special rate so that you no longer need to know the standard meal allowance that applies to each and every area where you stop for sleep. When reporting on your income tax return, make sure that you use this special rate for all your travels and not the regular standard meal allowance rates for each state.

When it comes to the federal government’s fiscal year to use, it’s up to you. Once you visit the GSA website to check out the list of the per diem rates of each city or state, you may either choose the rates from the 2016 fiscal year table or the 2017 table to report your travels, which is crucial in determining your income tax return for one fiscal year. However, you have to be consistent. If you use the 2016 table in reporting one travel, then you must use the same table for all the other travels you are reporting.

What if You Travel Outside the U.S.?

 The Department of Defense has assigned locations which can be considered foreign areas and non-foreign areas. The standard meal allowance rates mentioned above do not apply to these areas.

There are special rates that apply to non-foreign areas like Alaska, Hawaii, Puerto Rico, Guam, the Northern Mariana Islands, U.S. Virginia Islands, American Samoa and Wake Island, as well as to non-foreign areas which are geographically located outside the continental U.S.

If you travel to a non-foreign area outside the U.S. and want to know the per diem rate that apply to your travel location, go to www.defensetravel.dod.mil/site/perdiemCalc.cfm. But if your travel location is a foreign area, you must go to www.state.gov/travel/. Under the Foreign Per Diem Rates, click on Travel Per Diem Allowances for Foreign Areas. You will then see the list of per diem rates in the area that you are looking for.

 Whether you are allowed to use the standard meal allowance, entitled to special rates, travel in the U.S. or outside the U.S., it is always critical that you maintain proper records to substantiate all your meals. Always be on the safe side by making sure that you have something to present to back up your expenses once the need for an audit arises in the future.

Getting Started with Your Very Own Business Venture

A great start-up business always starts out as an idea, but you have to transform that idea into action. That’s where many individuals can start to feel overwhelmed. It’s understandable to freeze up at the deluge of things that are required to get a business started, but getting going is actually easier than you might think.

Like any big goal, if you start by breaking it down into smaller tasks, you’ll be able to tackle enough of the actions necessary to get started. Here are six ways to break down the process and simplify getting started with your own small business.

Right now, aspiring entrepreneurs all across the country are planning their paths to business ownership. It’s a journey that requires a lot of hard work, and many people end up failing. But if your company survives, the rewards of entrepreneurship are well worth the obstacles you’ll face on the road to success.

Choose your Industry

Every new business starts with an idea. Maybe there’s something you are really knowledgeable and passionate about, or perhaps you think you’ve found a way to fill a gap in the marketplace. Wherever your interests lie, it’s almost guaranteed that there’s a way to turn it into a business. If you know your strengths and what you enjoy, you are more likely to tackle a business problem that is best suited to your skills and interests and is less sensitive to your shortcomings. Capitalize on your strengths, and accept input from advisors and the team on decisions outside your range. Everyone will see you as a better listener and a stronger leader who is not autocratic and knows how to tackle the many unknowns of a new business. Too many people fail because they are working on someone else’s problem. You won’t be happy in the wrong business.

Another option is to open a franchise of an established company. The concept, brand following, and business model are already in place; all you need is a good location and the means to fund your operation.

Once you’ve narrowed your list of ideas down to one or two, do a quick search for existing companies in your chosen industry. Learn what the current brand leaders are doing, and figure out how you can do it better. If you think your business can deliver something other companies don’t (or deliver the same thing, but faster and cheaper), you’ve got a solid idea and are ready to create a business plan.

Writing the Business Plan

During the brainstorming, you should also start thinking about your business plan. A smart entrepreneur has a vision of where he/she sees herself and the business in the foreseeable future and writing it down in a business plan helps you stay on track and focus on your goal. A business plan is an essential road map for business success. This living document generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues.

