October 2021 Newsletter

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Happy October! With the 2021 tax filing season just a few months away from starting, the IRS is warning taxpayers to be on the lookout for signs that your identity has been stolen. This month’s newsletter alerts you to some of the common signs of identity theft and what you can do if you discover that you’re an identity theft victim.

Also in this month’s edition, learn about a bank secret that can be yours, tips for dealing with common accounts payable problems in your business, and more. Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.

IRS Warns of Identity Theft Signs

With identity thieves continuing to target the tax community, the IRS is urging you to learn the new signs of identity theft so you can react quickly to limit any damage.

The common signs of ID theft

Here are some of the common signs of identity theft according to the IRS:

  • In early 2022, you receive a refund before filing your 2021 tax return.
  • You receive a tax transcript you didn’t request from the IRS.
  • A notice that someone created an IRS online account without your consent.
  • You find out that more than one tax return was filed using your Social Security Number.
  • You receive tax documents from an employer you do not know.

Other signs of identity theft include:

  • Unexplained withdrawals on bank statements.
  • Mysterious credit card charges.
  • Your credit report shows accounts you didn’t open.
  • You are billed for services you didn’t use or receive calls about phantom debts.

What you can do

If you discover that you’re a victim of identity theft, consider taking the following action:

  • Notify creditors and banks. Most credit card companies offer protections to cardholders affected by ID theft. Generally, you can avoid liability for unauthorized charges exceeding $50. But if your ATM or debit card is stolen, report the theft immediately to avoid dire consequences.
  • Place a fraud alert on your credit report. To avoid long-lasting impact, contact any one of the three major credit reporting agencies—Equifax, Experian or TransUnion—to request a fraud alert. This covers all three of your credit files.
  • Report the theft to the Federal Trade Commission (FTC). Visit identitytheft.gov or call 877-438-4338. The FTC will provide a recovery plan and offer updates if you set up an account on the website.
  • Please call if you suspect any tax-related identity theft. If any of the previously mentioned signs of tax-related identity theft have happened to you, please call to schedule an appointment to discuss next steps.

 

This Bank Secret Can Be Yours. Know the way loans work…and use it to your advantage!

Every banker knows that the majority of the money they make on a loan is made in the first few years of the loan. By understanding this fact, you can greatly reduce the amount you pay when buying your house, paying off your student loan, or buying a car. Here is what you need to know:

Your payment never changes

When you obtain a loan, the components of that loan are interest, the number of years to repay the loan, the amount borrowed, and the monthly payment. Assuming a fixed rate note, the payment never changes. Here is an example of a $250,000 loan.

 

It is important to note that your payment in month one is $1,158 and your monthly payment thirty years later is the same amount…$1,158.

Each payment has two parts

What does change every month is what is inside each payment. Every loan payment has two parts. One is a payment that reduces the amount of money you owe, called principal. The other part of the payment is for the bank, called interest expense. Now look at the component parts of the first payment and then the last payment:

 

So while your monthly payment never changes, the amount used to reduce the loan each month varies DRAMATICALLY. Remember your total cost of borrowing $250,000 includes more than $166,000 in interest!

Use the knowledge to your advantage

Here’s how you can use this information to your advantage.

For new loans

  • Only sign up for loans that allow you to make pre-payments without penalty.
  • When borrowing money, keep some of your cash in reserve. Try to reserve a minimum of 10 to 20 percent of the amount borrowed. So in this example, try to reserve $25,000 to $50,000 in cash.
  • Immediately after getting the loan, consider using the excess cash as a pre-payment on the note. By doing this you can dramatically reduce the interest expense over the life of the note, all while keeping your payment constant. Even though your monthly payment may be a little higher, the extra payment amount will pay back the loan more quickly.

For existing loans

  • Create and look at your loan’s amortization table. This table shows how much of each payment is used to pay down the loan balance and how much goes to your lender as interest. In the above example, 67 percent of the first payment is for the bank, while only ½ of 1 percent of the last payment is for the bank.
  • Pay more to you than the bank. Aggressively prepay down any loan until more of each payment goes to you versus the bank. This is the crossover point of your loan.
  • Find your sweet spot. After hitting the crossover point, next consider the efficiency of each prepayment and determine when you consider your prepayment ineffective. No one would consider prepaying that last payment when interest expense is only $4.00. But if more than 25% of the payment goes to interest? Keep making prepayments.

Final thought

When you make a prepayment on a loan, reduce the loan balance by your prepayment, then look at the amortization table. See how many payments are eliminated with your prepayment and add up all the interest you save. You will be amazed by the result.

 

Tips For Dealing With Common Accounts Payable Problems

The accounts payable process is typically very labor-intensive for many small business owners. While moving to a paperless environment may help alleviate some of your accounts payable headaches, there will be new problems you’ll have to successfully navigate.

Here are some of the most encountered accounts payable problems and several solutions to consider.

Common problems with accounts payable

  • Double payment. A vendor sends you an invoice for $100. Your company promptly pays this vendor $100, but a short time later another payment for $100 goes out to the vendor. Sometimes this can be the fault of the vendor sending an invoice in different ways (i.e. via fax and e-mail). Or the vendor moves to digital invoicing and emails more than one person in your company, effectively duplicating the invoice electronically. Or even worse, you print out a digital invoice twice.
  • Vanishing invoices. Your company could get an invoice from a vendor and have that invoice get misplaced, or the invoice accidentally gets destroyed before ever making it into your A/P system. With digital invoices, how do you know which one is the original and which one is a duplicate?
  • Sending payment prior to delivery. There are sometimes benefits to paying an invoice as soon as possible. However, if your company pays an invoice before a shipment arrives, that could lead to an awkward conversation with your vendor if any of the shipment arrives with damaged or missing items.
  • Matching errors. A manual investigation is often required if a discrepancy is discovered between purchase orders, invoices and other documents. This often happens when multiple invoices are paid with one check, and the breakout of the invoices does not fit on the check stub or other payment documentation. It gets more complicated if your supplier applies payments haphazardly creating a past due account, all while you continue to pay the bills.

What you can do

  • Update your internal controls. Have your A/P team help update internal processes and document how invoices should be handled. Pay special attention to separation of duties and full use of purchase orders to ensure invoices are accurate.
  • Have one inbox for A/P. All e-mails with invoices should go to one inbox. This will help reduce the chances that an invoice will be received or paid twice. Limit access to this billing address.
  • Limit access to cash accounts. It’s more important than ever for someone without authorization to your company’s cash accounts to review bank reconciliations. Not only will this help to potentially uncover erroneous payments, but it could also help to uncover potential fraud that is occurring in your company.
  • Track key performance indicators. Create a report each month of all unpaid invoices and another report that shows payments made. Explore bank security features to identify duplicate payments and allows you to control checks that are confirmed for payment. Use your accounting software help identify duplicate dollar amounts and duplicate invoice numbers.
  • Be cautious with ACH. Giving a vendor automatic access to your firm’s checking account needs to be tightly controlled. Explore ways to ensure you are reviewing these auto payments on a timely basis and that you are receiving supporting invoicing of these payments.

Please call if you have any questions about improving your business’s accounts payable process.

 

Understanding the world of NFTs

The collectibles industry used to be defined by classic keepsakes such as stamps, coins, and trading cards. Today, a new kind of collectible called non-fungible tokens (NFTs) has exploded in popularity. From music to digital game pieces, NFTs are digital assets that sometimes sell for millions of dollars. Twitter co-founder Jack Dorsey sold his first-ever Tweet as an NFT for $2.9 million!

But is there any substance behind the hype? And what does it mean for you?

Understanding NFTs

NFTs offer a blockchain-created certificate of authenticity for any digital asset. This asset can be a piece of music, a token for a popular game, or a piece of digital art. To understand an NFT, consider its components:

Non-Fungible…Where cryptocurrency like a Bitcoin is designed to be readily tradable (fungible), non-fungible is just the opposite. There is one and only one of it.

Token…In this case the non-fungible identification is attached to a specific digital asset or token.

Therefore, each NFT is unique and can readily solve the problem of users creating multiple copies of a digital asset. In effect, Jack Dorsey’s original tweet cannot be copied or duplicated because of NFT technology!

Why NFTs are popular

Traditional artists rely on auction houses and galleries to sell their work. These galleries and auction houses authenticate the work as original. Now artists can sell digital works at the same prices as rare works of art by using NFTs to do the authentication work for them. It is so popular now that even companies are getting in on the action. For example, a Charmin digital brand was auctioned off to raise funds for charity.

Why some NFTs are so expensive

Just like physical collectibles, there’s a market for NFTs. Current NFT buyers tend to be tech workers and entrepreneurs who understand the intricacies of purchasing digital goods. Artists are also dipping their toe into the NFT waters. For instance, superstar artists like King of Leon and Steve Aoki have sold NFTs for millions of dollars. Just imagine if your favorite musician decided to record an exclusive piece of music and then only sell 100 copies of the song. How much would you pay?

What you need to know

Here’s what you need to know about getting involved with NFTs:

  • Large cash outlay not necessary to invest. There are multiple NFT marketplaces where you can get involved as a buyer without getting into 5- and 6-figure bidding battles. Some of the more popular marketplaces are Opensea, Rarible, SuperRare and Nifty Gateway.
  • Beware of fees to create NFTs. If you want to create your own NFT, you’ll likely spend hundreds of dollars in various fees to make your own tokens. If you end up selling your tokens, you may be able to cover the cost of these initial fees. If you struggle to sell your tokens, however, you’ll end up eating the cost of creating the tokens.
  • Do your research. Since NFTs are so new, there isn’t a lot of history to judge its performance. As with any investment, you could either make a fortune, lose everything you invested, or end up somewhere in between. And these digital assets are treated just like other property, so you would pay capital gains taxes if you sold an NFT at a profit.
  • NFTs require power. NFTs use blockchain technology. Blockchain technology requires power. Lots of it. There is growing concern on the energy usage for this new digital marketplace and whether it is sustainable.

Because NFTs are becoming so popular, so fast, many experts are leery of what the world of NFTs will look like in the future. Regulation is currently lacking, and legal precedence is unclear. While blockchain technology can verify your purchase, does owning the NFT of something really mean you own the asset? Will NFTs stand up in court? These are some of the questions being asked without concrete answers.

