Medical Expenses Deduction – What you can and can not do?

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Medical Expenses Deduction – What you can and can not do?

Sep 13, 2017 Posted by Sanjiv No Comments

Medical bills can sure burn a hole on your wallet especially if there are emergencies that come out of nowhere and are not completely covered by one’s insurance. This being said, the IRS allows the taxpayers some relieve, making these expenses somehow tax-deductible. In order for anyone to make the most out of the tax deduction, they must know what is regarded as medical bills and the steps to claim deduction from these.

Deduction from medical bills

The IRS lets tax payers to subtract medical expenses that are qualified and also exceed 10% AGI. The AGI or the adjusted gross income is taxable income and also deducts any adjustments such as contributions and deductions to the traditional interest from student loan and IRA.

Take this for example, a modified AGI that totals $45,000 that has medical costs of $5,475 can be calculated by $45,000 and 0.10 to find out the 10 percent which means $4,500 is deducted to the amount. This then leaves the tax payer a deduction on his medical expenses that amounts to $975. This was calculated by deducting $4,500 from $5,475.

Which medical bills can be deducted?

The IRS lets the tax payer subtract preventative care, vision and dental care and treatment surgeries as medical expenses that qualify. Consultations with psychiatrists and psychologists are also deducted. Appliance like contacts, glasses, hearing aids and false teeth as well as prescription medications are also considered as deductibles.

The IRS allows the tax payer to subtract the expenses for travel when the purpose is medical care. This includes bus fare, parking fees and mileage on cars.

What cannot be deducted?

Medical expenses that is reimbursed, like from the payer’s employer or insurance, is not deductible. This also includes the fact that IRS usually does not allow expenses for cosmetics. The cost for drugs that were not prescribed, with the exception of insulin, as well as purchases primarily for the purpose of general health, like health club bills, toothpaste , diet food or vitamins, nicotine products that are non-prescription or medical bills that were paid for in a previous year cannot be deducted.

How to claim the deduction for medical expenses

To claim the deduction from medical expenses, this must be itemized. Itemizing medical expenses requires the taxpayer does not follow the deduction that is already considered as standard but only the expenses deduction in the situation that it is greater than the former.

Those who choose to itemize must use the Form 1040 when filing their taxes and then attach this to Schedule A. Here, they can also document the total of their medical expenses that they paid for that year on Line 1. The AGI income can be found in Line 2.

Then the 10% of the AGI is placed in Line 3.

Difference between the expenses as well as 10% of the AGI is in Line 4.

The total amount that is listed in Line 4 will then be subtracted to the AGI to reduce the income that is taxable for that year.

If the amount obtained, along with the standard deductions claimed, is lower than the standard deduction, then this should not be itemized.

Maximizing Medical Expense Deduction

If taxpayers spent loads of their hard-earned cash on medical bills, they can write those off but the first requirement is that it should exceed a hefty amount before it is regarded as a deduction.

  • The IRS allows the taxpayer to subtract the costs of medical bills on their tax returns if it is beyond 10% of the AGI. Only the costs that go beyond this amount is deducted.
  • Taxpayers aged 65 and older can use 7.5% from the previous year when claiming the medical expenses that have been itemized.

Which Medical Deductions Are Covered?

The taxpayer’s bills from medical and dental expenses along with his or her spouse and dependents are listed on the tax return. Therefore, these are allowed deductibles. However, medical expenses for parents are not considered due to exemption purposes. Another deductible is that of a dependent that has passed away during the year that they were covered.

Medical Deductions That Are Often-Overlooked:

  1. Travel expenses when going to and returning from locations for medical treatments. The IRS considers this as a deductible and also evaluates the allowance through a standard rate of cents-per-mile. For this income tax year, the rate per mile is 17 cents.
  2. Insurance payments income that has already been taxed. This also covers insurance cost for long-term care, which has certain limits depending on the age of the claimant.
  3. Medical treatments that are uninsured, like eyeglasses, contact lenses, hearing aids, false teeth and even artificial limbs.
  4. Cost of treatment for drug and alcohol abuse.
  5. The cost for corrective vision surgery through laser. This is also tax-deductible. This is often-overlooked and such a shame because taxpayers can have lots of tax deductible from this.
  6. Medical costs as prescribed by physicians. For example, if a doctor prescribes installing a humidifier into the home’s air-conditioning and heating to relieve problems concerning chronic breathing, the device along with the extra costs on electricity for it to operate are partially deductible.
  7. Costs for medical conferences. Expenses on admission and transportation to any medical conference of a chronic illness that is suffered by the tax payer, his or her spouse or dependents can be covered. Lodging costs and meals incurred during the seminar cannot be reduced.
  8. Weight-loss programs. There are some instances that may count as deductible, just like the programs to stop smoking. However, diet programs are also medically necessary. Take this for example, a doctor can recommend a particular regimen to decrease the risks of obesity and hypertension in one’s health.

One can also get a tax break with a flexible account for medical spending. Taxpayers can check for plans they can participate in to increase pay that they can take home.

Special medical needs

The cost for special medical needs can also be written off. These are wheelchair, equipment that lets the deaf person use a phone, devices that produce television captioning and crutches. Service animals specially there for the hearing impaired and the blind and the costs in retrofitting cars with hand controls and spaces to hold wheelchairs can also be written off.

Other Aging-in-place remodels in the home that can be written off:

  • Ramp installation
  • Widening hallways and doors as well as lowering cabinets and counters
  • Adjusting fixtures and electrical outlets
  • Exterior landscaping that can ease the house access

There are home remodeling that can be prescriptions for tax breaks, in the situation that the IRS rules and doctors’ orders are followed.  If needed, adding chairlift can also be used to ascend and descend the stairs all for medical condition. Therefore, this is also considered an expense that is legitimate.

Changes to one’s home in order to make this specially accessible for any handicapped resident are also tax-deductible. Taxpayers must remember that they won’t be able to be considered as deductions from the over-all costs of the tax return. Once there is an improvement, it increases the property’s value, then the amount is deducted from the cost of the project. The difference, then, can count as medical expenses.

Elevators are not deductible. IRS regards this as structural changes that add more to the value of the home and therefore does not necessarily require a medical deduction.

Medical yet not tax-deductible

Cosmetic surgery and health club payments or bills from weight-loss programs are not deductible because these are not medically necessary. Operations for hair transplant and electrolysis treatments are also not deductible. For these procedures, taxpayers can consider financing surgeries that are not medical related and has credit card cash-back.

6 Medical Deductions That Can Be Deducted Without the Taxpayer Itemizing

Calculating medical expenses for deduction is difficult due to the Adjusted Gross Income floor of 10%. If the tax payer is below 65 years of age, it is 7.5%. There are medical expenses that are considered to be deductible despite one not qualifying for deducting the medical expenses in the form of itemized deduction. Deducting expenses can also lower the taxable income and also cut the taxpayer’s taxes. Filing status as well as the number of dependents usually does not affect the deductions.