Among the possible sub parts of your business plan includes the:

  1. Executive Summary which is the snapshot of your business plan as a whole and touches on your company profile and goals. This section briefly tells your reader where your company is, where you want to take it, and why your business idea will be successful. If you are seeking financing, the executive summary is also your first opportunity to grab a potential investor’s interest.
  1. Company Description provides information on what you do, what differentiates your business from others, and the markets your business serves. This section of your business plan provides a high-level review of the different elements of your business. This is akin to an extended elevator pitch and can help readers and potential investors quickly understand the goal of your business and its unique proposition.
  1. Service or Product Line answers questions like what do you sell? How does it benefit your customers? What is the product life cycle? Get tips on how to tell the story about your product or service. If you have any existing, pending, or any anticipated copyright or patent filings, list them here. Also, disclose whether any key aspects of a product may be classified as trade secrets. Last, include any information pertaining to existing legal agreements, such as nondisclosure or non-compete agreements.
  1. Funding Request and Financial Projection tackles the possibilities if you need funding. This provides financial projections to back up your request is critical. You should develop the Financial Projections section after you’ve analyzed the market and set clear objectives. That’s when you can allocate resources efficiently.  If you are planning to make your new business your full-time job, it’s wise to wait until you have at least some money put away for startup costs and for sustaining yourself in the beginning before you start making a profit.
  1. Marketing & Sales reveals how you plan to market your business? What is your sales strategy? Marketing is the process of creating customers, and customers are the lifeblood of your business. In this section, the first thing you want to do is define your marketing strategy. There is no single way to approach a marketing strategy; your strategy should be part of an ongoing business-evaluation process and unique to your company. After you have developed a comprehensive marketing strategy, you can then define your sales strategy. This covers how you plan to actually sell your product.

Selecting Your Preferred Business Structure

An important step in forming a new business is to choose the type of business structure you will use. There are several types of business entities to choose from, including sole proprietorship, partnership, corporation, limited liability company, and limited partnership. Each has its own advantages and disadvantages, as well as tax consequences of which you should be aware. When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. Legal and tax considerations enter into selecting a business structure.

You have to decide which of these entities best suits your business objectives and needs. You can get help in making this decision from a tax practitioner, such as an accountant, enrolled agent, or attorney. A tax practitioner can also provide information about how to establish the business structure you choose.

As an entrepreneur, you will have no place and no one to hide behind. Knowledge of yourself is the key to confidence, and confidence builds leadership. Building a new business requires good leadership to develop the market, attract customers, motivate the team and conquer the unknowns.

Register your Business

Obviously, you need to register your business and declare proprietorship to it. But before you can do that, you have to settle on what to call it. Naming your business is an important branding exercise, but if you choose to name your business as anything other than your own personal name then you’ll need to register it with the appropriate authorities. This process is known as registering your “Doing Business As” (DBA) name.

Choosing a business name is an important step in the business planning process. Not only should you pick a name that reflects your brand identity, but you also need to ensure it is properly registered and protected for the long term. You should also give a thought to whether it’s web-ready. Many businesses start out as freelancers, solo operations, or partnerships. In these cases, it’s easy to fall back on your own name as your business name. While there’s nothing wrong with this, it does make it tougher to present a professional image and build brand awareness.

After you register your business, the next step is obtaining an employer identification number (EIN) from the IRS. While this is not required for sole proprietorships with no employees, you may want to apply for one anyway to keep your personal and business taxes separate, or simply to save yourself the trouble later on if you decide to hire someone else.

Take Care of the Legalities

To run your business legally, there are certain federal and state licenses and permits you will need to obtain. For some other industries like buying and selling liquor, special certificates are needed before you start operating or else you might find yourself and business in an unnecessary trouble. The form of business you operate determines what taxes you must pay and how you pay them. The following are the five general types of business taxes according to Internal Revenue Services.

 Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized. The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax

Generally, taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

It should be noted that anytime self-employment tax is mentioned, it only refers to Social Security and Medicare taxes and does not include any other taxes that self-employed individuals may be required to file.

 Excise Tax

This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. One of the major components of the excise program is motor fuel.

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.

 Form 720 – The federal excise taxes consist of several broad categories of taxes, including the following.

  • Environmental taxes.
  • Communications and air transportation taxes.
  • Fuel taxes.
  • Tax on the first retail sale of heavy trucks, trailers, and tractors.
  • Manufacturers taxes on the sale or use of a variety of different articles

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

Aside from national laws that your business needs to abide by, there are also local state laws that you need to be aware of and observe for a smooth sailing operation. It is very important where your establishment located, and what government rules apply.