 

Ideas to Help Onboard New Employees

With today’s competitive labor market, it’s important that your company has an onboarding system ready to go when you get a prospective employee to say “Yes!” to joining your company. Here are some ideas:

  • Engage before day one. Once a contract is signed or a verbal acceptance given, candidates may still be hearing from other companies that they have interviewed with and could easily rescind their acceptance. So keep your company front of mind until day one by making periodic check-ins to answer any questions and ensure your new employee knows what to bring and do on their first day of work.
  • Immediately schedule one-on-one meetings with the supervisor. A study by Microsoft Analytics found that employees who got little or no one-on-one time with direct managers were more likely to be disengaged. Similarly in a LinkedIn survey, 72 percent of respondents said that such one-on-one time was the most important part of their onboarding process. Whether these meetings take place in person or virtually, consider scheduling several one-on-one meetings with the new employee’s manager throughout the first few months of employment.
  • Schedule meetings with other team members. In addition to scheduling one-on-one meetings with the new employee’s supervisor, consider scheduling meetings with other team members. These meetings will help the new employee further develop more personal connections with people throughout the company.
  • Ensure equipment arrives on time. With widespread supply chain disruptions still plaguing many industries, double-check with your suppliers that all necessary equipment arrives and is set up and tested prior to your new employee’s first day.
  • Develop milestones. Many new employees are unsure of their performance during the initial months of a new job. To help both the employee understand how they are doing and to give your business an idea of what tasks you want your new employee to be responsible for, consider developing a list of milestones to ensure the new employee is being properly utilized.

 

IRS Backlog of Historical Proportions. What you need to know if one of your tax returns is stuck

The IRS is coping with a backlog of historical proportions and it is impacting millions of taxpayers. According to IRS sources, as of July 31, there are still over 13 million tax returns that are to be processed. The nearly unprecedented delay is being attributed to the COVID-19 pandemic, under staffing at the IRS, and a slew of recent tax law changes. The challenge is how to navigate the IRS notices if you are caught up in this mess.

Complicating your tax life

  • You’ve filed for an extension via mail, but the IRS says you haven’t filed your return yet and issues notices and penalties.
  • You keep getting letters from the IRS after responding to initial inquiries.
  • You filed your tax return on time, but the IRS says it doesn’t have your return, even though you may have received a confirmation.

What you can do

While you may not be able to get your tax return processed any faster, there are steps you can take to stay informed and make it easier for the IRS to work with your tax situation:

  • Track your refund status. The IRS has developed an online tool, “Where’s My Refund?” that can provide updates. Find it at https://www.irs.gov/refunds.
  • Check out IRS2Go. The agency also provides a mobile app called IRS2Go that checks your tax refund status. You can see if your return has been received, approved, and sent.
  • Stay calm and keep responding. If the IRS sends you notices, keep detailed records of the notices and your timely replies. Eventually, they will get caught up. So keep good records by leaving a digital footprint and back up electronic records with paper versions.
  • Prior correspondence is your friend. When you’re replying to IRS notifications, attach copies of prior correspondence with your latest letter. Make it easy for the IRS to follow your paper trail by dating each response and keeping the most recent response on top.
  • Keep proof of delivery. Use express delivery or certified mail to confirm that the IRS receives your responses in a timely manner.

Remember that the IRS is working as quickly as it can to clear this backlog. Please call if you have any questions about a tax return you believe to be stuck because of this situation.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

Advanced Child Tax Credit payments from the IRS

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Beginning in July 2021, the IRS began sending payments to qualifying families.  A qualifying family is one that has a dependent child aged 17 (in 2021) or younger that was claimed on the 2020 tax return.

The tax payments that the IRS is sending will be direct deposited or paid by check.  Each payment is 1/12th of the full amount.  Please keep track how much you receive.

Credit amount:

  • The full credit amount for 2021 per child aged 6 to 17 is $3,000.
  • The full credit amount for 2021 per child aged under 6 is $3,600.

Credit phase out begins:

  • $75,000 single or married filing separate
  • $112,500 head of household
  • $150,000 married filing joint.

How will this affect your 2021 tax return?  The amount received will be offset against the full qualified amount.  For example:  One child aged 10 would qualify for $3,000.  If the advanced credit of $1,500 was received for July – December, then the credit on the tax return would be $1,500.

If you have questions, please contact our office we are happy to help! 615-750-5537.

Key Changes to the COVID-19 Economic Injury Disaster Loans Program

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On September 8, 2021, the U.S. Small Business Administration (SBA) announced following key changes to the COVID-19 Economic Injury Disaster Loans (EIDL) program to make it easier for the small business communities to access the more than $150 billion in funding available for loans:

  • Maximum loan cap increased from $500,000 to $2 million
  • Use of funds was expanded to include payment and pre-payment of business non-federal debt incurred at any time (past or future) and payment of federal debt
  • Extend the deferment period to 24 months from origination for all loans (existing loans with a less than 24-month deferment will be adjusted)
  • Affiliation requirements simplified to an affiliate is a business that you control or in which you have 50% of more ownership
  • Developed additional path to meet program size standards for businesses assigned a NAICS code beginning with 61, 71, 72, 213, 3121, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812
  • Exclusivity Period: From September 8, 2021 to October 8, 2021, the above policy changes will be applicable to applications for <$500K while applications for >$500K will not be approved and therefore receive the policy changes until October 8, 2021
  • See more details on the COVID-19 September 8, 2021 Policy Changes.

Contributed by PHB staff auditor, Binh Ngo

 

Sources:

Drew, J. (2021, September 9). SBA quadruples Covid-19 EIDL limit to $2 million. Journal of Accountancy. Retrieved September 13, 2021, from https://www.journalofaccountancy.com/news/2021/sep/sba-raises-covid-19-eidl-limit-2-million.html?utm_source=mnl%3Aalerts&amp;utm_medium=email&amp;utm_campaign=09Sep2021.

SBA. (2021, September 8). COVID EIDL Program Updates Effective September 8, 2021. Retrieved from https://www.sba.gov/document/support-covid-19-eidl-program-updates

September 2021 Newsletter

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With a little over four months remaining until you can begin filing your 2021 tax return, now’s the time to kick your tax planning into high gear. We are here to help with that! Also learn how to give your business a financial check-up,  about the inflation we are experiencing and what you can do about it. We have also included some info about state income taxes and how they compare.

Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.

Time to Schedule Your Tax Planning Session

Now is the time to schedule a tax planning appointment. If you are on the fence, here are some things to consider:

  • It can make a difference. This is especially true if you have a major event that occurs during the year. For example:
    Even in uneventful years, external forces like new tax laws can be managed if planned for in advance.

    • Selling a house? You can avoid taxes if primary residence requirements are met.
    • Starting a business? Choosing the correct entity can lower your taxes every year!
    • Getting ready to retire? Properly balancing the different revenue streams (part-time wages, Social Security benefits, IRA distributions and more) has a huge impact on your tax liability.
  • Put yourself incontrol. Timing is important when it comes to minimizing taxes, and the timing is often in your control. For instance, bundling multiple years of charitable contributions into one year can create an opportunity to itemize deductions. Plus holding investments for longer than one year to get a lower tax rate, and making efficient retirement withdrawals are other examples of prudent tax strategies that you control.
  • There are tax planning opportunities for every level of income. There are tax strategies to be implemented at all income levels, not just those at the top of the tax bracket. Tax deductions are available for student loan interest, IRA contributions and others even if you claim the standard deduction. Certain tax credits (called refundable credits) will increase your refund even if you don’t owe taxes. Missing any of these tax breaks can unnecessarily increase your taxes.
  • There may still be COVID tax breaks. While it’s true that many one-time tax breaks were offered for only the 2020 tax year, there are still plenty of COVID tax breaks available in 2021. Some of these tax breaks include an expanded child tax credit, an increased child and dependent care credit, the ability to roll forward unused funds in your Flexible Spending Account and charitable deductions that are available to all taxpayers, even if you don’t itemize your deductions.
  • You have help. Tax planning is often as simple as looking for ways to reduce taxable income, delay a tax bill, increase tax deductions, and take advantage of all available tax credits. The best place to start is to bolster your level of tax knowledge by picking up the phone and asking for assistance.

Thankfully, it’s not too late to get on track for 2021. If you haven’t scheduled a tax planning session, now is a great time to do so.

Give Your Business an End-of-Summer Check-up

As summer winds down, your business’s financial statements may be due for a quick check-up. Here are several review suggestions to help determine the health of your business prior to year end.

  • Balance sheet reconciliations. Reconcile each asset and liability account every quarter. A well-supported balance sheet can guide decisions about cash reserves, debt financing, inventory management, receivables, payables, and property. Regular monitoring can highlight vulnerabilities, providing time for corrective action.
  • Debt service coverage. Do you have enough cash to adequately handle principal and interest payments? Calculate your cash flow to ensure you can handle both current and future monthly loan payments.
  • Projected revenue. Take a look at your income statements and see how your revenue has performed so far this year versus what you thought your revenue was going to be. If revenue varies from what you expect, get with your sales and marketing team to pinpoint what has gone better, or worse, than expected.
  • Projected expenses. Put a stop to disappearing cash by conducting a variance analysis of your expenses. What did you expect to spend so far in 2021 on salaries and wages compared to what you actually paid your employees? What about other big expenses like rent or insurance? Take the amount of money actually spent so far in 2021 in each of your major expense accounts and compare it to your spending forecast. Then create an updated forecast for the balance of the year.

A review of your financial statements now will help you be prepared if you need to navigate an obstacle or capitalize on potential opportunities to expand your business. Please call if you have any questions on how to dig deeper in your analysis of your business’s financial statements.

It’s BACK! Inflation is Among Us. How to shield your money from inflation.

Recent high inflation rates are driving up the price for almost everything and eroding the value of your money. With varying opinions on the potential duration of the current inflation surge, it’s important to understand the causes and how you can protect your money.

Possible causes of this inflation

While the root causes of inflation are not always easy to identify, the premise is simple – prices are going up for goods and services. This is often because demand is higher than supply. Here are some of the basic drivers of today’s inflation.

  • The demand-pull situation. Demand for a product increases but the supply remains the same. Think of a vendor selling ponchos at a state fair. If it rains, demand is going to spike and fair-goers are willing to pay up to keep dry. This situation is rampant during the pandemic, as we all see runs on things like toilet paper and hand sanitizer. And now we are seeing pent-up demand being released, as some of the pandemic restrictions are eased. An example of this is popular vacation locations being all booked in advance.
  • The cost-push situation. Demand stays constant but supply is reduced. An example of this is a lower-yield crop season when a major drought hits a region. Consumers still want their dinner salads, but lettuce is sparse. So retailers charge more to cover their increased costs. Or when paper mills switched production to handle higher toilet paper demand, pulp used for paper and packaging had supply reductions creating a shortage which increased their prices.
  • Factoring in the money supply. The more money there is available to spend (high money supply), the more the demand on all goods and services goes up. This is being manifested in wage increases as employers are having a hard time filling jobs and is also the result of many of the government spending programs during the pandemic.