Listed are the medical deductions that the IRS considers, even without itemizing:

  1. Account Contributions from Health Savings. If the taxpayer contributes any amount to the HSS or the Health Savings Account, then it serves as deduction from the taxable income of the taxpayer. The maximum that is allowed can reach to a maximum of $3,350 for the individual. For families, it is $6,650 per year. If the taxpayer is beyond 55, he or she can contribute an additional $1,000 every year. If the employer contributes to the HSA, this can either be deducted or not deducted in the contributions.
  2. Account Contributions from Flexible Spending. Like the HSAs, when there is an employee-sponsored that can be spent in a flexible manner, which is also known as the FSA, the taxpayer is contributing his income before tax and therefore, reducing his income that is taxable. For income tax year of 2016, the rate was $2,550 for every spouse.
  3. Health Insurance for the Self-Employed. If one is self-employed, he or she can deduct the premiums from the insurance for himself or herself, his or her dependents. The premiums for LTC or long-term care insurance can also be paid for the year.
  4. Work Experiences That Are Related for the Impaired. If the taxpayer is physically as well as mentally disabled and requires services or equipment in order to perform a job, then this can be deducted. Expenses can also include readers, personal assistants and pieces of equipment that are required and necessary for the job. There are expenses that are paid by the taxpayer’s employer and are also considered as reasonable accommodation as it is stated under the ADA or Americans with Disabilities Act.

Personal Physical Injury Damages

If the taxpayer is reimbursed for physical injuries as well as expenses from a legal action, then the tax payer can deduct this amount from the taxes. If they are receiving a settlement and the reimbursement,  there is a tax on the settlements but there are no reimbursements. The taxpayers cannot reduce medical costs that have been covered by reimbursement.

Tax Credit on Health Coverage

The HCTC or the Health Coverage Tax Credit covers the monthly health insurance premium for as much as 72.%%. These are premiums that are paid by taxpayers who are regarded as eligible. These are the requirements for those who wish to claim HCTC:

  • TAA or Trade Adjustment Assistance recipient
  • Recipient of the Reemployment TAA
  • Alternative TAA recipient
  • PBGC or Pension Benefit Guaranty Corporation pension. This is for the payer who covers his own health insurance.
  • Any qualifying members that are listed of the individuals above.

Here is a rundown of the medical expenses you can deduct:

  • Fees to doctors, dentists, psychiatrists, surgeons, chiropractors and other medical professionals.
  • Medical insurance premiums that are beyond the portion of what the employer pays
  • Long term care insurance premiums that are up to certain limits
  • Long term care
  • Inpatient drug treatment and alcohol programs
  • Dentures
  • Ambulance service
  • Modifications to the tax payer’s home for medical care, like wheelchair ramps
  • Weight loss programs for specific diseases that have been diagnosed by a certain physician
  • Fertility treatments like sterilization and pregnancy test kits
  • Nursing supplies like breast pumps
  • Prescription drugs as well as insulin
  • Glasses, hearing aids, contacts and crutches
  • Guide dogs for the deaf or the blind
  • Cosmetic surgery required because of a disease or an accident
  • Removing lead based paint from surfaces that are in poor repair and is within the reach of any child
  • Admission and transportation going to a conference about a chronic condition of the taxpayer or any of the dependents
  • Stop smoking programs, but excluding non-prescriptions drugs such as patches and nicotine gum
  • Psychiatric care

For a complete list of deductible medical expenses, anyone can just check the IRS Publication 502. These deductions are then used when filing out Form 1040 or Schedule A. Writing off medical expenses as deductions can make for a healthier bottom line on anyone’s tax return. Taxpayers should make sure that the only appropriate expenses are included because auditing IRS can be stressful. It is also possible to ask for the assistance of experts so there are no mistakes made in taxation and the appropriate deductibles.

Getting Started with Your Very Own Business Venture

May 16, 2017 Posted by Sanjiv No Comments

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.

How to Effectively Manage Business Risks

Apr 30, 2017 Posted by Sanjiv No Comments

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.

How to Simplify Business Taxes

Apr 23, 2017 Posted by Sanjiv No Comments

If the only purpose of the tax system is to raise the government’s revenue, it could have been simpler. Unfortunately, its goals include ensuring efficiency, fairness and enforceability, influencing social policy and delivering benefits for certain industries, so simplicity in taxes seems out of the question.

While the current tax system is already too complicated, it gets even more complex year after year. Oftentimes, tax simplicity contradicts certain policy goals. While most people think that taxes should be equally conductive, fair, enforceable and simple, it is a fact that even those people who agree on these goals also disagree when it comes to their relative importance. Consequently, policies serve to balance the competing goals and simplicity ends up being least prioritized.

If you own a small business and are unfortunately not a tax expert, you may find it hard to deal with your business taxes. Because of the complexity of the tax system, it is very common for business owners to spend their tax time in panic and stress as they scramble to get their documents together in hopes of meeting deadlines and avoiding penalties.

Business owners often experience tax woes since they are supposed to treat business taxes as a process that needs careful attention throughout the year. The complexity of the tax system makes business tax preparation just as difficult that business owners sometimes feel like preparing for the tax season is an all-year burden that they have to carry.

Business taxes may be a bit complicated, but the good news is that there are ways through which you can simplify them. But before you know how to simplify business tax, it is better to understand first what business taxes are all about.

Business Taxes

 Business taxes have five general types, and the type you pay depends on the form of business that you operate. The give general types of business taxes are:

  • Income Tax. Except partnerships, all types of business are required to file an annual income tax return. The form that you use in filing depends on the organization of your business or your business structure. This type of tax is a pay-as-you-go tax, which means that you pay it as you earn or receive your income. Usually, this is withheld from your pay. Otherwise, you might be required to pay estimated tax.
  •  Estimated Tax. It is by making regular payments of this type of tax during the year that you pay your taxes on income, including your self-employment tax.
  •  Self-Employment Tax. This business tax is primarily for those who work for themselves. Whatever self-employment tax you pay contributes to your social security system coverage, which is responsible for providing you with disability benefits, retirement benefits, survivor benefits and hospital insurance benefits. The law requires you to pay your SE tax if you meet any of the following requirements: (1) your net earnings from being self-employed were $400 or more; (2) you work for a church or any organization controlled by a church which elected an exemption from the FICA taxes.
  •  Employment Tax. You should pay your employment tax if you have employees whose social security and Medicare taxes, as well as federal income tax withholding and federal unemployment (FUTA) tax you are responsible to file.
  •  Excise Tax. You need to pay your excise tax if you do manufacture or sell products, operate different businesses, use various kinds of facilities, products or equipment, or receive payment for certain services. This tax has several tax programs, and one of the major components of these programs is motor fuel.

 Now that you know the different business taxes that you need to pay, and considering how complicated filing and paying them are, it is time to understand how to simplify your business taxes.

 Preparing for the Tax Season

 The key to simplifying your business taxes is to treat them as something that requires your attention throughout the entire tax year. As you begin to see it that way, preparing for tax time won’t be as burdensome for you anymore and it will no longer have to take your time away from your business.

Business taxes are manageable if you know how to prepare them right. Basically, you will need a reliable technology to help you automate your finances. Other things that you need will be—

 Establish better habits for next year and beyond. After completing your taxes for the current year, commit to establish better habits for the following years. You may have promised yourself to do the same last tax year and in the years prior, but this time, make sure that you will stand by your commitment to do better.