 

The good and the bad news is that as an entrepreneur, you won’t have a manager charged with directing your efforts or peers helping you implement, and your new team will be quick to tell you only what you want to hear. Thus the burden is on you to capitalize on your strengths, find co-founders and team members to fill the gaps and find mentors and advisors you trust.

Know What Kind of Documents are Needed When Claiming Business Travel Expenses

It is clear that taxpayers can deduct regular travel expenses when the trip is entirely business related. Additionally, if the taxpayer is on a domestic business trip and made personal side trips or stayed longer than the business purpose required, then the expenses must be allocated between business and personal. The portion of the trip dedicated to business activities is deductible. Any portion related to personal activities is not deductible.

However, if a trip is primarily for personal activities, such as a vacation, then the only deductible business expenses are those incurred at the destination that is directly related to the trade or business and none of the expenses for traveling to the destination are deductible.

IRS parameters

In general, all trip expenses must be recorded on the travel expense statement including procurement card expenses. If a trip is paid for entirely by procurement card, a travel expense statement must be completed and approved. It is not necessary to enter this travel report in AIS; however, the statement and documentation must be retained in the department. As a best practice, the supplemental procurement card expenses form should be used to detail procurement card activity. If the supplemental form is not completed, all procurement card expenses should be clearly marked on the travel expense statement. Procurement card expenses should be deducted from the total expense using line #22. The original procurement card receipts should be kept in the department or school procurement card files.

Even if the expense is clearly deductible the deduction can be denied if not substantiated. Taxpayers must keep adequate records and documentary evidence. However, the taxpayer can use the per diem method of deducting expenses and still satisfy the substantiation requirements for the amount of the expense. The time, place, and business purpose must still be substantiated through adequate records and documentary evidence. The per diem method can be used by employers, employees and self-employed individuals. Self-employed individuals and employees can only use the per diem method for a meal and incidental expenses, not lodging. Additionally, a taxpayer, whether employer or employee or self-employed can alternate during the year between the per diem method and the actual expense method. The per diem rates for travel can be found at www.gsa.gov/perdiem.

Taxpayers in the transportation industry may use a special per diem rate. A taxpayer eligible for this rate is in the transportation industry if the work directly involves moving people or goods by airplane, barge, bus, ship, train or truck and often requires travel during a single trip to localities with differing rates in the per diem tables. These rates, if chosen, must be used for the entire year.

According to the streamlined guidelines set by the Internal Revenue Services (IRS), there are a couple of documentation that should always be kept, regardless of circumstances or situation, to make sure that you can have an easier time in proving that your trip was primarily for business purposes. While it is best to log in everything, these ones below are the most crucial documentations needed to stake your claim.

Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

  • Cash register tapes
  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC

Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Credit card receipts and statements
  • Invoices

Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tapes
  • Account statements
  • Credit card receipts and statements
  • Invoices
  • Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses. If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.  For additional information, Publication 463 of the IRS document provides more details with regard to Travel, Entertainment, Gift, and Car Expenses.

Assets are the property, such as machinery and furniture that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions are taken for depreciation
  • Deductions are taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

The following documents may show this information.

  • Purchase and sales invoices
  • Real estate closing statements
  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Meals

Amounts paid for food and reasonable restaurant gratuities while traveling away from home are another deduction. The IRS gives taxpayers two methods to calculate meal costs. It publishes daily per diem rates applicable to various geographic areas that you can use without regard to the amount actually spent. Alternatively, you can keep records of all meals and list the total costs paid. Regardless of the method chosen, the total allowable meal expense gets a further 50 percent deduction. Calculate this reduction before applying the 2 percent adjusted gross income limitation.

Instead of keeping records for meal costs, the taxpayer can claim an IRS meal allowance, which is referred to as the M&IE per diem rate (for meals and incidental expenses). The M&IE rate includes tips for service people such as porters, and hotel maids, but does not include the cost of laundry, cleaning, or pressing of clothing, which can be deducted separately with the proper documentation. Self-employed individuals can claim the M&IE allowance, but employees may only claim the allowance if they are not reimbursed under an accountable plan, if their employer is not related to them, and if they do not own more than 10% of the employer’s outstanding stock.