Ideas to protect yourself during high inflation

  • Alternative savings that is NOT cash. The value of your money sitting in your wallet or in low interest bank accounts is shrinking before your eyes. The past year has seen the highest inflation rates in the last decade at 5.4%, according to the Consumer Price Index (CPI). That means if your savings account is earning 0.6%, you’ve lost 4.8% in purchasing power over the last 12 months. Get your money to work for you by considering:
    • Low risk, dividend-paying stocks
    • CDs, bonds and other investments with various maturities to prepare for higher rates
    • Direct lending vehicles through vetted, respected facilitators
    • Investing directly in property, small businesses or other tangible assets
    • Invest in yourself to learn a new trade or skill
  • Lock in fixed rates on debt. Inflation can be your friend if you have a low interest, fixed-rate loan. For example, inflation will tend to increase the value of your house over time, yet your monthly payment will remain the same. So borrowing money at a low fixed interest rate, while the underlying property value increases with inflation, can be a strategy to consider.
  • Delay large expenditures. Do your part to reduce demand by postponing large purchases. Consider delaying the purchase of a new car, adding to your home or taking an overseas trip until demand flattens and prices come back to a normal rate.

It’s impossible to avoid the effects of high inflation altogether, but with some smart investing and the will-power to temporarily curb spending, you can reduce inflation’s impact on your personal bottom line.

The Busy Business Owner: Get Back 15 Minutes a Day

Meetings, phone calls, emails, text messages, and water cooler conversations with your employees constantly bombard you as a business owner. Freeing up even just another 15 minutes a day could dramatically improve both your workflow and peace of mind. Here are some suggestions for getting back 15 minutes every day:

  • Use your phone. Whenever possible, use your phone instead of an email. Oftentimes talking with someone directly is more efficient than spending the time to compose an email. Plus, email chains can fill your inbox and require precious minutes to read and decipher. Using the phone can also help avoid potential misunderstandings, as a person’s tone of voice conveys information that may be lost or misinterpreted when shared via a written message.
  • Be brief with emails. Tech entrepreneurs Mark Cuban and Jeff Bezos are known for their brief emails that consist of only a couple words. In situations where you do use email, consider crafting a response that is only several words in length. And remember the golden rule of emails: send fewer emails to receive fewer emails.
  • Plan your meetings. Face-to-face time with colleagues, vendors, and customers is often productive and essential for growing a business. On the other hand, meetings can be a huge waste of time if not properly planned. Establish clear goals for a meeting in advance so your team can focus on priorities and get back to work.
  • Minimize distractions. Business owners enjoy developing a rapport with their employees. These personal conversations, however, need to have boundaries so that both you and your employee can stay on task. Tell your team if there’s a day you don’t have time for small talk. Consider putting an old-fashioned Do Not Disturb sign on your door when you need to get things done.
  • Delegate when possible. If you’re a small business owner who built a company from scratch, you may be reluctant to relinquish control over day-to-day operations. But failure to delegate can sap time from more important tasks like planning, building relationships with key vendors, and growing your customer base. So develop a plan to train your employees to assume more responsibility over time.

Fifteen minutes may not seem like much, but a busy business owner can work wonders with just a little more time every day.

Even Non-Income Tax States Have Taxes

With the increased popularity of working-at-home, you may consider moving to one of the nine states that don’t impose an individual income tax. Before doing so, you should understand how each of these states raises its revenue. And then consider how you can reduce your tax obligation in your current home state.

Here’s some help.

According to Kiplinger and the Tax Foundation, here is how the nine states that collect no individual income taxes collect money from their residents.

Alaska

  • Alaska is one of five states with no sales tax, but local jurisdictions may impose sales taxes, with rates reaching 7.5%. The average is 1.76%.
  • The median property tax rate is $1,182 per $100,000 of assessed home value, slightly above the national average.

Florida

  • The statewide sales tax is 6%, but local jurisdictions can add up to 2.5%, with an average combined rate of 7.08%.
  • The median property tax rate is $830 per $100,000 of assessed home value, a middle-of-the-road figure nationally.

Nevada

  • The state sales tax rate is 6.85% while local jurisdictions can add up to 1.53%. The average combined rate is a lofty 8.23%.
  • The median property tax rate is $533 per $100,000 of assessed home value, one of the lowest in the country.

New Hampshire

  • Besides no state income tax, this tax haven has no state or local sales taxes.
  • Property tax is the main revenue source. The median property tax rate is $2,050 per $100,000 of assessed home value, the third-highest rate in the U.S.

South Dakota

  • The 4.5% state tax may increase to an average combined rate of 6.4%, below the national average.
  • The median property tax rate is $1,219 per $100,000 of assessed home value, above the national average.

Tennessee

  • Tennessee previously had an income tax on dividends and interest, but it disappeared after 2020. The current 7% state sales tax rate may be combined with a 2.75% on sales of single items for an overall maximum rate of 9.55%, the highest in the U.S.
  • The median property tax rate is $636 per $100,000 of assessed home value, below the national average.

Texas

  • The sales tax in the Lone Star state is 6.25%, plus local jurisdictions can add up to 2%, with an average combined rate of 8.19%, which is well above the national average.
  • The median property tax rate is $1,692 per $100,000 of assessed home value, which is a tie for the seventh-highest rate in the country.

Washington

  • Municipalities can increase the 6.5% state levy by 4% for an average combined rate of 9.23%, the fourth-highest in the nation.
  • The median property tax rate is $929 per $100,000 of assessed home value. This is middle of the pack.
  • Unlike the other eight states, Washington has an estate tax, with a $2.193 million exemption (indexed for inflation). Tax rates range from 10% to 20%.

Wyoming

  • The 4% sales tax may be increased by municipalities for a combined rate of 5.33%. This is the eighth-lowest in the U.S.
  • The median property tax rate is $575 per $100,000 of assessed home value, tied for the tenth-lowest in the nation.

Here are some ideas to lower your property and sales tax bills:

Appeal your property’s valuation assessment. You may be able to lower your property tax bill by providing evidence that your home’s assessed value should be lower. Start your appeals process by contacting your county assessor’s office. Some appeals can be done online, while others may require a visit to your assessor’s local office.

Shop during tax-free weekends. Many states feature one or two weekends each year where sales taxes are suspended. These sales tax holidays sometimes correspond to high volume shopping periods, such as back-to-school sales in late summer.

Deduct sales taxes on your Form 1040 tax return. You’re allowed to deduct up to $10,000 of combined property taxes and sales taxes on your tax return, so be sure to look into this deduction if you itemize your Schedule A deductions. The only potential headache if you deduct sales taxes is needing to track and record all sales taxes you’ve paid throughout the year.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

August 2021 Newsletter

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This year, summer may mean more money for you due to the child tax credit advance payments. Find out what you need to know about these payments as you read on. Also learn how to maximize your vehicle expense deduction if you’re a business owner, several things to consider when looking for your next banking relationship, and how to protect your privacy from companies trying to pry into your online life.

Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.

Get Your Child Tax Credit Payments NOW!

The first advance payment from the newly expanded child tax credit was recently sent out by the IRS. Payments are scheduled to be made on the 15th of each month through December.

Here’s what you need to know about the child tax credit and the advance payments.

Background

For the 2021 tax year, an expanded child tax credit reduces your tax bill by $3,600 if you have a qualifying child that’s age 5 or under, or by $3,000 if you have a qualifying child from age 6 to 17.

If the total amount of the child tax credit for your family exceeds the total taxes you owe, you’ll receive the amount of the credit as a refund.

Child tax credit advance payments

Instead of waiting to file your tax return to receive the entire amount of your child tax credit, the IRS is directed by Congress to send 50% of the credit to you in six monthly payments beginning in July 2021.

For example, say you have three kids, ages 10, 12 and 16. Also assume your income is not too high and your children meet the IRS definition of a qualifying child. Instead of waiting until 2022 when you file your 2021 tax return to receive the entire $9,000 child tax credit, you can get paid half of the child tax credit amount, or $4,500, in 2021.

The advance payments began July 15 and continue for six months until December 15. The family in this example would receive six payments of $750 starting July 15, for a total of $4,500.

What you need to know

The monthly payments are automatic. You’ll automatically receive advance payments if:

  • You filed a 2019 or 2020 tax return and claimed the credit, OR
  • You gave information in 2020 to receive the Economic Impact Payment using the IRS non-filer tool, AND
  • The IRS thinks you are eligible, AND
  • You did not opt-out of the early payments.

Register with the IRS. If you didn’t file a 2019 or 2020 tax return but are otherwise eligible for the child tax credit, you’ll need to register with the IRS to receive the child tax credit. Click here to visit the IRS website to find out if you need to register.

Consider if you should opt out of the advance payments. Getting half of your child tax credit ahead of time may not be the right move for everyone. For example, if your 2021 income ends up higher than expected, you may need to pay back the advance payments when you file your tax return. To opt out, click here to visit the IRS’s child tax credit update portal.

Make the Most of Your Vehicle Expense Deduction

Tracking your miles whenever you drive somewhere for your business can get pretty tedious, but remember that properly tracking your vehicle expenses and miles driven can lead to a significant reduction in your taxes.

Here are some tips to make the most of your vehicle expense deduction.

  • Keep track of both mileage and actual expenses. The IRS generally lets you use one of two different methods to track vehicle expenses – the standard mileage rate method or the actual expense method. One year the mileage method may result in a higher deduction, while the actual expense method may be higher in a subsequent year. But you won’t know which method results in a higher deduction unless you track both your mileage and actual expenses.
  • Consider using standard mileage the first year a vehicle is in service. If you use standard mileage the first year your car is placed in service, you can then choose which expense tracking method to use in subsequent years. If you initially use the actual expense method the first year your car is placed in service, you’re locked in to using actual expenses for the duration of using that car in your business. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate the first year.
  • Don’t forget about depreciation! Depreciation can significantly increase your deduction if you use the actual expense method. For heavy SUVs, trucks, and vans with a manufacturer’s gross vehicle weight rating above 6,000 pounds, 100% bonus depreciation is available through the end of the 2022 tax year if the vehicle is used more than 50% for business purposes. Regular depreciation is available for vehicles under 6,000 pounds with annual limits applied.
  • Don’t slack on recordkeeping. The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.

Please call if you have any questions about maximizing your business’s vehicle expense deduction.

Help! I Just Got a Letter From the IRS

Summertime means the 2020 tax filing season is firmly in the rearview mirror for millions of Americans. But summertime is also the season when the IRS sends letters to unlucky taxpayers demanding more money!

If you receive a notice from the IRS, do not automatically assume it is correct and submit payment to make it go away. Because of all the recent tax law changes and so little time to implement the changes, the IRS can be wrong more often than you think. These IRS letters, called correspondent audits, need to be taken seriously, but not without undergoing a solid review. Here’s what you need to do if you receive one.