 Your business finances need your attention as much as your family finances do. If you are not the type of business owner who keeps track of your business income and expenses, then you are one of those business owners who see tax time as a nightmare.

  •  Track your Business Income and Expenses. To save yourself the trouble, make it a habit to track your income and expenses all the time. That may sound a bit demanding, but it definitely works. To keep track of your finances as they happen, use a spreadsheet or a software program. Reconstructing all your income and expenses for months at once will not only lead to an erratic report but will also leave you drained.

Another advantage of keeping track of your income and expenses in a simple spreadsheet is that you get to see the profit you make and all the numbers you need for tax time.

  • Set Aside Money for Taxes. One of the easiest ways to avoid getting hit with a surprisingly hefty tax bill is to make it a habit to allot money for your business taxes each month. For most businesses, that is equivalent to 30% of your total income. If you set aside this percentage, you will be better off than business owners who don’t set aside anything for tax time.

If you make a conscious decision now to set aside money for your taxes, you don’t only get to avoid considerable penalties but also ease the burden of having to pay a huge sum when the due date for filing taxes comes. That may seem difficult to do at first, but it positively forces you to not procrastinate your taxes until the crazy tax time arrives.

Record everything electronically. Most business owners keep piles of receipts and other important documents in a box, particularly a shoebox. Such a practice is highly inefficient because when the receipts pile up, everything becomes a mess and things become even more stressful for you since you will end up not even knowing what’s in that box. Why don’t you ditch it and start learning how to record everything electronically? That way, you can be sure that your archive is automatically ready when the filing time next year comes.

It is also best to set aside one time to sort out your records. If you plan to do this once a month, a good date would be the time you get your monthly statement for your business checking account. Come up with a checklist that includes your bank account reconciliation and look through all of your transactions to make sure that you don’t commit errors.

Back up your records. Have you ever thought of what may happen to all your data in case a huge disaster hits your place? That is why it is important that you back up all your files and records regularly to a remote location, such as in the cloud. You may also do the backing up on-site, but make sure that you store away all valuable business information from the office. Remember that the law does not find lost records as an excuse when the auditing time comes.

Find a good accountant/ tax advisor. If you think you can’t handle all the paperwork by yourself, you can get an accountant. Accountants are trusted advisors that you can rely on throughout the year. They can help you plan and prepare for the tax season.

If you have just started your business, it is better if you talk to a tax advisor as soon as now. You can explain the basics of your business to your accountant and tax advisor so he can clue you in on the tax deductions you are entitled to. You may not appreciate having a tax advisor by your side straightaway, but when the demands of tax time get more complicated, you will. Since they are savvy about business taxes, they can help you go about every stage of the process.

In the months leading up to tax time, accountants and tax advisors are business owners’ best friends. Ahead of this dreaded season, request from them a tax preparation document to ensure that you have enough time to prepare and that you get all the deductions and breaks you are entitled to.

Use online banking. In most cases, banks allow their clients to download all of their transactions. To help you prepare for the tax season, you can visit the bank every month to mark all your tax-deductible transactions. That way, you can prepare a comprehensive list of all your tax deductible items before the tax season comes.

As you prepare for the tax season, it also helps to use reminders and alerts. You may consider having a specific calendar that’s especially dedicated to your business finances. There, you can set up all your financial reminders for all the payments, transfers and other transactions that you need to perform. This way, you don’t let your financial tasks get lost in the rush of your daily business reminders. It is also advisable that you put alerts on your business checking account so the calendar can alert you when your balance gets too low, or when a new transaction is made.

Automate accounting process. If you own a business, considering an accounting solution is a big help to your tax woes. Finding an accounting solution will help you drive accuracy and efficiency throughout the year and ease your burden during tax time. When you use online accounting for your finances, you don’t only get the latest version of the accounting tool but you also remove the need to invest a large sum of money upfront.

If you own a small business, you can easily pull the transactions you had from your business bank accounts and automatically update them. That way, you can come up with customized financial reports and view your balances more straightforwardly, especially if you use a software that features customizable reports. This is a big time-saver, you’ll see.

Another benefit of automating your accounting process is that you get to plan ahead for your important deadlines. Most accounting software today don’t only keep track of your income and expenses but also have alert features to ensure that you are up-to-date with your business finances and deadlines.

File online. Filing your taxes online is not only faster for you but also ensures that it your filing is less prone to errors. In most cases, tax agencies also require online than manual filing.

When you start having your business financial tracking set in place, you will discover that it actually takes so little time to accomplish your financial review and just a bit of effort to get rid of tax woes that are usually experienced by delinquent business owners. The business tax system is complicated, yes, but there is always something you can do to streamline the process.

If you have just started out your business, it’s normal if your expenses outweigh your income. Setting up a system to track your finances may seem unnecessary at this point, but you shouldn’t make the mistake of waiting until all your financial records have already piled up. Simplifying your business tax is a result of easy habits that you need to learn from the beginning. Try it. When the tax time comes around, you’ll be grateful you’re prepared.

Hire Your Children To Save Taxes

Jan 19, 2017 Posted by Sanjiv No Comments

Child labor is a subject that has a negative connotation in our society. For most people, it means depriving children of their childhood. It means forcing them to work when they should be at home watching TV, or playing in the fields.

But it is a different matter altogether if the child is employed by his or her parent’s company.

If you have a small business and you have children aged below 18 years old, it is highly recommended that you hire them as employees. It can be a very fulfilling experience to them. It can hasten their growth, develop a sense of pride and self-worth, and teach them to be more responsible.

Moreover, it can save your company thousands of dollars in taxes. It’s like hitting two birds with one stone—your children can be productive during their spare time and you andyour company can get to save a lot of money.

Hiring teen and young adults in a family owned business benefits both parents and the young ones. Parents get to save more as their businesses have lesser tax burden. Children, on the other hand, can be productive and get some extra money for their extracurricular and summertime activities.

Tax Benefits

There are several ways for your company to benefit from hiring your children as workers:

  1. The child’s salary is free from taxes.

You might know that the first $6,300 of income in a fiscal year is free from federal taxes. This is called the Standard Deduction. So if you hire a child as an employee of your firm, you’re basically keeping that amount in the family. Hire someone else and that $6,300 is taken out of you.

That money coming from your own pocket can be used by your son or daughter to buy a car, or go on a vacation. Even better, he can use it to support himself or his college education.

  1. The child’s salary will be tax deductible.

Let’s say that you are hiring your child with an annual pay of $6,300.  You can declare that amount as tax deductible from your business income.  The first $6,300 earned by a child working in his/her parent’s firm is not subject to tax. Yes, this means that your child’s earning will not only be subject to federal income tax tax but also state tax, FICA, or Medicare.

You, as the business owner, meanwhile, can declare that amount as fully deductible. This means that you will get a tax relief based on your child’s salary as an employee of your business.

For instance, your business is in the 35 percent tax bracket. You hire your 14-year old son to work in your office and help you with the filing of documents, or working  with the spreadsheets. For the year, he earns $6,300 in wages. He must also has no other sources of income.

You, as the business owner, stand to save $2,205 since the full amount of his wages will be deductible as compensation.