The standard meal allowance for travel within the Conterminous (or Continental) United States (CONUS), meaning locations within the continental United States, is $46 per day, although higher rates may apply to more expensive localities such as major metropolitan areas and resort areas. Outside of the Conterminous United States (OCONUS) rates apply for travel to Alaska, Hawaii, Puerto Rico, United States possessions, and foreign countries. Generally, only 75% of the allowance can be claimed for the 1st and last days of the trip. Workers in the transportation industry who are subject to the Department of Transportation hours of service limits, such as interstate truck drivers and pilots can deduct 80% of their meal costs. CONUS rates can be found by zip code or by city and state.

If meals are not claimed on a particular day but the taxpayer had other incidental costs, then instead of using actual costs, an allowance of $5 per day can be claimed for the incidental expenses, even if the actual expenses were less than that.

Important documentation features

Substantiate is a fancy way to say: the taxpayer has to prove it. Taxpayers must keep evidence of business travel expenses in order to deduct them. The information that must be noted:

  1. The date. The date the expense was incurred will usually be listed on a receipt or credit card slip; appointment books, day planners, and similar documents have the dates pre-printed on each page, so entries on the appropriate page automatically date the expense.
  1. The amount. How much you spent, including tax and tip for meals.
  1. The place. The nature and place of the entertainment or meal will usually be shown by a receipt, or you can record it in an appointment book.
  1. The business purpose. Show that the expense was incurred for your business — for example, to obtain future business, encourage existing business relationships, and so on. What you need to show depends on whether the business conversation occurred before, during, or after entertainment or a meal.
  1. The business relationship. If entertainment or meals are involved, show the business relationship of people at the event — for example, list their names and occupations and any other information needed to establish their business relation to you.

Cautions

Trying to write off your personal vacation as a business expense isn’t worth the risk. “You have to recognize that travel and entertainment is a highly suspect area,” Barbara Weltman, a tax and law expert and the author of JK Lasser’s Small Business Tax Guide, said. “It’s an area that the IRS is on the lookout for because of the potential of crossing the line a little bit and claiming business write-offs for what are really personal expenses. You can assume that if you get audited the IRS is going to look very closely at this area, so you want to make sure you do things right.”

When traveling or entertaining for business purposes, it’s important to document everything.  It’s not enough to just keep receipts, you also need to document who you spoke with, what you spoke about, and how it was related to your business. For travel, the IRS also requires you to keep a written or electronic log, made near the time that you make the expenditure, recording the time, place, amount and business purpose of each expense. This once took the form of expense reports. Increasingly, online programs and even apps, like Tax Tracker, are available for documenting business expenses.

Weltman also suggests creating a paper trail that can be traced if you are audited by the IRS. Take notes on meetings you attend while traveling, keep programs of conferences you attend, sign into conferences, and keep e-mails sent to those you met with during business meetings.

As with all deductible business expenses, you are also expected to keep receipts for travel and entertainment purchases. For meals, make sure that the receipt includes the exact cost of the meal as well as the name and location of the restaurant. Get in the habit of writing down who was present (names and business relationship) and what business was discussed.

For entertainment expenses, document: the amount of each separate expense; the date of the entertainment; the name, address, and type of entertainment; the business reason for the entertainment; and the name, title, and occupation of the people who you entertained.

Whenever business expenses are claimed it is a good idea to keep detailed records and receipts for everything. Business expenses can be charged to a practice credit card, receipts should be obtained from taxi drivers or other modes of transportation, and a detailed copy of the hotel bill should be kept. For the show, meeting or conference, a copy of all charges, as well as a copy of the convention schedule/agenda, can help prove it is relevant to your practice.

 

The safe way to go in all of this is to just diligently record all your business-related travel expenses in a log complete with dates, times, descriptions, locations and amounts. Include your travel expenses, lodging expenses and the costs of your meals. Also include taxis, fees, tips and any other incidental expenses.

No matter how you document your expenses, you are supposed to do it in a timely manner. You don’t need to record the details of every expense on the day you incur it. It is sufficient to record them on a weekly basis. However, if you’re prone to forget details, it’s best to get everything you need in writing within a day or two. Just make sure to keep all supporting paper documentation of the recorded expenses. This way, when you present.