  • Stay calm. Don’t overreact to getting a letter from the IRS. This is easier said than done, but remember that the IRS sends out millions of these correspondence audits each year. The vast majority of them correct simple oversights or common filing errors.
  • Open the envelope! You would be surprised how often taxpayers are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category, try to remember that the first step in making the problem go away is to open the correspondence.
  • Conduct a careful review. Review the letter. Understand exactly what the IRS is explaining that needs to be changed and determine whether or not you agree with their findings. The IRS rarely sends correspondence to correct an oversight in your favor, but sometimes it happens.
  • Respond timely. The IRS will tell you what it believes you should do and within what time frame. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.
  • Get help. You are not alone. Getting assistance from someone who deals with this all the time makes the process go much smoother. And remember, some of these letters could be scams from someone impersonating the IRS!
  • Correct the IRS error. Once you understand what the IRS is asking for, a clearly written response with copies of documentation will cure most IRS correspondence audits received in error. Often the error is due to the inability of the IRS computers to match documents it receives (for example 1099s or W-2s) to your tax return. Pointing out the information on your tax return might be all it takes to solve the problem.
  • Certified mail is your friend. Any responses to the IRS should be sent via certified mail or other means that clearly show you replied to their inquiry before the IRS’s deadline. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest tacked on to your tax bill.
  • Don’t assume it will go away. Until receiving definitive confirmation that the problem has been resolved, you need to assume the IRS still thinks you owe them money. If no correspondence confirming the correction is received, you should follow-up with another written confirmation request to the IRS.

Get the Best Bank for Your Buck

A checking account at one bank is the same as a checking account at another bank, right? Well, maybe not. In fact, according to the J.D. Power 2021 U.S. Retail Banking Satisfaction Study, now 41% of people do all their banking online. This is a pretty big shift from traditional banking.

After reviewing the financial strength of a bank, here are several other things to consider as you decide what’s really most important to you in selecting a bank.

The online bank versus nearby location

While having a nearby brick and mortar location is important to many banking consumers, you might find better interest rates with an online-only bank because they don’t spend lots of money to maintain physical branches. As people switch to taking care of all their basic banking transactions online, one of the reasons to visit your local bank branch is to talk with a banker. If you believe you’d benefit from such discussion, make sure the online bank you’re considering will facilitate that for you.

Understand key bank fees

In addition to charging loan fees when they lend out money, banks bring in much of their revenue by charging fees on your deposit accounts. You’ll have a much more positive experience by ensuring your bank’s fees don’t outweigh the benefits of the account you’re considering. Here are three key fees to understand:

  • Monthly maintenance fees. This is a monthly fee a bank charges on an account. Understand how yours works. Banks will waive these fees if your account is above a certain balance. Others waive the fees if you behave in a way they want you to behave. For instance, if you use a debit card versus writing a paper check. Others want you to make direct deposits. Still others want you to use their bill pay service. Understand this fee class and determine if you can abide by the terms your bank sets for them.
  • Overdraft fees. These fees are charged to a checking account if you attempt to buy something but don’t have enough money in your account. There are a variety of ways to avoid overdraft fees, such as signing up for a protection program or linking your savings account to automatically pay the rest of the bill. Take the time to understand your bank’s options to avoid overdrafts and the cost associated with them.
  • ATM fees. Some ATMs require you to pay money to use their machines, especially if the ATM you’re using isn’t in your bank’s network. Don’t overlook the opportunity to save money by ensuring that the bank you’re considering supplies ATMs in your area so you won’t have to pay a fee every time you need to use an ATM.

Other banking tools

Banks often provide tools to help you budget your daily and monthly expenses. Many offer free credit scores and credit monitoring. Others offer automatic transfers into a savings account. Still others offer the ability to open multiple savings accounts and label each account for different purposes.

Keep these tips in mind the next time you need to choose a new bank. With many different banks to choose from, a little research can ensure the bank you choose fits your financial needs and priorities.

Unique Employee Benefits to Differentiate Your Business

A recent survey by the National Federation of Independent Businesses (NFIB) found that many companies are struggling to attract and retain qualified workers. While some businesses have countered this shortage of workers by raising hourly rates to record levels according to the NFIB, other businesses don’t have the financial flexibility to do this.

If you’re a business that doesn’t have the financial resources to raise pay, consider differentiating yourself by adding unique employee benefits. After all, the cost of losing a potential or existing employee to a competitor may outstrip the expense of an easy-to-implement employee perk.

Here are several unique benefits to consider offering current and prospective employees:

  • Flexible schedules. By creatively managing time, you can maintain workflow and keep employees productive. For example, some firms have offered a 9/80 work schedule. Over the course of two weeks, an employee works eight 9-hour days, one 8-hour day, and gets one day off. Another common option is the 4/10 schedule where each employee works four 10-hour days and takes every Friday off.
  • On-site health and wellness perks. Some examples include allowing workers to visit a mobile dental clinic or registered nurse during work hours, negotiating a group discount at the local gym and providing employee gym memberships, or making weekly massages and lunch-break yoga classes available.
  • Family support. On-site childcare for busy parents, rooms for nursing mothers and generous parental leave policies are family benefit options to consider. Some companies have implemented a program of chore help where the business covers the cost of laundry or cleaning services for workers who work long hours. For some businesses, permitting employees to work from home several days a week is another great perk for workers who have families and may need the location flexibility.
  • Pet-friendly office. Let dog owners bring their furry companion to work on a periodic basis. Besides decreasing stress for the pet owner, dogs often facilitate group bonding. Other pet-friendly options include free training classes or discounted veterinary services. For employees who don’t own pets, pet-friendly funds can be applied toward other perks such as gym memberships or free lunches.
  • Referral bonuses. If your firm is struggling to attract qualified workers, consider paying existing employees for every person who attends an interview via an employee referral. The existing worker might be offered a lump sum payment or even an allowance for each month the new hire remains on the job.

By being flexible and listening to your employees, you can generate many ideas for unique employee benefits. And the retention that results will benefit both you and your employees.

Big Tech knows who you are! Tips for enhancing your digital privacy

Companies are following your every move. When you have a cell phone, they are tracking what apps you use, where you go, who you talk to and more! Other smart devices listen to your conversations in your home, keep track of what you view on your TV, and report where you visit and what routes you take to get there. Even worse, the more you share the greater the chance a hacker gets this information.

Consider these tips to more actively protect yourself and your information.

The power of the opt out

Apple recently introduced an opt out feature on their iPhones. Historically, when you download a new app onto an iPhone, you have to manually opt out of sharing your device’s data. Now when you download a new app on your iPhone, you’ll be asked whether you want to opt in and allow the app to have access to your information.

So if you are an iPhone user, start with the opt out and then deliberately select who you wish to give access to your information. And opt out does not have to be global. For instance, a direction function needs your location when you use it. But it does not need to be turned on all the time.

Actions:

  • Leave opt-out as default on iPhones and set default to opt-out on other mobile phone brands.
  • Review all apps and turn off tracking and data sharing.
  • Actively turn off your phone if you do not wish to be tracked.
  • Review all smart devices and select your opt out options. Include TVs and personal assistants in your review.

Protect your web browsing

Companies love to keep tabs on your browsing habits. And it is not just limited to their own sites. They might spy on ALL your activity. They see every website you visit, monitor all your clicks, and track all social media likes and videos you view. They then use this information to determine what you see and read. In short, they control your world view, both in content and in what ads you see.

Actions:

  • Actively use ad blockers such as AdBlock and uBlock.
  • Turn off cookies and periodically empty your cache.
  • Avoid downloading any and all extensions unless absolutely required.

Use best data protection practices

As the internet and smart devices evolve, so do the thieves that wish to steal your identity and your financial resources. So keep up-to-date on best data protection practices.

Actions:

  • Vary passwords and user IDs. Keep track of them outside of your computer.
  • Keep operating systems and software up-to-date.
  • Encrypt your emails and computer hard drive.
  • Keep banking information off your cell phone.
  • Back up all your devices remotely.
  • Use current antivirus software.
  • Monitor your credit reports for any suspicious activity.
  • Confirm before opening suspicious emails or attachments.

Most importantly, stay informed. In the end, the burden of protecting your data always falls on you.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

July 2021 Newsletter

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Can you believe that 2021 is more than half-way over? It’s time to kick your tax planning into high gear! Included in this month’s newsletter are several ideas to help you reduce your tax bill.

There is also an article that provides some ideas on how to think about debt. Some of it is good, while other debt is bad. Plus, the IRS is turning up the heat on small business audits.

Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.

Ideas to Lower Your 2021 Tax Bill

Now is the time to begin tax planning for your 2021 return. Here are some ideas:

  • Contribute to retirement accounts. Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can stash away between now and December 31. So consider investing in an IRA or increase your contributions to your employer-provided retirement plans. Remember, you can reduce your 2021 taxable income by as much as $19,500 by contributing to a retirement account such as a 401(k). If you’re age 50 or older, you can reduce your taxable income by up to $26,000!
  • Contribute directly to a charity. If you don’t have enough qualified expenses in order to itemize your deductions, you can still donate to your favorite charity and cut your tax bill. For 2021, you can reduce your taxable income by up to $300 if you’re single and $600 if you’re married by donating to your favorite charity.
  • Consider a donor-advised fund. With a 2021 standard deduction of $12,550 if you’re single and $25,100 if you’re married, you may not be able to claim your charitable donations as a tax deduction if the total of your annual donations is below these dollar amounts. As an alternative, consider donating multiple years-worth of contributions to a donor-advised fund if you have the available cash so you can exceed the standard deduction this year. Then make your cash contributions from the donor-advised fund to your favorite charities over the next three years.
  • Increase daycare expenses. If you and/or your spouse work and have children in daycare, or have an adult that you care for, consider using a daycare so you and a spouse can both work. This is because there is a larger tax break in 2021. If you have one qualifying dependent, you can spend up to $8,000 in daycare expenses while cutting your tax bill by $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 in daycare expenses while cutting your tax bill by $8,000. To receive the full tax credit, your adjusted gross income must not exceed $125,000.
  • Contribute to an FSA or an HSA. Interested in paying medical and dental expenses with pre-tax dollars? Then read on…If you have a flexible spending account (FSA), you can contribute up to $2,750 in 2021. This allows you to pay for medical expenses in pre-tax dollars! Even better, unspent funds in an FSA can now be rolled from 2021 to 2022. And if you have a health savings account (HSA), you can contribute up to $3,600 if you’re single and $7,200 if you’re married. So add up all your contributions to your FSA or HSA so far in 2021 and see how much more you can contribute between now and December 31.

Please call us at 615-750-5537 to discuss these and other tax planning opportunities.

Good Debt Versus Bad Debt – How to tell the difference

Not all debt is created equal. Knowing the difference can change the way you look at your spending.

Good debt adds value

Good debt often leads to financial growth, because the product or service being purchased adds more value than the debt that comes with it. Student loans are usually an example of good debt because the related education allows you to earn more income.