  1. No FICA taxes.

As mentioned earlier, your child’s salary isn’t subject to FICA tax. This means your firm won’t have to pay FICA taxes on your child’s wages.

However, there are certain requirements for your child’s salary to be exempt from this kind of tax:

  1. Your business is a sole proprietorship
  2. It is a husband-wife partnership
  3. It is a husband-wife LLC considered as husband-wife partnership for tax purposes
  4. It is a single member LLC treated as sole proprietorship for tax purposes

It should be noted that your child’s salary is not exempt from FICA taxes if your business is a corporation. FICA tax exemption is also not applied if the business is a partnership, or one or more partners are not parents of the child.

  1. Setting up retirement savings plan.

What most people don’t realize is that children under 18 can contribute to their own individual retirement account (IRA). This can be a great way for them to get a head start as far as saving and investing money is concerned.

Your child can contribute up to $5,500 to a traditional IRA. He can subtract the amount from their income for tax purposes. However, your child can’t make more contribution to what he earned in a year. So if he earned $5,000 in a year, the maximum IRA contribution he can make is $5,000.

  1. Shifting a parent’s higher taxed income to a child.

Since your child can save by a) having his income exempt from taxes and b) having the option to set up IRA on the income, you can then shift your higher taxed income to him.

Going back to our examples, your son makes $6,300 and then adds $5500 as a contribution to an IRA. Thus he has $11,800 shielded from taxes, and your business can write off that amount as a legit business expense that can reduce your gross income.

That’s the maximum amount that your child can make in a year sans tax. If you give him a higher pay than $6,300 in a year, the next $9,275 will only be taxed at a rate of 10%.

Thus, your son stands to have a tax of just $927.50 for the year on aggregate earnings of $21,075.

You’ll be wise enough to include that amount in your own income as you can incur a tax liability of $10,600. You can save up to $9,672 in taxes by doing so.

Guidelines

There are several things that you should know if you are to hire your kids as employees. Knowing these guidelines should keep the IRS from disallowing your company from claiming said tax exemptions:

  1. He/she must be a real employee.

Your children should be hired as bona fide employees. This means that they have work that is helpful and appropriate for your business. Typical jobs for children include routine office work such as typing jobs, stuffing envelopes, cleaning the office, answering phones, or making deliveries.  Tech-savvy teenagers can help in marketing a company through social media. Or they can help in maintaining the spreadsheets of the firm.

They can’t be hired for jobs that have no connection with your business, like mowing your lawn at home. Suffice to say, children shouldn’t be asked to do household chores and get compensated for it.

Since your child is considered as a real employee, he or she should fill out their timesheets. It is also recommended that they sign a written employment agreement that specifies the duties and work hours of the employee.

  1. The work must be age-appropriate.

The work assigned to your child should be age-appropriate. There’s a chance that a 8 or 9 -year old child can help in some tasks in the office like stuffing envelopes or even making deliveries. But it will be difficult for the IRS to believe that a child aged below that age can perform any useful work for your firm. Employing a 6 or 7 year old for photocopying work or filing can put you in trouble with the IRS.

It’s also a no-no for children aged 16 years and below to work in a dangerous industry. Hence if your business is heavy equipment contracting, you can’t assign your 15-year old son to the field.

  1. Child should comply with legal requirements.

Since the child is considered a real employee, he or she should comply with the same legal requirements as you would when you hire a stranger. Thus, he will have to apply for a Social Security Number and fill out IRS Form W-4. He or she should also complete Form I-9 of the U.S. Citizenship and Immigration Services.

  1. Compensation must be reasonable.

Simply put, your child’s salary should be consistent with market rates.

Many shrewd business owners would try to give their children a big compensation because it can give them more tax savings in the long run. It would enable them to shift much of their income to their kids who are likely to be in a much lower income tax bracket. But you shouldn’t attempt to do this as the IRS would eventually find out about this if they do an audit.

In paying your children, you should give them a reasonable compensation. The total compensation must include the salary plus all the fringe benefits such as health insurance and medical expense reimbursements.

To get an idea on how much you are to pay your child, you can call an employment agency to see the typical compensation for the type of work that your youngster will do in your business.

  1. Pay in cash.

It’s up to you to decide how much you would pay your son for the services he renders to your business. Just make sure that you pay him in cash if you don’t want to get in trouble with the IRS. Compensation in the form of foods and other things won’t cut it.

There was this case of a tax preparer in Washington who also owned an employment agency. She employed her three children aged 8, 11, and 15. The kids earned a combined $15,000 in two fiscal years for doing tasks like filing and stuffing envelopes. Their mom deducted their salary as business expenses. The IRS disallowed it.

Why?  It’s because the children’s wages was used by their mom to pay for their food, often pizza.  Also, she used the money to pay for their tutor’s fees.

While the mother argued that it was her children who asked her to spend their earnings that way, the Tax Court ruled in favor of the IRS. It noted that it is her parental obligation to provide food and support her children’s education, and the wages of the kids should not be used for these purposes.

  1. Be diligent about documentation and book keeping.

One way to ensure that this arrangement won’t backfire on you is to be diligent about the documentation and book keeping. Doing so would convince federal or state auditor that you reasonably employed your children for your business, and that your tax claims are legit.

Aside from getting all the state permits necessary to employ children, your company’s recordkeeping and payroll tax accounting must also be fool-proof. The payroll for your kids must be done in the same way that an employer would do the payroll for another employee. Paying a fair market rate, as mentioned earlier, would also satisfy the auditors.

  1. Your child should also help your business.

Finally, business owners should not only be concerned with the tax savings they’ll get when they hire their children. They must also be sure that their children can do the tasks assigned to them. The children should be able to help the business, and not just for the tax savings that the firm gets because of them.

Sure, they’ll reduce taxes by employing a child. But if the child doesn’t do a good job at work, then it would probably best to hire another individual to do the job for the firm.

Let’s say that a father hires his 15-year old son to help typing documents in his office. He’s able to save $3,000 in taxes for doing so. But if his son just lounges around the office and doing nothing, then the father didn’t really get the best out of this arrangement. It would have been better for him to hire another person who can actually help his company.

With the tax savings that small business owners can get, it really makes a lot of sense for them to hire their children during summer or even on weekends. The business owner not only stands to save on taxes, but also instils in his/her children values like hard work and responsibility.

If you decide to do this, you should ensure that you do things right. Get your children the necessary permits. Do your accounting cleanly. And give them real wages—not slices of pizza. If you do things correctly, you can save thousands of dollars in taxes while training your children who could be your successor one day.

Dividing Your Family Fortune In The United States

Oct 29, 2016 Posted by Sanjiv No Comments

Dividing Your Business Fairly Among Your Children

You’ve done well in your life. You’ve had a successful career as an entrepreneur and built up a business that you can pass on to your kids. After spending much time and energy to build up your company, you naturally want the firm to outlive you and become more successful in the future. So you count on your children to continue your legacy.

But your problem is this—only one of your children is involved in your company. The others have shown no interest at all in your business, or have gone to different career paths. So how do you prepare your estate plan, knowing that more than half of your fortune (if not all) is tied up with your business?