How to Effectively Manage Business Risks

Risks are normal in any business. Even the most successful businesses today had to deal with certain threats in the past that almost laid their success on the line. Sometimes, it is tempting to wish that your business no longer has to take any calculated risk and be as smooth sailing as possible, but that just cannot be.

In the real world, business is tantamount to risk-taking and you can’t just wish to keep risks at bay. Why? Because business does not work that way. Taking risks is necessary in any business for without it, growth is never possible. Remember, it is through risks that you get to meet new clients, discover new sectors and learn new things. Without risks, business loses its essence.

Risk Management

 People in the business sector are pretty familiar with the term risk management. By definition, risk refers to the probability of an event and its consequences. When you manage risks, you use certain methods, processes and tools to deal with these risks.

Running a business involves different types of risk, and while some risks can go only as far as causing serious but manageable damage to your business, there are risks that are beyond repair and have the potential to destroy your business. That is why businesses, no matter how big or small, need to be equipped with the right methods and tools to prepare for these risks before they strike. While preparing for risks does not guarantee 100% that your business will be free from risks, such preparations can moderate their impacts on your business.

Risk management involves determining what could go wrong with your business and evaluating which of the possible risks you should deal with. After doing so, you implement strategies that will help you manage those risks. Managing risks before they strike is the most cost-effective way of dealing with them.

Potential Business Risks

 Before you try to understand Risk Management as a process, it is important that you familiarize yourself with the different types of risk that businesses usually face.

  • Strategic Risks. Strategic risks are risks that have to do with how you operate in the industry where your business is in. These risks usually arise from changes in demand, mergers and acquisitions and other changes in the industry. For instance, a big U.S. company is acquiring your major Canadian competitor. If the acquisition activity happens, then your competitor will have the potential to have a distribution arm in the U.S. So, what should you do?

 Now that you know that this potential acquisition activity can pose a risk on your business, you have to prepare how you will respond once the risk is already at hand. As you do this, you may consider researching if there is any U.S. company that is big enough to do the acquisition and which among your Canadian competitors might be a target of this U.S. company.

  • Compliance Risks. As the name suggests, these risks have to do with your need to comply with certain regulations, as well as your need to act in such a way that your customers and potential investors will be pleased. To manage compliance risks, you must consider whether certain safety or health legislations can force charges in your business or increase your overheads.

When it comes to legislative risks, you may want to ask yourself if certain legislations, particularly tax laws, can make your products and services less marketable. For instance, some tobacco businesses were threatened when legislations pushing up the costs of tobacco products were passed. The significant increase in the cost of their products reduced their appeal and made it difficult for tobacco business owners to promote and sell their products.

  • Financial Risks. Financial risks are associated with the overall finances of your business, including your financial systems and the transactions that your business enters into. Some examples of financial risks are customers who did not pay you for your services, or the growing interest of your business loan. But how do you prevent such risks?

The first and most important thing you should do to prepare your business for financial risks is by regularly examining your financial operations, most especially your cash flow. Being too dependent on one customer is not good for your business, because if that customer fails to pay you, that could have some serious implications when it comes to the viability of your business. Aside from cash flow, some of the other things you should examine are the ones who owe you money, the way you extend credit to your customers, and the things you should do to recover your owed money.

  • Operational Risks. Operational risks are the risks that have to do with the operations and administrative procedures taken by your business, including recruitment of employees, supply chain, IT systems, accounting controls, regulations and the composition of your board.

As you run your business, it is necessary for you to examine each aspect of your operations and make provisions for every possible risk that may turn up. For instance, being too reliant on just one supplier may pose operational risks for your business. Imagine if your sole supplier goes out of business. Where does that leave you? You can minimize this risk by looking for some other suppliers that you can do business with and not depending too much on the one that you currently have.

One of the most common operational risks today has to do with information security. As a business, you keep track of necessary information. That is why part of your responsibilities as a business owner is ensuring that every bit of information is protected from hackers who may break into your IT system and steal valuable data from you. Many business owners have experienced losing large sums of money from their accounts to hackers due to poorly secured IT systems.

Aspects of the Risk Management Process

 The process of managing risks is one of the most crucial parts of any business. It is often considered an indispensable part of strategic management because it helps you identify the risks confronting your business and address them. By doing so, you are able to increase the likelihood of your business’ success.