Some purchases result in value more directly. Taking on a mortgage, for example, can be valuable simply by giving you access to a place to live all while building equity. Additionally, a mortgage is often considered good debt because your property can be used as collateral for other debt once you’ve made some payments on it, or your home has gained in market value. Even better, good debt often comes with a tax deduction on the interest you pay on things like your mortgage or student loans.

Bad debt adds expense

Credit card debt is almost always bad debt. Not only are interest rates on credit cards higher than most other types of debt, but most purchases made with credit cards are for things that do not contribute to personal financial growth. In fact, interest expense is so high that credit card companies are now legally required to display the cost of this debt directly on their billing statements. Auto loans are another example of bad debt, because cars usually lose value quickly, often leaving more money owed on the debt than the car is worth! But even good debt can turn bad if there is too much of it. Take out too large a mortgage and you may struggle to make payments!

Debt always means higher cost

Debt’s big benefit is allowing you to pay for something over time. The cost of any purchase using debt MUST include the interest expense of taking on that debt. You can compare that with the option of saving up money and then making the purchase without interest. Is the extra interest worth the benefit? Comparing the cost of the purchase with interest, to the value you stand to gain by purchasing the asset, can help you determine whether using debt is a good or bad choice for you.

Final thoughts

Here are some ideas on how to manage good versus bad debt.

  • Consider carefully what you can afford and make a plan for how you will pay off any debts before you take on the debt.
  • Never carry a balance on a credit card unless it is an emergency. Pay the balance in full every month.
  • Calculate the entire cost, including interest, of anything you purchase using debt. This is the REAL cost of an item.
  • Use savings, whenever possible, to purchase goods and services that would otherwise be considered bad debt.
  • Pay off high interest debt first.
  • Financial growth is often the key measure for defining good versus bad debt, but not always. Other factors, like personal interest, growth, and well-being can also be measures for your debt decisions, as long as you can truly afford the payments.

Reach out for help if you aren’t confident whether a potential debt will lead to more good or harm. Making the right choice could save you money.

Small Business IRS Audit Mistakes

In late 2020, the IRS announced that it will increase tax audits of small businesses by 50 percent in 2021. Here are several mistakes to avoid if you do get audited by Uncle Sam.

  • Mistake: Missing income. A long history of investigating has led IRS auditors to focus on under-reported income. If you’re a business that handles cash, expect greater scrutiny from the IRS. The same is true if you generate miscellaneous income that’s reported to the IRS on 1099 forms. Be proactive by tracking and documenting all income from whatever source. Invoices, sales receipts, profit and loss statements, bank records—all can be used to substantiate income amounts.
  • Mistake: Higher than normal business losses. Some small businesses struggle in the early years before becoming profitable. If your company’s bottom line never improves, the IRS may view your enterprise as a hobby and subsequently disallow certain deductions. As a general rule, you must earn a profit in three of the past five years to be considered a legitimate business.
  • Mistake: Deductions lacking substantiation. Do you really use your home office exclusively for business? Does your company earn only $50,000 a year but claim charitable donations of $10,000? Do you write off auto expenses for your only car? The key to satisfying auditors is having clear and unequivocal documentation. They want source documents such as mileage logs that match the amount claimed on your tax return and clearly show a business purpose. If you can’t locate a specific record, look for alternative ways to support your tax return filings. In some cases, a vendor or landlord might have copies of pertinent records.
  • Mistake: No expense reports. If you use your credit card for business, create an expense report with account numbers and attach it to each statement. Then attach copies of the bills that support the charges. This is an easy place to blend in personal expenses with business expenses and auditors know it.
  • Mistake: No separate books, bank accounts or statements. Never run personal expenses through business accounts and vise versa. Have separate bank accounts and credit cards. A sure sign of asking for trouble is not keeping the business separate from personal accounts and activities.
  • Mistake: Treat the auditor as an enemy. Auditors have a job to do, and it’s in your best interest to make their task as painless as possible. Try to maintain an attitude of professional courtesy. If you’re called to their office, show up on time and dress professionally. If they come to your place of business, instruct staff to answer questions honestly and completely.

Please call us if you either need help preparing for an upcoming IRS audit or would like to know how to audit-proof your financial records.

Common Tax Mistakes When Selling a Home

With home sales booming throughout much of the country, you may decide that now’s the right time to put your abode on the market. If you do put your primary residence up for sale, try to steer clear of the following mistakes.

  • Not qualifying for the home sale exclusion. If you’ve owned and used your home as your principal residence at least two out of the last five years, you can can exclude from your taxable income the first $250,000 of gain if you’re single and $500,000 if you’re married.
    What you can do: Consider a delay of selling your home until you meet the 2-out-of-5 year threshold. If you can’t qualify for a full exclusion, you may qualify for a partial exclusion if your sale results from an employment change, a need for medical care or other IRS-approved circumstances.
  • Forgetting to deduct points. If you have points from your current mortgage that you haven’t deducted on a previous tax return, include the balance of these points on your next tax return. Too many taxpayers forget to do this and lose thousands in deductions.
    What you can do: Review your loan documents before selling your property. Identify all costs, including points, that are included in the loan. Save the document with your tax records to ensure the deduction is not forgotten.
  • Not double checking your settlement statement. Closely review the closing statement. It is easy to assume all the numbers are correct and the math is done right. Often this is not the case! And a mistake here could be costly.
    What you can do: Review the closing document multiple times. Have your Realtor and closing agent explain items you don’t understand. Pay special attention to property taxes. The property tax bill will be allocated between the seller and the buyer. Only pay the share of the bill that covers the time period when you’re the owner.

Selling a home is full of tax implications. Since selling a home is not an everyday occurrence, it is easy to make a mistake. So if you need help with these or any other tax questions surrounding the sale of your house, please call…before you sell!

Manage Your Business’s Unemployment Taxes

As a business owner, you’re required to pay three different types of payroll taxes.

  1. FICA (Federal Insurance Contributions Act) is the tax used to fund Social Security and Medicare programs.
  2. FUTA (Federal Unemployment Tax Act). Employers pay this federal tax to provide unemployment benefits to laid-off workers.
  3. SUTA (State Unemployment Tax Act). State governments also collect taxes known as SUTA that finance each state’s unemployment insurance fund.

While FICA may be easy to understand, unemployment tax calculations are easily misunderstood.

How FUTA and SUTA taxes are calculated:

The FUTA calculation. The federal unemployment tax rate is 6% on the first $7,000 of each employee’s income, regardless of where the company does business. In addition, employers who pay their state’s SUTA taxes on time can receive a maximum credit of 5.4%, reducing the FUTA rate to 0.6%. Certain employee benefits—employer contributions to health plans, pensions, and group life insurance premiums, for example—are also excluded from the calculation.

SUTA taxes are more complicated. Tax rates and taxable thresholds (known as wage bases) vary from state to state, industry to industry, and business to business. In Oregon, for example, the first $43,800 of an employee’s salary is taxed under SUTA. In Arkansas, that threshold is $10,000. In Oregon, a new employer is taxed at a rate of 2.6%, but more established businesses in that state have rates ranging from 1.2% to 5.4%. Other factors affecting SUTA tax liability include the firm’s history of on-time payments to the state insurance fund and the number of former employees receiving unemployment benefits.

How to reduce your SUTA and FUTA tax bills

  • Hire cautiously. If you employ someone who doesn’t work out, you could end up with additional unemployment claims and a higher SUTA tax rate.
  • Train vigorously. To increase productivity and reduce turnover, target your investment in continuing education. Keep employees happy and loyal. Again, high turnover leads to unemployment claims, which leads to bigger SUTA tax bills.
  • Terminate judiciously. If you must reduce personnel, consider offering severance or outplacement benefits to terminated employees. The sooner they return to the job market, the fewer the unemployment claims that will be factored into your company’s SUTA tax calculation.
  • Dispute carefully. Take the time to verify the accuracy of unemployment claims, as bogus representations by former workers can drive up your SUTA taxes. If an employee was fired for gross misconduct and thus disqualifying himself or herself from collecting unemployment, have strong documentation to support the termination.
  • Pay regularly. Under federal guidelines, employers who make their SUTA contributions on time can reduce the amount of FUTA taxes by up to 90%.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

June 2021 Newsletter

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Do you know your net worth? Find out why knowing this number is one of the most important financial concepts you’ll want to understand. If you own a small business, read about why you should consider hiring your kids for a part-time summer job. Also in this edition, find out how a continuous 12-month forecast can help you better organize your finances and tax obligations.

Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.

Know This Number!

Knowing your net worth and understanding how it is changing over time is one of the most important financial concepts that everyone needs to understand. This number is used by banks, mortgage companies, insurance companies and you! Your net worth impacts your credit score, which in turn impacts your interest rates and things as mundane as the amount you pay for auto insurance.

A simple definition

  • Net worth is the result of taking all the things you own (assets) minus what you owe others (debts and liabilities).
  • Assets include cash, bank account balances, investments, your home, vehicles or anything else that you could sell today for cash. Assets also include any businesses or business interests you own.
  • Liabilities are what you owe others, such as a mortgage or car loan, and any other debt, like credit card or student loan debt.

Your net worth changes over time, reflecting how you spend your money. For example, if you have tons of bills and spend more than you bring in, your bank account balances will be lower. If you spend a lot on your credit cards, your debt will go up. The net effect is a lower net worth.

Everyone has a net worth

Yes, everyone. Even a 6-year-old with money in their piggy bank has a net worth. If your child is saving up for a bike, they will convert one asset (cash) into another asset (their new bike)!

Calculating your net worth

  • Step one. Reconcile your bank accounts and loans. Try doing this every month, as these are the easiest parts of your net worth to track and calculate.
  • Step two. Calculate the value of all your remaining assets. For some of your assets, such as stocks, you can go online and find the current value of the stocks you own. For other assets, you’ll have to estimate what you could sell that asset for today.
  • Step three. Add up all your asset values, then subtract all your debts. What you’re left with is your net worth (and yes, your number could be negative)!

Why you should know your net worth

Knowing your net worth contributes to the big picture of your financial circumstances. Here’s why it’s beneficial to know your net worth:

  • You want to apply for student loans. You’ll likely need to submit an application that details all your cash and other assets when applying for student loans. If your net worth is high enough, you may have to foot some of the tuition bill yourself.
  • You want to get insurance. Some types of insurance use your credit score as part of the calculation for determining your premium payments. Knowing if you have a high net worth may help in obtaining a favorable premium amount.
  • You want to diversify your investments. Certain investments are available only to individuals who have a high enough net worth.
  • You want to buy a home. Banks want to see that you have plenty of cash when compared to your debts. If you have too much debt, you may need to either pay down the debt or increase your down payment.

Knowing your net worth and how to calculate it can help you achieve some of your financial goals. Please call if you’d like help calculating and understanding your net worth.