There are many factors you will have to weigh in as you contemplate your estate plan. One  is that there is your desire for the company to live beyond your life. After all, it was you who built up the firm. Would that mean that the child who’s now involved in the business gets a lion’s share of your estate?

On the other side of the fence, your plan to give a majority of your wealth to the child involved in the family business would likely hurt your other children. As a parent, the last thing you want to happen is for your family to fall apart because of disagreements in dividing the family fortune.

First of all, you should realize that your predicament isn’t uncommon. In fact, this is one of a more typical problems facing families that own or operate a business. Passing on a family business can get really tricky when not all the children are working in the company.

In estate planning for a business owner, equal distribution of wealth may not always be fair. It’s a given that most parents will try to be generous, so they’ll think that the fair way of distributing wealth among their children is to divide the fortune equally among the siblings.

But that isn’t fair at all to the child (or even spouse) who is involved in a company, much more to one who has helped tremendously in growing it. The child may feel resentment toward his siblings who had nothing to do with the business but end up getting lots money from it.

There are three options that you may want to explore if you want to distribute your wealth to your children fairly. These are:

Life insurance

Life insurance is considered by some experts as the most tax-efficient way of leaving wealth to children since all life insurance proceeds are received tax-free by the beneficiaries. It is also an effective way of equalizing the wealth distribution in your family especially when only one or two children are involved in the family business.

Since the child who’s involved with the family business is likely to take over from you as the owner or majority shareholder of the company, it would be practical to name the child or children not involved in the company as the beneficiary.

But there are some downsides to doing

Tax Planning with Sanjiv Gupta CPA

Tax Planning with Sanjiv Gupta CPA

this strategy.  There’s the risk that the child involved in the business may feel that he or she is not getting a fair share. The child may be taking over as the company head honcho, but the fact remains that he has to maintain and nurture the business. On the other hand, the other children will simply have to invest the money you left them in a bank or brokerage account.

You’ll also have to determine how much insurance to buy. It’s tricky, to say the least. Your company may be worth a few million dollars today but it could double its value by the time the insurance policy pays out.

Buy-sell Agreement

Another way, albeit more complicated, is to have a buy-sell agreement to the interested child, or the one who is involved, willing and capable of taking over the family business.

A buy-sell agreement can be an integral part of your estate planning, especially if you have children that are not heavily involved in your family business.  In this scenario, you can equally divide the shares of the business among your children but give some privilege to the one who’s been helping you in the company.  It could be the win-win solution to your estate planning woes.

A buy-sell agreement can put limitations on the future sale or transfer of the business. This would minimize, if not completely eliminate, any chances that your business would be transferred or acquired by other people or those who aren’t part of your family. This can also give your child involved in the business the first right to buy the shares owned by his/her siblings.

Think of a buy-sell agreement as a prenup. The document can stave off a lot of  problems that can potentially destroy your family. It would prevent conflicts within your family, particularly your children.

A buy-sell agreement clearly establishes procedures that must be followed in case that you, as the business owner, becomes disabled or dies. It would establish the price and terms of a buyout, in case the children who are not involved in the business decide to give up their stake.

Buy-sell agreements often take into consideration the following issues:

  • Triggering events—these pertains to events that trigger the provisions of the agreement, such as the death of the business owner, divorce, and retirement.
  • Business valuation—this sets the value of shares to be transferred.
  • Buyout terms—buyout terms usually favor the buyer, in this case, the child who is involved in the business. That means lower down payments, interest rates, and even longer buyout periods.
  • Funding—this determines how the departing owner will be paid. Funding may be obtained through insurance coverage such as life, disability and business continuation insurance.  Others opt for installment purchases dependent on cash flow, or through savings generated in a sinking fund.

There are two kinds of buy-sell agreement that you and your heirlooms can enter into—mandatory and optional buy-out. In mandatory buy-sell agreement, the child who is involved in the business will be obligated to purchase your shares in the company when you die. Funding could come from the options mentioned earlier. This is the more recommended type of buy-sell agreement because you can be assured that your business stays within the company once you are gone.

But if the buy-sell agreement is optional, there should be a right of first refusal to prevent your children from transferring their shares to a third party without offering these first to the son or daughter involved in the business. This would prevent them from selling their stakes in your company to other people, or those who are outside of your family.

Since the son or daughter who is involved in the family business appears to be favored in a buy-sell agreement, there’s one way for you to balance things out, so to speak. You can leave your other personal assets to the other children who are not involved in the business. For example, you can name them as primary beneficiaries of your home to make up for the fact that you are basically leaving your business to your son or daughter who is working for your company.

Giving the Business to All Your Children

If neither of those two options appeals to you, then you could just leave your business to all your children. If you have two children, you can give 51 percent to the child who is involved in the business. The other child gets the other 49 percent. Then you can make a writing or agreement that the child with who’s involved in the business will buy his/her sibling’s shares at a predetermined time.

There are pros and cons in this arrangement.

One major advantage of this arrangement is that you won’t have to take any cash out of your business to pay for the life insurance premiums which would later be used by the child involved in the company in buying your share.  This means that your company will have more opportunity to grow as it won’t have to allocate part of its income in paying for rather expensive life insurance policies.

Another advantage is that the child who’s not working in the company won’t feel left out with the way you divided the shares. It’s unlikely for the child to feel slighted with the way you divided the shares especially if you make him/her understand that the higher percentage of shares is a reward for the other sibling who has been helping out the company.

However, a disadvantage of this agreement is that your children are hitched together. If the child who gets the majority of the shares screws up or fails to keep the business profitable, then the other child will have to pay the price as well.  You could also argue that the child who has majority stake has undue pressure to perform because the fortunes of his siblings depend on him.

If this doesn’t sound appealing to you, you might even want to ask your children about how you can divide your business fairly. The child who’s involved in the business may even ask his sibling to do some consulting work for the company just to even things out.

Planning Ahead

Regardless of the arrangement you eventually decide to adapt in dividing your business assets to your children, you should plan now how you will be transferring your wealth to your family members.  Doing so would spare your children a lot of worries by the time that you have to leave the company due to disability and even death.

This underlines the need to plan your timeline for the transfer of your wealth. By planning early on, you will be able to divide your fortunes fairly to your children. It can prevent any animosity amongst your kin, especially when there is one child who is heavily involved in the operations of your business. You want to reward him/her for helping you out but not in a way that would offend his/her siblings, right?

There are several things that you need to ask yourself in planning your estate:

  1. How long do you think you will work?
  2. What are your sources of income once you retire?
  3. Do you want to continue working for the business if you have given up your position/retired?
  4. Do you prefer a traditional, leisurely retirement; one which you are no longer involved in the final decision-making in your company?

By answering these questions, you can have a better perspective of your overall financial situation and estate plan. You can then work out an estate plan that would be in sync with your goals as well as those of your kin.

Once you have made up your mind on when to divide your estate fairly among your children, look for a financial planner and an attorney who have solid experiences in succession planning.

Unexpected life events should not only be the reason for you to start planning about succession and distribution of your wealth. Planning early also means that you and your family will have more time for in-depth conversations, so you can respond to the concerns of your children and spouse.