The risk management process basically involves micro processes, such as systematically identifying the risks facing your business, evaluating the possibility of the occurrence of an event, understanding how you should respond to these events, setting up systems to tackle the consequences of these events, and monitoring how effective or ineffective your risk management processes are.

 How Risk Management Benefits Your Business

 While risk management does not totally guarantee the success of your business, it makes the risks manageable enough. Among the common results of the risk management process are the following:

  • It allows you to allocate your resources more efficiently
  • It allows you to project or expect what may go wrong with your business, hence minimizing the impact of risks and preventing considerable financial loss
  • It helps improve your planning and decision-making
  • It increases the chances that you will be able to conduct your business according to your business plan and budget

 If you are the type of business owner who always loves to try something new, knowing how to manage risks efficiently can benefit your business a lot. For instance, you plan on launching a new product. Two of the risks that you should consider in this case are the competitors that follow you in the market and the existing technologies that can possibly make your new product redundant.

Evaluating Risks

Part of the risk management process is risk evaluation. This technique particularly lets you identify the significance of potential risks to your business and decide whether you are going to accept these risks or prevent them. But how do you evaluate these risks?

Evaluating risks basically involves identifying them and ranking them afterwards. You can do this by determining the consequence and probability of each risk, such as asking yourself if their consequences and probabilities are low, medium or high. Businesses that efficiently assess their risks can attest to the advantages of this practice.

It helps to include a risk evaluation in your business plan, in which you determine the risks that can impact your objectives and assess them in the light of costs, concerns of investors and even legal requirements. In cases when the cost of preventing a potential risk is too high, not preventing the risk at all makes more sense. So, it is important that you assess these risks and weigh which will cost you more—preventing them or mitigating them once they’re already at hand?

In evaluating potential risks and assessing them based on cost, concerns and legal requirements, it is best to plot a risk map and include there the likelihood of the risk’s occurrence. In this risk map, you rate each risk on a scale of 1 to 10, with 10 meaning that the risk is of major concern to your business. You can also include in the risk map the probability scale of each risk, which you do by assessing if the risk:

  1. Is very likely to occur
  2. Has some chance of occurrence
  3. Has small chance of occurrence, or
  4. Is not likely to occur

By plotting this map, you are easily able to visualize all the possible risks in relation to each other and see the extent of damage they can do to your business.

 Four Ways to Deal with Risks

 Since risks are normal in every business, they are not supposed to make you nervous. As a business owner, you have all the freedom to plan around these risks, limit their impacts and prevent the worst from happening. You only have four options when dealing with risks—mitigate it, avoid it, transfer it, or accept it.

  • Mitigating the Risk. To mitigate a potential risk, you should come up with contingency plans before the risky situation arrives. So, when it’s already there, you can easily carry out your Plan B. For example, you have an upcoming promotional event for your new product and you expect several investors to attend. Since the event is set in an open area, the risk is that it might rain. Rain can be considered a risk since that may affect the number of people to attend the event. To mitigate the risk, you may consider renting a large tent to shelter your guests or giving out free umbrellas to them.
  • Avoiding the Risk. There are certain instances when you find the risk consequences to be too high. In such cases, it is best for you to cancel that high-risk initiative altogether. One example would be a product launch that could exhaust all of your company’s finances. Instead of letting this new product cripple your business financially, cancel the launch and avoid the risk of being broke.
  • Transferring the Risk. This strategy is very common in insurances. Since it involves passing the risk on to someone else, it mainly applies to risks and situations that you can put in black and white, such as in contracts. A good example is insuring yourself against the risk of a car accident. In this case, your insurer will carry the financial risk in case you get caught in such an accident.
  • Accepting the Risk. In managing risks, remember that you always have the choice of doing nothing. However, you have to make every conscious effort possible to understand the risk and to decide whether it is fine to accept it. If you think the risk is insignificant and won’t have any impact on your business, then you can choose to take no action at all.

When you manage potential risks to your business, you can take advantage of any of these four strategies independently or in combination. Just like in any endeavor, business requires careful planning. Even if you think that a risk is not likely to happen, it is still best to prepare yourself for it.