 

Hire Your Kids for Tax Savings

Summer’s almost here, and soon most children will be on their long-awaited summer vacation. If you own or manage a business, have you thought of hiring your children, nieces, or nephews for a summer job?

If you do it right, it can be a win-win situation for everyone.

The kids will earn some money and gain valuable real-life experience in the workplace while your business will have some extra help during summer months when other staff may be on vacation. If it’s a family business, there might even be some tax advantages as well.

If your child is doing a valid job and the pay is reasonable for the work, your business can generally claim a normal tax expense for wages paid. Your child will probably pay no or very little income tax on the wages they earned. And if the child is under age 18 and your business is unincorporated, neither your child nor your business will have to pay Social Security or Medicare payroll taxes in most cases.

To make the arrangement work, follow the following guidelines:

  • Ensure it’s a real job. It could be a simple job, such as office filing, packing orders, or simple production activities. But it needs to be an actual job.
  • Treat your child like any other employee. Expect your child to work regular hours and exhibit appropriate behavior. Don’t show favoritism or you risk upsetting regular employees.
  • Keep proper documentation. Keep records of hours worked just as you would for any employee. If possible, pay your child using your normal payroll system and procedures.
  • Avoid family disputes. If the arrangement is not working, or is disrupting the business, help your child find a summer job at another business.

How to Roll with a Continuous 12-Month Forecast

Tax and financial planning is a year-round proposition. In fact, you can benefit personally from a continuous, 12-month rolling forecast, much like a business does.

What is a rolling forecast?

Rolling forecasts let you continuously plan with a constant number of periods 12 months into the future. For example, on January 1, you would plan what your financial picture looks like each month through January 1 of the following year. When February 1 rolls around, you would then drop the beginning month and add a forecast month at the end of the 12-month period. In this case, you add February of the next year into your 12-month forecast.

The month you add at the end of the 12 months uses the finished month as a starting point. You then make adjustments based on what you think might happen one year from now. For example, if you know you are going to get a raise at the end of the year, your next-year February forecast would reflect this change.

How to take advantage of a rolling forecast

By doing tax and financial planning in rolling 12-month increments, you may find yourself in position to cash in on tax- and money-saving opportunities within the next 12 months. Here are several strategies to consider:

  • Plan your personal budget. Will you need to put a new roof on your house? How about getting a new vehicle? Do you need to start saving for your kids’ college education? A rolling 12-month forecast can help you plan for these expenses throughout the year.
  • Plan your healthcare expenses. If you have a flexible spending account (FSA) for healthcare or dependent care expenses, forecast the amount you should contribute for the calendar year. Although unused FSA amounts are normally forfeited at year-end, your employer may permit a 12-month grace period (up from 2½ months) for 2021. This means that you could potentially roll over your entire unused FSA balance from 2021 to 2022. Your forecast can help you see the impact of this change.
  • Plan your contributions to a Health Savings Account (HSA). When an HSA is paired with a high-deductible health insurance plan, you can take distributions to pay qualified healthcare expenses without owing any tax on the payouts. For 2021, the contribution limit is $3,600 for an individual and $7,200 for family coverage. In this case, you can forecast an increase in contributions and double-check to ensure you have enough money on hand to pay future bills.
  • Plan your estimated tax payments. This is often significant for self-employed individuals and retirees with investment earnings. The quarterly due dates for paying federal and state tax liabilities are April 15, June 15, September 15, and January 15 of the following year (or the next business day if the deadline falls on a holiday or weekend). So if your personal income is seeing a recovery from the pandemic, your rolling forecast will show this and allow you to plan for the estimated tax payments.
  • Plan your retirement contributions. If you participate in your company’s 401(k) plan, you can defer up to $19,500 to your account in 2021 ($26,000 if you’re 50 or over). Contributions and earnings compound tax-deferred. As the year winds down, you might boost your deferral to save even more for retirement.

While initially setting up a rolling 12-month forecast can be a bit of a pain, once established, it is pretty easy to keep up-to-date as you are simply rolling forward last month into the future. A well-planned system can often be the first sign of future challenges or potential windfalls!

 

The Hidden Tax Consequences of Cryptocurrency

You may recognize the name Bitcoin and maybe even Ethereum, but what about Litecoin, Dogecoin or Ripple?

These are just some of the more than 4,500 cryptocurrencies available today. There are hidden tax complications, however, associated with every cryptocurrency transaction. Here’s what you need to know.

  • Every transaction has a tax consequence. The IRS treats cryptocurrency as investment property, like stock, and taxes every transaction as a capital gain or loss. When you pay for something in the traditional manner with U.S. dollars, the IRS doesn’t care what the value of the dollar is at the time of the transaction. For virtual currency purposes, however, the value matters. For example, assume you buy Bitcoin for $10 and two months later the market value of that Bitcoin grows to $15 and you spend that $15 worth of Bitcoin to buy something, you’ll have a $5 taxable short-term gain that needs to be reported on your tax return. If you spend a lot of cryptocurrency, tracking the gains and losses can be very complicated.
  • Big gains mean big taxes, but big losses may be limited. In classic IRS form, there is no cap on the amount of taxes you might owe in a single year for gains on the value of cryptocurrencies you sell, while losses might take many years to recoup because of the annual $3,000 loss limit against income. Adding to the complexity, virtual currencies have dramatic valuation changes…much more so than most traditional investment securities. So you will need to budget appropriately for the taxes you’ll owe whenever you use or sell cryptocurrencies.
  • Cryptocurrency puts you on the IRS’s radar. Being relatively new, virtual currency has caused the IRS to become very concerned about potential mistakes and fraud related to how cryptocurrency is reported on tax returns. The IRS is so concerned about you not reporting cryptocurrency activity that the very first question of your tax return, right beneath where you put your name and address, asks if you took part in any virtual currency transactions over the past year.
  • You are responsible for bookkeeping. With the IRS watching so closely, it’s important to be accurate with your recordkeeping so you can properly report all virtual currency gains and losses on your tax return and substantiate all your transactions in the event of an audit.

 

Ideas to Identify and Manage Problem Accounts

As a small business, once you decide to extend credit to a customer, you now have a financial stake in continuing that relationship even if you suspect there might be trouble brewing. While you don’t want to crack down on a good customer too hard, too soon, you also don’t want to be taken advantage of by a customer who has become unable or unwilling to pay. Here are some ideas to help you manage this risk.

Develop a rating system. Score each customer with a number. The number represents to whom you will sell on credit and how much risk you are willing to take. Also have scores that represent customers you will not bill and those who you will no longer take orders from because of credit risk. Develop a system to objectively assign the score. Payment history and external credit scoring reports are both good indicators of whether a particular customer will be an acceptable credit risk.

Consider credit applications. Create a simple credit application. The application should be signed by the responsible party to pay the bill. If large credit amounts are expected, get a person to take personal responsibility to pay the bill. This will provide an additional means to collect your money should the company fail to pay. You will need this signed document if you wish to use a collection agency to collect delinquent accounts.

Look at history. Those to whom you provide a credit line must have their payment history monitored. If they are habitually late payers, reduce their credit line. If they frequently miss payments, move them to prepay only.

Create a notes section on your customer records. Use this to record what a late paying customer tells you. Over time, this will reveal the customers who are honest and the customers who fail that test. This idea also provides continuity of communication for the customer that tries to tell different employees different stories.

Develop a collection system. The best credit rating system starts with a receivable aging report run once a month. This will quickly show you current trouble customers and potential trouble customers. When a bill ages through the report, know what you are going to do to collect bills at 30 days, 60 days, 90 days and anything older than that.

Look for other signs of trouble. Train your team to be on alert for:

  • Customers paying smaller invoices while larger invoices go unpaid.
  • The customer fails to return your phone calls or shows annoyance at your inquiries.
  • Your requests for information, such as updated financial statements, are ignored.
  • The customer places multiple, large orders and presses you for a higher credit limit.
  • The customer tries to coax you into providing a good credit report to another supplier.
  • You get word that the customer’s credit rating has been downgraded.

Remember, great customers can have sincere problems paying a bill. By having a good credit rating system, you can more readily identify the customers you want to accommodate to pay their bills and those customers whose activity should be suspended because they are truly problem accounts.

As always, should you have any questions or concerns regarding your tax situation please feel free to call us 615-750-5537.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

May 2021 Newsletter

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Tax day is just about here and we are excited to celebrate our 10 year anniversary as a firm this month! Read about some helpful hints that can make paying your bills less stressful and we have some suggestions for how small businesses can help one another stay afloat until the entire economy returns to normal. Finally, read about some tips from the Federal Trade Commission on keeping your kids safe online.

Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.

The Art of Bill Paying

Paying bills is an inevitable part of everyday life, but that doesn’t mean it has to be stressful. Here are some ways to get control of your budget and perfect the art of stress-free bill paying.

  • Make a budget. Knowing what you are making and what you are spending is essential to proper bill paying. First, find out how much you are making every month and then subtract the static items such as rent or mortgage payments, credit card payments and cell phone expenses. Then, budget out how much you will need for other essentials (such as food and clothing). Once the essentials are accounted for, you can look at the money you have left and decide where to allocate the rest.
  • Find a budget tool that works. One of the best ways to get a handle on your finances is to use a budgeting app such as Intuit’s Mint or PocketGuard. You can securely link your bank accounts to these apps and download all your transactions in the app. Your bank may also have an app to track your spending, so also check with them. You can then choose which tools to use to make a budget and categorize the transactions to be allocated to a certain part of the budget (such as food, car, housing, etc).
  • Set up autopay. Put recurring bills such as utilities, internet, and your cell phone on autopay so they will be automatically deducted from your account on their due date. If you decide to use autopay, it is still a good idea to look at the amounts being deducted every month to make sure everything is correct.
  • Consider your non-regular payments. Don’t forget to account for bills that come due occasionally and plan for the cash outlay. Common examples of this are property tax payments, income taxes, and annual/semi-annual insurance payments. You will need to plan to have enough cash on hand for these expenses when they come due.
  • Adjust due dates. Paying bills isn’t as stressful when you know that you can afford to pay them, and what better time to pay bills than right after you get paid! The money will be there and you can pay those bills before that money has a chance to go anywhere else. Consider asking if you can change the due dates for some or all of your bills to correspond with when your paychecks are deposited into your bank account.
  • Don’t forget to pay yourself! One of the best ways to start developing a savings account is making yourself part of your budget! Take however much you think you can spare and set up an automatic transfer to a separate savings account. Use this money to establish an emergency fund of approximately six to nine months of expenses. This extra cushion will come in handy if something unexpected occurs.

 

Helping Your Fellow Business Owner

Your firm survived 2020. Now you may be asking yourself when will the economy return to pre-pandemic levels? Will it be this fall? A year from now? Longer?