The pros like the financial planner and attorney can give you sound advice on how to deal with the concerns of your family members. They will also be there to support you through the various legal and documentary requirements needed in distributing wealth to your children.

The most important part is to open your communication lines with your family, especially your children. Keep the conversation healthy by sticking to the issue at hand. You must also deal with any emotions such as feelings of insecurity and jealousy by speaking to each child, if you think you must.

The bottom line is that by planning your succession early on and having this communicated with your children, you can look forward to a future wherein your business flourishes and no cracks whatsoever on the foundation of your family.

GST Bill India

India will finally become a developed nation with GST

Aug 14, 2016 Posted by Sanjiv 1 Comment

It has been hailed as the biggest tax reform in India’s 70-year history as an independent nation. The good and services tax (GST) bill was passed into law by Rajya Sabha last August 3. With its implementation starting on April 1, 2017, it will create a national value added tax in India and create a common national market in the country of 1.2 billion people.

The GST has been billed as a game changer for the Indian economy. It will develop a common Indian market, minimize the cascading effect of the tax on the cost of goods and services, and affect almost all aspects of the business operation in the country—from the pricing of products and services, supply chain, accounting, and tax compliance.

The GST is basically a ‘destination based tax’ meaning it will be levied on where the goods or services as consumed, and not where they are produced.  It puts an end to the complicated, indirect tax system in India where the Center and the State levy overlapping taxes.

There have been proposals to amend the Constitution and change India’s  tax system with the GST. Then Prime Minister Atal Bihari Vajpayee had initiated the discussions on the GST.  In 2006, Congress had looked into it. In March 2011, a constitution amendment bill was introduced but was lapped with the dissolution of the 15th Lok Sabha.

The enactment of the GST is definitely one of the highlights of Prime Minister Narendra Modi’s reign.

Why GST will move India Forward ?

  1. The GST is a single tax levied on goods and services, from the manufacturer to the consumer. It subsumes various Central level taxes such as Central Excise duty, additional excise duty, service tax, countervailing duty, and special additional duty of customs. It also subsumes state-level taxes like sales tax, entertainment tax, purchase tax, entry tax, taxes on a lottery, betting, and gambling.
  2. GST is defined as any tax on goods and services other than alcohol for human consumption. It won’t also include taxes on petroleum products and stamp duty on an immovable property because these provide substantial revenue to the states.
  3. A centralized GST council will be set up. It will decide which taxes can be levied by states and which can be subsumed into the GST.
  4. The GST will be composed of central and state minister in charge of the finance portfolio. A dispute resolution mechanism will be established to resolve disputes regarding the GST.
  5. Petroleum products like crude, high-speed diesel and natural gas shall be subject to GST on a date to be determined by the GST council.
  6. Taxes on entertainment at panchayat, municipality, or district level will continue to be levied by states.
  7. States will continue to levy stamp duties which are typically imposed on a legal agreement by the central government.

Benefits

The following are the expected benefits of GST on the Indian economy:

  1. Simplify taxation. GST will replace 17 indirect taxes that various states and the Central government levy on goods and services. It is also expected to reduce compliance costs.
  1. Reduce tax evasion. With a simplified taxation system, more traders will be encouraged to pay taxes.

For instance, a mobile phone distributor buys mobile phones from a manufacturer and sells it to a wholesaler.  In the present system, the distributor has to bear the burden of paying excise duty. Thus, he’d rather pay without invoice as it can add up to his total costs.

But with the GST in full effect, the distributor will gain credit for all the taxes paid at the previous stage. This would encourage him to pay with an invoice. Thus, it is expected that all traders will opt for taking a bill for their purchases.

  1. No more long queues at a checkpoint. Long queues of trucks at interstate checkpoints are one of the familiar sights in India. State authorities would have to review and examine freight then apply the relevant taxes and fees.

In fact, Indian trucks average a mere 80,000 kilometers a year no thanks to these delays and gridlocks. In comparison, trucks bringing various commodities across the US average 400,000 a year.

With the GST in full effect, those long lines at interstate checkpoints would be a thing of the past.

  1. Encourage growth of small entrepreneurs. Because of the simplified taxation system, small entrepreneurs can set up a business in any state of the country without having to worry about tax differences. GST basically removes location bias, and can encourage enterprising citizens to set up businesses in undeveloped locations.
  1. Improve GDP. The Finance Commission had commissioned a study that showed India’s GDP will improve to about 2 percent after the implementation of the GST.
  1. Goods/Services to become cheaper. For consumers, the GST will also mean lower prices of most goods and services except for liquor and tobacco. With the GST, overlapping taxes will no longer affect the prices of commodities. For example, the construction and building materials industry are projected to be one of the biggest beneficiaries of the GST thus products like paints and cement are absolutely going down. Moviegoers, meanwhile, will be paying less for a movie ticket as the GST will bring down the high 27 percent entertainment tax.

Effect on Key Industries

Many key sectors of India’s economy are projected to benefit from GST. Among these are:

  1. The Information technology sector will benefit from the elimination of multiple levies, and this is projected to result to deeper penetration of digital services in the country.

In India, most IT firms have different delivery centers and offices servicing a single contract. But with the GST rolled out, there’s a possibility that firms would require each delivery center to issue a separate invoice to a contracting party. The costs of electronic products like mobile phones and laptops are also anticipated to rise as duty on manufactured goods could go up to 18 percent from the current base of 14 percent.

  1. Fast moving consumer goods. On the positive side, companies in the FMCG market will see a substantial reduction in their logistics and distribution costs. It has been shown that FMCG firms pay as much as 25 percent in taxes due to various levies like VAT, entry tax, and excise duty. With the GST, there could be significant reduction in taxes of up to 17 percent.

On the flip side, however, prices may increase by 20 percent if the recommended 40 percent GST for tobacco and aerated beverages is approved.

  1. E-commerce. The Indian e-commerce industry is seen as one of the biggest beneficiaries of the GST. The sector’s growth has long been hampered by an archaic tax regime. After all, the old tax structure was created long before the e-commerce industry was born. Industry experts believe that the unified tax system will help the e-commerce sector to expand and spur the growth of online retail startups.

With the GST, dual taxation will be avoided. In the old system, states often have to ask where to levy the tax—the place where the seller is located, or the place where the buyer is located.

With the GST everything is clear now—the tax will be in the state where the consumer resides. Thus there will be no need to pay for other taxes like entry tax, VAT on sales, and excise on manufacturing.

The GST also means there will be no complicated paperwork that buyers online would have to accomplish. In 2015, several e-commerce firms like Amazon India and Snapdeal ceased delivering products in the northern Indian states of Uttar Pradesh and Uttarakhand because tax authorities in those states required the filing of VAT declaration form at the time of delivery.

  1. Buying Cars will become cheaper – Prices of vehicles could drop by as much as 8 percent as a result of lower taxes. However, the demand for commercial vehicles like trucks and delivery vans may be affected in the medium term because companies would no longer need to expand their fleet due reduced time at checkpoints which translate to greater efficiency of their fleet.
  1. Expect More Movies Soon – Film producers and multiplex players are among the most taxed sectors in the country, having to deal with service tax, uniform tax, and entertainment tax. But with the GST, there will be uniformity in taxation and it is projected that taxes could go down by as much as 4 percent.