Employment Matters: The Difference Between Contractors and Employees

When there’s extra work that needs to get done and there are no sufficient employees to do the job, companies usually hire more workers to keep up with the customer rush. If you happen to find a job in a company, make it a point that you understand your status in that company. That way, you will know how you are supposed to be treated by your new employer.

More often than not, problems arise because independent contractors think of themselves as employees, and vice-versa. For some, knowing whether they are contractors or employees doesn’t matter because all that matters to them is that they got a job and an income. However, they don’t realize that not knowing which classification they belong to—independent contractor or employee—will put them at the risk of tax troubles in the future.

But how does the law classify contractors vs. employees?

Telling Between Contractors and Employees

On the surface, you probably cannot tell what sets contractors apart from employees because most of the time, they do the same work. However, the law views them differently. The law also views the companies that hire them just as differently.

Basically, the thing that makes contractors different from employees is their degree of independence and control over the work that’s assigned to them. Usually, while an employee performs tasks that are dictated by others and are provided trainings to effectively do the job, an independent contractor has more than one client and sets his own hours at work. A contractor typically does not have a boss and he uses his own tools in performing his job. Also, his salary doesn’t automatically come at a definite date because he invoices for each of his completed assignments.

While that seems pretty much understandable, there can sometimes be gray areas, too.

In many cases, companies prefer hiring contractors instead of employees so they can save on labor costs. Financial-wise, hiring contractors makes more sense because contractors are not entitled to benefits. Also, companies save considerably on taxes since in hiring contractors, it no longer becomes necessary for the employer to pay portion of the state unemployment taxes.

Companies that follow the law and take the employee route usually regret their decisions at some point in the future because of the cost that making someone an employee entails. That explains why small businesses that operate on tighter margins are often tempted to hire contractors instead of employees, even when the job that needs to get done calls for an employee.

To minimize their costs, business owners make people believe that it is more advantageous to be a contractor than an employee since contractors’ take-home pays are bigger. While that may be true on the surface, that is not as simple as it seems.

The Tax Implications of Contractual Work 

If you are an employee, your employer is the one that pays half of your Social Security and Medicare taxes and withholds half of these taxes from your salary. That and the withholding of your federal and state income taxes are the reasons why those employees who work at $9 per hour at fast-food restaurants take home less every payday.

So, does that prove that being a contractor is better than being an employee?

The answer is not necessarily. Why? Because independent contractors pay 100% of all their Social Security and Medicare taxes when they file their tax returns, and pay all the income taxes that were not withheld. And if you are a contractor and you failed to make estimated tax payments every quarter to cover your taxes, prepare yourself for an unfortunate surprise come April. This only goes to show how tax responsibilities affect the amount that employees take home during payday versus the amount taken home by contractors.

Contractors Escaping Taxes

 Sounds common, doesn’t it? Many contractors believe that one of the advantages of being an independent contractor is that they get to escape taxes. Actually, they don’t. Well, that’s always possible. But that is not legal.

If you are a contractor and are paid in cash, don’t think that that already lets you get out of paying taxes and not report it. Whether your pay comes in the form of a check, cash, digital transfer or barter, and regardless of its amount, remember that every pay you get for each work that you do is taxable income.

Many contractors get all the more confused about taxable contract income because of the amounts that the IRS uses to require reporting of earnings. Remember that when you are a contractor, you get Form 1099-MISC to lay down the details of how much you have made for each job. Form 1099-MISC is what you need, not a W-2. However, as a contractor, an employer does not need to send you a form 1099 if your earnings during the tax year in question is less than $600.

The law can’t stress enough that the abovementioned rule is just a reporting requirement and has nothing to do with your taxable income. However much you earn, your earnings are always legally taxable and should be reported either on Schedule C or as other income on Form 1040.

For your FICA taxes, which refer to your Social Security and Medicare taxes, these taxes are self-employment taxes which you are responsible for in full. If you are an independent contractor, you should report the amount of your FICA taxes and pay them via Schedule SE.

While being an independent contractor has its share of advantages when it comes to taxes, there are instances when a business hires a contractor who is eventually deemed as an employee. In such cases, both parties lose significant amount of taxes, interests, penalties and premiums.