Until the economy fully emerges from the pandemic, small businesses can help one another stay afloat. By collaborating with other like-minded firms, your business can find creative ways to strengthen local markets and encourage consumer loyalty.

Consider the following ideas of how you can help each other:

  • Partner with industry peers. One Vietnamese restauranteur in New York City was eager to open his business for in-person dining. Then the pandemic hit. According to a Time Magazine article, two years of careful planning, hard work and sacrifice seemed fruitless. But sympathetic restaurant owners in nearby Chinatown reached out with an innovative idea: offer a punch card to encourage customers to support local businesses. By partnering with this newly-minted entrepreneur and introducing him to like-minded people, established firms kept the restaurant business alive in their locale and helped a fledgling owner pursue his dream.
  • Donate staff resources. During government-mandated quarantines, some industries enjoyed burgeoning revenues while others were trying to keep staff employed. Why not offer to help if you have excess labor? For example, businesses selling camping gear and recreational vehicles saw an uptick in consumer demand. A company supporting that industry might offer some of its staff on a temporary basis to help another firm meet customer needs. Such a partnership could provide the added benefit of boosting morale and avoiding layoffs.
  • Leverage locations. Say you’re a company that raises chickens. You might partner with a firm offering other meat products to share a tent at a farmer’s market. Or two dance studios might join forces to enable patrons to attend similar classes at across-town venues. You could team up with others to organize a business fair. Or you might donate space to help another business sell goods at a common location for centralized pickup and delivery.
  • Share your expertise. Perhaps you’ve experienced great success with your business website, but other firms are struggling to make inroads in the digital marketplace. You could teach these companies how to connect with customers via social media. Train them to build and market a website. If you have remote workers, share your experience about helping home-based employees stay productive.
  • Cross promotions. Look for businesses that you can help and that can help you. Then cross-promote each other’s services. Customers of dog groomers need veterinarians and vice versa. Accountants need their hair cut and customers of hair salons need accountants. Vacation rental property owners can offer restaurant deals for their renters and restaurants can offer the rental owners coupons for meals. The ideas are endless, you just need to think creatively.

Before making a commitment to help another business, be sure to weigh the pros and cons. Any potential relationship should benefit both parties. Don’t be afraid to consider companies outside your industry or local market, but look first to businesses with services and products complementing your own.

 

Building a Fortress Balance Sheet

The best way to weather a storm is often by being prepared before the storm hits. In the case of small businesses, this means building a fortress balance sheet.

What is a fortress balance sheet?

This long-standing idea means taking steps to make your balance sheet shockproof by building liquidity. Like a frontier outpost or an ancient walled city, businesses that prepare for a siege—in the form of a recession, natural disaster, pandemic, or adverse regulatory change—can often hold out until the crisis passes or the cavalry arrives.

Building a fortress balance sheet isn’t just a good idea for mitigating risk. Healthy cash reserves can also enable your firm to capitalize on opportunities, expand locations, or introduce new products.

Consider these suggestions for building your own fortress balance sheet.

  • Control inventory and receivables. These two asset accounts often directly impact cash reserves. For example, carrying excess inventories can deplete cash because the company must continue to insure, store, and manage items that aren’t generating a profit. Also take a hard look at customer payment trends. Clients who are behind on payments can squeeze a firm’s cash flow quickly, especially if they purchase significant levels of goods and services—and then fail to pay.
  • Keep a tight rein on debt. In general, a company should use debt financing for capital items such as plant and equipment, computers, and fixtures that will be used for several years. By incurring debt for such items, especially when interest rates are low, a firm can direct more cash towards day-to-day operations and new opportunities. Two rules of thumb for taking on debt are don’t borrow more than 75 percent of what an asset is worth, and aim for loan terms that don’t exceed the useful life of the underlying asset. A fortress balance sheet also means that debt as a percent of equity should be as low as possible. So total up your debt, equity and retained earnings. If debt is less than 50% of the total, you are on your way to building a stronger foundation for your balance sheet.
  • Monitor credit. A strong relationship with your banker can help keep the business afloat if the economy takes a nosedive. Monitor your business credit rating regularly and investigate all questionable transactions that appear on your credit report. As with personal credit, your business credit score will climb as the firm makes good on its obligations.
  • Reconcile balance sheet accounts quarterly. It’s crucial to reconcile asset and liability accounts at least every quarter. A well-supported balance sheet can guide decisions about cash reserves, debt financing, inventory management, receivables, payables, and property. Regular monitoring can highlight vulnerabilities in your fortress, providing time for corrective action.
  • Get rid of non-performing assets. Maybe you own a store across town that’s losing money or have a warehouse with a lot of obsolete inventory. Consider getting rid of these and other useless assets in exchange for cash.
  • Calculate ratios. Know how your bank calculates the lending strength of businesses. Then calculate them for your own business. For example, banks want to know your debt service coverage. Do you have enough cash to adequately handle principal and interest payments? Now work your cash flow to provide plenty of room to service this debt AND any future debt! But don’t forget other ratios like liquidity and working capital ratios. The key? Improve these ratios over time.

Remember, the best time to get money from a bank is when it looks like you don’t need it. You do this by creating a fortress balance sheet!

 

Taxes: These Basics are for Everyone

Understanding how our tax system works can be tricky for anyone. Whether you’re an adult who never paid much attention to the taxes being withheld from your paycheck or a kid who just got his or her first job, understanding the basics can help refine and define questions you may have.

Many schools don’t teach these tax lessons. This results in many people entering life with a pretty incomplete picture of how taxes work, unless someone else takes the time to explain these tax concepts. Here are some pointers to help you or someone you know navigate our tax maze.

Taxes are mandatory!

While we can have a debate about how much each person should pay, there’s no debating that local, state and federal governments need tax revenue to run the country. These funds are used to build roads, support education, help those who need financial assistance, pay interest on our national debt and defend the country.

There are many types of taxes

When you think of taxes, most think of the income tax, which is a tax on business and personal income you earn from performing a job. But there are also other types of taxes. Here are some of the most common.

  • Payroll taxes. While income taxes can be used to pay for pretty much anything the government needs money for, payroll taxes are earmarked to pay for Social Security and Medicare benefits.
  • Property taxes. These are taxes levied on property you own. The most common example of this is the property tax on a home or vacation property.
  • Sales tax. These are taxes placed on goods and services you purchase. While most of this tax is applied at the state and local levels, there are also federal sales taxes on items like gasoline.
  • Capital gains taxes. If you sell an investment or an asset for a profit, you may owe capital gains taxes. The most common example of this is when you sell stock for a gain. Capital gains taxes could also come into play with other assets, such as a rental property you sell for a profit.
  • Estate taxes. This tax is applied to assets in your estate after you pass away.

Not all income is subject to tax

Most, but not all, of your income is subject to tax.

  • While your paycheck is subject to tax, interest earned from certain municipal bonds is not. And the government often excludes things like benefits from the tax man.
  • Capital gains taxes have exclusions for gains on the sale of your home and donated stock.
  • Estate taxes have an exclusion, so only estates in excess of the exclusion are taxed.

This is why having someone in the know can be really helpful in navigating these rules.

The progressive nature of income tax

When it comes to income taxes, the government gets to take the first bite. The question is how BIG of a bite the government gets to take.

For example, if you only have one chocolate chip cookie, the government’s bite is really, really small. If you have 1,000 chocolate chip cookies, the government takes a small bite from the first 100 cookies, a larger bite from the next 100 cookies, and an even larger bite from the remaining 800 cookies.

This is called a progressive tax rate system. For example, if you’re considered single for tax purposes in 2021, the first $9,950 of taxable money you earn gets taxed at 10%. The next $30,575 you earn gets taxed at 12%. The next $45,850 gets taxed at 22%. Money you earn above this point will get taxed at either 24%, 32%, 35% or 37%.

Understanding the progressive nature of our tax system is a key concept in managing the size of the bite the government takes. That is why tax planning is so important!

Deductions can decrease the government’s tax bite

The progressive tax system is complex because it is manipulated in a big way by our elected officials. This is typically done through credits, deductions and phaseouts of tax benefits.

For example, there is a fairly complex deduction for families with children, and the earned income tax credit is an added tax cut for those in the lower end of the progressive income tax base. There are also credits and deductions for businesses, homeowners, education and many more types of taxpayers.

As you can imagine, the U.S. tax system is very complex with many nuances. Please seek help if you have further questions or are facing a complicated taxable transaction.

How to Protect Your Kids Online

This is a very common topic but, also really important! Any tips or advice that can help a parent and protect a child is always worth sharing in our opinion. So, do you honestly know what your kids are doing online? That question may seem like it has a simple yes or no answer, but that’s hardly the case. With so many streaming platforms, social media outlets and new gaming options popping up every day, it’s nearly impossible to fully protect your kids from what they can encounter online.

The Federal Trade Commission has several suggestions for protecting your kids online. Here are some of its recommendations.

  • Overcommunicate. How successful you will be with your child’s online safety hinges on communication. Ask them about the newest apps and online trends. Be open about the dangers of the internet and teach them to be skeptical about every website and app. Encourage them to bring concerning items they find to you to have a discussion. The goal is to make your child as concerned about their online well-being as you are.
  • Limit where and how they use their devices. Most phones, tablets and computers have parental control options that allow you to set age, time and content restrictions. Spend some time to understand what’s available to parents and how it works. It can be hard to know where to draw boundaries for your children, but don’t let that discourage you. A good practice is to start by over-restricting and then becoming more lenient over time. In addition to what your kids can access, set rules about where they can use their devices.
  • Stress the safe-guarding of personal information. Most kids know not to openly share addresses, phone numbers or personal information online, but there are a few places where it happens inadvertently. One of those is in your profile you set up for a website or app. In some cases, your profile is made public to other users. Another place it can happen is in-app chatting. Most apps and games have a forum that allow users to interact with one another. Frequently ask your kids about who they are interacting with online and follow up on any suspicious online relationships. Never allow photos of your home or address to be shared or posted.
  • Observe attitude and behavior. Monitor your child’s activity and let them know you are doing so. If your child is struggling with something they came across online, or have found themselves in a dangerous situation, they may show signs through their behavior. If you notice them withdrawing emotionally, looking to access devices in private, or showing signs of anxiety or depression, your kids may need your help.

Discussing the dangers of the online world with your child can be uncomfortable and awkward, but in today’s interconnected world, it’s imperative in order to keep them mentally healthy and physically safe.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

April 2021 Newsletter

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Welcome to the craziness that is the 2020 tax filing season! Because the IRS is still playing catch-up from last year, in addition to new tax laws passed in the middle of this year’s tax filing season, the April 15 individual tax return deadline was moved to May 17. In this edition, you’ll read about how these new tax laws affect both your 2020 and 2021 tax returns. Also read about extended tax breaks for businesses, along with creative ways to do something nice and unexpected for someone else.