However, the new law will not be beneficial to all sectors of the economy. It will hurt certain industries such as the following:

  1. Airline industry. Flying will become more expensive in India. GST will replace service tax on fares which range between 6 and 9 percent, depending on the class of travel. But with GST, that rate will be between 15 and 18 percent.  Meaning, it will better for you to purchase tickets from the United States.
  1. Insurance/ financial sectors. Insurance firms are likely to hike their premiums as taxes will go up to 300 basis points. Investors, meanwhile, will have to pay more for mutual fund products given that taxes would push it by 3 percent.
  1. The rollout of the GST could lead to the higher price of medications in the country. The GST can likely increase indirect tax by 60 percent, which pharmaceutical firms will likely pass on to consumers.

Challenges

Aside from the negative impact of the new tax system on certain sectors of the Indian economy, there are also other challenges that need to be hurled such as:

  1. It can hurt the country’s own manufacturing industry – With Modi’s Government big push towards the “Make In India” Campaign – this might be a setback 

One of the worries of those who opposed the GST is that it can lead to imports being cheaper compared to goods produced in India. Under the GST imports are entitled to a set-off against the final selling price which is not permissible under the existing tax regime.

Once the GST has been rolled out, it would replace taxes like countervailing duty, a special additional duty of customs, among others. With lesser taxes, the prices of imported goods in the market will likely go down as well.

That would have a detrimental effect on the manufacturing sector in India, which is beset by cumbersome labor, high taxes and various regulatory laws in most states. As such, there is a fear that the GST would hurt the Make in India campaign.

  1. India will be implementing a complicated tax regime.

India will have the most complex version of a GST in the world. In most countries, GST pertains to one tax for all commodities and service. It is also applied throughout the nation.

In India, the central government and the states are allowed to concurrently levy GSTs.  States can also levy service tax, which is a central levy. In effect, there will be 31 GST enactments (for the 29 Indian states and the territories of Delhi and Puducherry) needed.

Moreover, states will be able to levy sales on potable alcohol, aviation fuel, diesel, and petrol. On the other hand, the central government can levy excise duty on all other goods including tobacco and tobacco products.

  1. Other issues to be addressed.

There will also be a lot of issues that need to be addressed on e-commerce transaction and restricted credit. Although each state will have its own GST, there will be multiple rules for each act. Moreover, there will be separate credit rules for integrated GST, central GST, and state GST. Studies also suggest there will be a substantial increase in the costs of paperwork and compliance.

With these issues to be addressed, many quarters are calling for the implementation in stages. The argument that this strategy will reveal possible hurdles in need of attention, as well as improving the IT infrastructure that is vital to a successful GST.

Although there are apprehensions on the implementation of the GT one thing is for sure—many sectors of the economy are looking forward to the day when the GST will be finally implemented. From the looks of it, this could be one way to help the third largest economy in Asia expand even further.

Tax Deduction Strategies for Small Businesses

Apr 12, 2015 Posted by Sanjiv No Comments

As a small business owner, you can utilize a proactive approach and seize all opportunities available for conducting tax deductions as provided for under the law. Overlooking certain crucial write-offs leads to a bloated tax bill. Changes to the recent tax law have altered how Section 179 on deduction on bonus depreciation works. You can maximize write-offs for your home office and get deductions for business travel and automobiles, along with tax shelters for real estate property.

  1. Tapping into Major Tax Savings as per Section 179 Depreciation

A small business can benefit through huge increment in First-Year depreciation allowance as covered by Section 179. Following this law, you can deduct full cost of most used and new business personal property. The maximum amount provided for here got gradually boosted for 2009 from $25,000 to $250,000. Later on, the 2012 American Taxpayer Relief Act (ATRA) preserved the $500,000 maximum deduction adopted by the 2010 Small Business Jobs Act for two years. This provision was backdated to 1st of January 2012 and remained effective through 31st December 2013.

  1. Claiming Bonus Depreciation for All Qualified Assets

A business can lay claim to “bonus depreciation” for assets which are qualified and placed in service during the whole year. This business tax credit applies to the following:

  • Property with 20 years or below of cost recovery period
  • Qualified leasehold improvements
  • Depreciable software which is not amortized for over 15 years
  • Water utility property

 

  1. Triggering Quicker Write-Offs as per Section 179 Depreciation

It is possible to maximize Section 179 expensing deduction by undertaking some shrewd planning of your taxes through the ways below:

  • You can claim the allowance accrued through compensation payments if your company zeroes out its taxable income. The tax law limits annual deduction to amount of income taxable.
  • Boost the limit of your business income, which should include that accrued from your active businesses.
  • Maximize business percentage if claiming allowance for assets partially utilized for non-business reasons.

 

  1. Larger Deductions for ‘Heavy’ SUVs according to Section 179

If you opt to deduct annual expenditure as opposed to using standard mileage allowance, take note of an appreciably large tax advantage if owning heavy-duty vans, pickups and SUVs. These vehicles have gross vehicle weight rating or GVWR of over 6,000 pounds from the manufacturer and are viewed as “trucks” for purposes of taxation.

Such heavy-duty vehicles depreciate more rapidly than regular passenger vehicles, when used intensively for business purposes.

  1. Deductions of Fuel Tax for Business Vehicles

You may deduct automotive expenses via a standard mileage rate, set each year by the IRS. Doing this sets you free from having to account for actual expenditure incurred. For instance, business drivers got 56.5 cents for each mile in 2013.

  1. Tax-Free Family Vehicles as part of Business Deductions

Operation and maintenance costs are deductible for cars utilized in doing business, which includes depreciation. Your auto repair firm may provide cars for the whole family in this case. The business you own can deduct the entire amount of operating costs if your family members are employed by the enterprise. Car expenses which are deductable include:

  • Cost of gasoline
  • Repairs,
  • Insurance
  • Interest on car loans
  • Depreciation
  • Licenses
  • Taxes
  • Garage rents
  • Parking tolls and fees

 

  1. Writing off Home Furniture and Computer as part of Self-Employed Tax Deductions

Under Section 179, many taxpayers who are self-employed may deduct purchases for equipment, as opposed to capitalizing them. This section applies to the vast number of business assets, including furniture and computers meant for domestic use.

  1. Owning Your Business Premises

Once profits of your company start growing and business stabilizes, consider owning as opposed to renting your quarters. When evaluating the comparative costs, think of a reasonable time-period, such as of 10 years and factor into your calculations purchase price of your desired building at a prime location.

  1. Sheltering Real Estate Property of up to $25,000

Prices of real estate have recently gone down in many places, presenting great opportunities for investment. As well, business owners can enjoy tax shelters for investing in property. One has to own a 10 percent minimum portion of such investment property without involving limited partnership interests, apart from actively managing it. Business tax credit of 10 percent is available too for fixing old buildings, which changes to 20 percent if the building has historic significance.

  1. Turning Home into Rental Property

Many home owners have been adversely affected by recent devaluation in real estate property. This even gets worse due to inability of deducting loss from selling your principal residence.