Since the relationship between a company and a worker sometimes tends to be a gray area, it is imperative that you protect your status as an independent contractor. Well, that is if you are really an independent contractor. To make sure that your work as a contractor remains independent of your employer, it should be able to pass the Four Point Test.

Determining Your Status

 If one asks you now whether you are a contractor or an employee and what makes you think so, do you know how to answer?

In Canada, a four-point test helps workers to determine their relationship with the business that you are working for. The agency clearly sets out a method that lets tax payers and workers identify the nature of their relationship with their companies.

The four-point test makes clear-cut distinctions between contractors and employees based on their control, tool ownership, risk of loss and integration.

  • Here, the issue is who controls the worker. If the employer has all the right to hire or fire you, determine your salary, decide on the time and place of your work as well as the manner in which you should perform your work, then you are an employee. Even if the employer does not directly control how you do your job, if he still has the right to do so, then an employer-employee relationship exists between the two of you.

 On the other hand, if you are a contractor, it is not necessarily the employer that runs the ship. As a contractor, you decide how you are going to perform your job and you maintain your right to decide where and when you are going to get the work done. In short, you are the only person responsible for planning the job that you need to get done.

  • Ownership of Tools. When it comes to tool ownership, the common notion is that what sets contractors apart from employees is that contractors supply their own tools. While that may be true, the problem is that it is also customary for other employees to provide tools for themselves so they can perform their jobs, such as in the case of garage mechanics and painters.

If that is the case, then how does tool ownership differentiate a contractor from an employee? According to CRA, the cost of using the tools is a better indication of whether you are a contractor or an employee. As per the CRA rule, you are considered an independent contractor if you purchase or rent large tools that call for major investment and expensive maintenance. Otherwise, you are an employee. Another good example of a self-employed, independent contractor is a home-based IT worker who uses his own computer to perform his job.

  • Chance of Profit/Risk of Loss. Here, determining which type of relationship exists between the business and the worker heavily depends on the financial involvement of the latter. Take a look at these questions:
  •  Do you have a chance of gaining profit?
  • Are you at risk of incurring losses due to damage to materials, delays or bad debts?
  • Do you cover the operating costs?

If your answer to all of these three questions is a Yes, then you are considered an independent contractor.

  • This criterion seems to be an attempt to presume the intention of the involved parties. According to CRA, a business relationship exists if the worker integrates the payer’s activities to his own commercial activities. On the other hand, an employer-employee relationship exists if the worker integrates his activities to the commercial activities of the payer.

The CRA does not lay out how to determine such integrations. However, an obvious way of proving that you integrate your own commercial activities is by having multiple clients. If you have only one client, it becomes easy for others to presume that you share an employer-employee relationship with that client. But be careful when having a single client, because that puts you at risk of being declared as a personal services corporation by the CRA.

Deciding Whether to Become an Employee or a Contractor

 Based on the facts discussed, it looks like being a contractor can be beneficial for you in terms of earnings and taxes, so long as you are prepared. However, remember that being an employee or a contractor is not really one of those decisions that you make when you look for a job. In reality, it is the business or company that decides whether you are a contractor or an employee.

Most of the time, employees are carried on the books, unlike contractors. So as a contractor, it is your responsibility to enshrine your relationship with the company you are working for through a contract. This contract should focus on the first three points of the four-point test and set out the intentions of both parties. Since you are an independent contractor, you have to make sure that such a written agreement is carefully crafted so your status is protected in case the other party subsequently changes his mind and argues that your relationship is not what you think it is.

At the end of the day, it is the business’ responsibility to weigh certain factors to determine whether a worker is an independent contractor or an employee. While other factors may indicate that one is an employee, other factors may indicate that he is an independent contractor. Apparently, there is no magic that stands alone in determining one’s status, but the key to making the right determination is by looking at the entire relationship that the person has with the company he is working for.

In a nutshell, what makes a worker an independent contractor is his being his own boss, although his work should still stay within the definitions of a contract with the party he is working for. Also, he is not eligible for benefits provided by the employer and retains a certain degree of independence and control. On the other hand, a worker is an employee if he treats the business as his stable source of income, is eligible to benefits and pensions, and gives up elements of control to his employer. He should also be working within the time and place specified by the employer.