Turning your home into rental property is a brilliant strategy in such situations. You only require holding it out for rent while relocating, before deducting losses once the place is sold. This is a shrewd tax move which capitalizes on an important distinction that applies to business or investment property.

Tax Credit on Car Expenses: Standard Mileage Rate vs. Actual Expenses

Apr 8, 2015 Posted by Sanjiv No Comments

Many people are still confused on what amount to deduct from their tax for expenses incurred on a personal vehicle’s repairs. They are given two options: deducting the actual expenses incurred, or deducting the amount computed by using the standard mileage rate. Which one is better? Which will benefit the taxpayer more?

In order to answer these questions, it would be best to get a clearer understanding of the two methods.

Using Actual Expenses

This is straightforward enough: deduct the amount actually spent or incurred on the operation, repairs and maintenance of a car or vehicle.

There must be a clear indication on which part of the amount was used for personal purposes and which part was for business use.

To come up with the final amount, the following are included in the computation:

  • Expenses on gas, oil and lubricants
  • Toll fees paid
  • Lease payments made
  • License fees
  • Insurance premiums paid
  • Rental and other fees directly related to the car, such as garage rental and parking fees
  • Cost of repairs (includes cost of spare parts and labor)
  • Cost of tires
  • Depreciation

Using the Standard Mileage Rate

Individuals will use a standard mileage rate set by the tax authorities. For tax year 2014, the rate was $0.56 for every mile. Only the miles used for business will be allowed as tax credit. This means that, in this method, the individual must keep track of the miles driven by the car, especially the miles driven for business.

The following are exclusions in this method; meaning, they cannot be claimed as deductions if the individual chooses to use the standard mileage rate, since they are already considered to be part of the rate set forth by the IRS.

  • Fees incurred on registration of vehicle
  • Insurance premiums on the vehicle
  • Fuel and maintenance expenses, including repairs
  • Lease payments on the vehicle, if any

A Comparison

In both cases, there is a need to divide the expenses between personal and business expense. An individual can only claim expenses on cars, including for auto repairs, if they have been used for business purposes.

Compared to the actual expenses method, choosing the standard mileage rate comes with several limitations or restrictions. For example, once it was chosen and clearly stated on the individual’s tax return, it is irrevocable, at least until the following tax year. Any amendments of the return within the year will also have to follow this method, even if the individual wants to switch to using the actual expenses.

Experts recommend that owners of new vehicles go for the standard mileage rate method during the first year that they use their car for business purposes. In the succeeding years, it would be up to the individual whether he wants to switch to using the actual expenses, or stick to the standard mileage rate.

Clearly, the simpler option would be using the actual expenses, provided you have documentation (e.g. receipts, toll tickets) to back it up. It also has the advantage of letting the taxpayer have his expenses for car repairs as a deduction. This method is also more advantageous for those who drive only a few business miles.

When trying to decide which of the two would be better, try performing mock-computations. The one that gives you a greater amount of deduction is surely the better option.

 

Theft Loss Deduction -Should you claim it ?

Mar 14, 2015 Posted by Sanjiv No Comments

Theft Loss Deduction – Understanding what you can and can not deduct

The very thought of paying Uncle Sam becomes cumbersome. But again thinking of the benefits that you receive from tax deduction gives you relief. Out of the many areas where tax deduction can help, loss of uninsured properties due to theft is a significant one. In case you are a theft victim, there is no need to worry a lot. In order to know more about tax deduction pertaining to losses on account of theft, the following information will surely help.

As a taxpayer, you are provided deduction by the IRS in case you have suffered sudden loss of substantial properties without any negligence from your end. But you need to ensure that you meet all the requirements in order to avoid reporting any wrong deductions on tax returns.

As per the Federal Law, theft refers to confiscation of property by any individual with the intention of depriving another individual of that property. This act is undoubtedly illegal and is certainly punishable. Some of the known instances of theft are blackmailing, burglary, kidnapping for ransom, larceny, extortion and robbery. However, if you lose money and property i.e. if you have misplaced those, then that does not fall under the category of theft. But if you get threatened by a person with physical coercion when you are attempting to get back your wallet, this kind of loss gets elevated to category of theft and becomes deductible.

You need to produce the proof that you have lost your property on account of theft and the monetary amount of deduction should also be substantiated. In order to do this, as per the IRS, you need to show the precise time of loss and also provide ample proof that you own the pilfered properties. In case you fail to provide minute details of the event and your property, IRS would consider certain other types of proof that support the deduction.

The deductible loss for the money that has got stolen is equal to the sum of money you are unable to recover. In case of property thefts, the basis has to be determined by you. The IRS says that it requires you as a taxpayer to not receive any reimbursement from any insurance company if you are taking the deduction. Insured properties that get stoned are not eligible for tax deduction.

Tax deduction can help in losses due to theft if you follow the steps mentioned below in reporting the loss on tax return.

  • You need to download a copy of IRS form 4686.
  • You are required to complete the first item in Section A of the form and then list every piece of property that has got stolen. The detailed description of every property should be provided by you along with the location from where it had got stolen and also the date of originally acquiring the property.
  • Next, you need to move on to the item 2 of the form. This means that now you have to list the price that had to pay for every item that has not got stolen. Every detail should be provided and should be original.
  • The item 3 talks about the reimbursements. The list of reimbursement covers insurance payment that you have received for your property that got stolen.
  • Next you need to check if the totals listed under Item 2 and item 3 vary. If you find that the totals pertaining to item 3 are more than those under item 2, then you are required to list the increase under item 4.
  • In item 5 you need to list the probable market value of the items before the theft took place. Then after you come to item 6, you need to inform about the properties that are of no value to you. Against those stolen properties, you have to list $0 meaning that those are of no value to you.
  • In the line 7 you need to re-enter the figures from line 5. Again in line 8, you need to re-enter figures either from line 7 or line 2, depending on whichever figure is lower. Then you need to deduct or subtract item 3 from item 8. The result that arrives has to be entered on line 9.
  • Next, complete line 10 by adding the total of all the items on line 9. Line 11 is meant for entering the lower line of number 10 or $500. In line 12, you need to subtract line 11 from line 10 following which you need to enter the result.
  • Line 13 is complete when you enter the total of line 12s from all the form 4684 in total that you are filing. You need to enter the sum of line 4s from all the form 4684 in total in line 14 that you are filing with your taxes.
  • You should determine if the amount that you have entered in line 14 is greater than line 13. If it is, then you will get a capital gain from your losses due to theft and again the difference has to get added in line 15 and on Schedule D of your tax return. In case you enter a capital gain, you need not complete the test of the form.
  • Line 14 has to get deducted from line 13 and the result needs to be entered in line 16. You need to list in line 17 entering $0 in case the theft loss is not disastrous. Similarly you need to enter $0 on line 18 as well. The figure from line number 16 has to be entered in line 19.
  • Then you need to calculate 10% of your gross earnings from Form 1040 and also line 38 and then enter that figure in line number 20. The figure that you would get by subtracting line 20 from line 19 has to be entered in line 21.
  • After adding the lines 18 and 21 the result that comes has to be entered in line 22. All these would reveal you capital loss in total from the theft for income tax reasons. This result should be entered on Schedule a, line 20.