Please call us at 615-750-5537 if you would like to discuss how this information could impact your situation. If you know someone who can benefit from this newsletter, feel free to send it to them.

 

ALERT! Late Tax Legislation Creating Havoc – Individual tax return deadline moved to May 17

Congress’ recent move to retroactively make a portion of 2020 unemployment income tax-free is creating havoc during this year’s tax filing season. Here is what you need to know.

Background

Unemployment compensation was received by millions of Americans during 2020 because of the pandemic. While unemployment income was necessary for many who lost a job, it’s also normally classified as taxable income to be reported on your tax return. Recently-passed legislation now makes the first $10,200 of 2020 unemployment compensation tax-free on your tax return.

The problem

The new legislation which contains this tax break didn’t become law until March of 2021, a full three months after the end of the tax year and after millions of Americans had already filed their 2020 tax return!

Understanding your situation

  • If you’ve already filed your 2020 tax return: Wait for further instructions. The IRS is trying to figure out a way to automatically apply this tax break for taxpayers who have already filed their 2020 tax return. This will avoid the need to file an amended tax return. There is no need to call at this time as the IRS has not provided further guidance.
  • If you HAVE NOT filed your 2020 tax return: The IRS has issued guidance on how to report this tax break on your 2020 tax return if you have not already filed. You will be notified once your tax return has been prepared.
  • Tax deadline moved to May 17. Because of all this havoc, the April 15 deadline for individual tax returns is now May 17. This extension applies only to Form 1040s. First quarter estimated tax payments for the 2021 tax year are still due by April 15.

Be assured you will be informed once the IRS issues further instruction on how to claim your tax break. In the meantime, enjoy the extra tax savings you’ll get sometime in the near future!

New Tax Breaks Benefit Millions – What you need to know

The recently-passed American Rescue Plan Act contains several tax breaks for you and your family. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.

Child tax credit (CTC)

  • The CTC for 2021 increases from $2,000 to $3,000 for kids ages 6 to 17 and $3,600 for kids ages 5 and under.
  • To receive the full tax credit your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household).
  • If your income is above the aforementioned thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).
  • You can receive up to 50% of your 2021 child tax credit in 6 monthly payments starting July 2021. The IRS is warning, however, that this July start date may be delayed because a computer system still has to be built to handle these monthly payments.

Child and dependent care credit (DCC)

If you and your spouse work and have children in daycare, or have an adult that you care for, you may be eligible for a larger tax credit in 2021.

  • You can now spend up to $8,000 in dependent care expenses for one qualifying dependent and get a 50% tax credit. This results in a maximum credit of $4,000 (up from $1,050).
  • If you have more than one qualifying dependent, you can spend up to $16,000 in dependent care expenses and get a 50% credit. This results in a maximum credit of $8,000 (up from $2,100).
  • To receive the full tax credit, your adjusted gross income must not exceed $125,000.
  • Dependents can include people of all ages, not just kids, as long as they meet the dependent qualifications.

Earned income tax credit

  • If you’re a household with no kids, the maximum earned income tax credit increases from $543 to $1,502.
  • More taxpayers qualify for the credit. The lower age limit for receiving the credit decreases from age 25 to age 19. The upper limit of 65 for receiving the credit is eliminated. There is no upper age limit for 2021.
  • You may use either your 2019 income or your 2021 income when calculating your credit to obtain the maximum credit.

Stimulus checks

  • A third round of stimulus payments in the amount of $1,400 is being sent to qualified taxpayers.
  • The payment phases out for income over $75,000 for single taxpayers, $112,500 for head of household taxpayers and $150,000 for married couples.

Action to take

  • Look for updates on the advance payments for the child tax credit. The IRS is sorting out how to get half of your child tax credit to you in 2021. Stay tuned for updates as to whether the payments will begin in July or if they will be delayed. You may also opt out of this early payment, but will need to wait for instructions on how to do so.
  • Consider increasing dependent care expenses. Look ahead to the rest of 2021 and consider if you should increase your dependent care expenses to take advantage of the significant increase in this credit. If you increase your dependent care expenses in 2021, remember you won’t be able to include the same amount of expenses when calculating your credit in 2022, as this tax credit increase is currently for 2021 only.
  • Conduct a tax forecast. With the dramatic increase in these credits, you may want to estimate next year’s tax bill. It may make sense to adjust your withholdings to account for a lower tax obligation.
  • Be conservative when forecasting your earned income tax credit. It is uncertain how the expanded earned income tax credit will impact those over 65 when you have no children. For example, are Social Security benefits considered earned income when calculating the earned income tax credit? Does the larger standard deduction for those over 65 affect the earned income tax credit calculation? Until clarification is issued by the IRS, you may wish to be conservative about the credit amount you’ll receive.

 

Businesses Get More Time to Apply For PPP Loans – Legislation provides other business relief provisions

Here’s what you need to know about the Paycheck Protection Program (PPP) loans and other business relief provisions of the recently-passed American Rescue Plan Act.

PPP loan application deadline extended. The deadline to apply for PPP loans is now May 31, 2021.

Sick leave extended. If your business provides sick leave for COVID-related reasons, you might get reimbursed for the sick pay through a tax credit.

  • Businesses which voluntarily provide sick leave through September 30, 2021 qualify for the credit. There are limits for each employee. However, for employees who took 10 days of sick leave in 2020 using this same provision, they can take another 10 days beginning April 1, 2021.
  • Refundable tax credits are available through September 30, 2021.
  • Covered reasons to get the tax credit now include sick leave taken to get COVID testing and vaccination, and to recover from the vaccination.
  • These benefits are also extended to self-employed workers.

Family Medical Leave Act Provisions extended.

  • Additional coverage is now available through September 30, 2021.
  • Qualified wages for this provision move to $12,000 (up from $10,000) however the credit was not increased.
  • The Family Medical Leave Act also applies to the self-employed.

Big increase in Employee Retention Credit.

  • Businesses can get up to a $28,000 tax credit per employee in 2021, up from a $5,000 maximum credit in 2020. This credit can be claimed through Dec. 31, 2021.

There are many more provisions in the close to $2 trillion dollar spending package, including money given to states. As everyone digests this new 500-plus page piece of legislation, more clarifications will be forthcoming from the IRS and other sources.

 

Cross-Training: Essential for Small Business Survival

Have you considered cross-training your employees to ensure more than one person knows all key functions? Cross-training can be a win-win situation for you and your employees. Large companies often use it to prepare managers for future promotions. But in small companies, it can be the difference between success and failure.

Why companies cross-train

Cross-training provides greater flexibility in scheduling, especially when dealing with unexpected workload and staffing issues. It also helps employees develop expertise in other areas and increases their awareness of the company’s roles and functions, helping them better understand where they fit into the big picture.

For employees, some of the biggest advantages of cross-training include:

  • Learning new skills
  • Working more efficiently and effectively with other departments
  • Feeling more invested in the company
  • Enjoying growth opportunities

Create your cross-training plan

How you implement cross-training will depend on the size and nature of your business. Consider prioritizing the departments that need and/or want cross-training the most. These departments may be understaffed or have many new employees. Look for important functions that are currently dependent on a single person’s knowledge. These areas should be a focus of your cross-training program.

If you’re considering cross-training your team, here are a few tips to help you prepare:

  • Document your key processes. You cannot cross-train if you don’t know the process. These written processes will turn into training documents as you implement your program.
  • Communicate to your team. It’s essential to get everyone involved before you start a cross-training program. Help your team understand why the company is cross-training employees. Reasons may be to prepare for organizational growth or new industry standards, to cover functions when someone is impacted by the pandemic, or to adjust to a changing structure around roles and responsibilities. Then continue to communicate with your team throughout the program with status updates and team meetings about progress and next steps.
  • Present cross-training as an opportunity. Your employees may be more resistant to cross-training if it feels like it’s an obligation or a threat to their roles. You can help them feel motivated by highlighting the benefits, like developing different skill sets and having a better understanding of how their contributions positively impact the business.
  • Start with a small pilot program. Test the waters with a select group of employees to get a better understanding of what works and what needs to be tweaked. You can then expand the program later as you gain insight and experience.
  • Determine cross-training hours. Figure out how much time can be dedicated to cross-training for each team to still run efficiently. This may include setting aside a few hours each day, or setting aside full days for a certain period of time to focus on cross-training. If your business is seasonal, ramp up cross-training during your low seasonal period.
  • Listen to feedback. You may learn that some employees have already started cross-training on their own. You can use this kind of valuable feedback to fine-tune your official cross-training program.

Keep in mind that some employees may resist having to train others, and productivity may suffer in the short-term. But remember the cost of not cross-training. If you lose a key employee and no one else knows how to do their tasks, your business may have trouble finding a replacement.

 

Don’t Overlook Renters Insurance

Do you rent an apartment or condo? If so, do you have renters insurance to protect your belongings and to cover you against liability claims?

A surprising number of renters don’t bother with insurance. Some assume they’re covered by their landlord’s policy. Wrong! Usually that covers only damage to the building and liability claims against the landlord. Others say their belongings aren’t worth enough to justify the cost. But add up how much it would cost you to replace everything you might lose in a fire and you’ll be surprised. In most cases, the cost of insurance is a small price to pay for the protection you’ll receive.

Typical protection

Renters insurance, sometimes called a tenant policy, typically protects against three things:

  1. Loss or damage to your personal belongings from fire, theft, etc.
  2. Liability claims from someone injured in your apartment
  3. The cost of temporary living expenses if your apartment is made uninhabitable by some catastrophe

When you buy renters insurance, you’ll have to decide the amount and type of coverage. Your agent can help you estimate the value of your belongings. You can either choose “actual cash value” coverage or “replacement value coverage.”

The first pays you the estimated value of items at the time of loss, based on their age and condition. The second pays the cost of replacing items with equivalent new items, up to the maximum value of coverage. The second method will pay you more, but obviously the premium will be higher. Try to identify anything of special value, such as expensive jewelry or electronic equipment. You may need a policy rider to cover the full amount of these items.

A few tips

Bundle for discounts. You may receive a discount if you buy your renters insurance and car insurance from the same company.

Save with roommates. If you have a long-term roommate, ask if you can take out a joint policy instead of two separate ones.

Know when and where kids are covered. If you have children living away at college, check whether they’re covered under your homeowners policy. Once they leave college, though, they’ll need their own insurance.

Take inventory. Create a thorough inventory of your belongings, recording the model and serial number of any equipment and take plenty of photos. This could be invaluable to support your claim if you ever have a loss.

 

And Because Kindness Really Does Matter: The Gift of Grace

After living under the weight of the pandemic for more than a year and listening every day to the bad news around us, why not look for ways to change the conversation by doing something nice and unexpected for someone else.

Here are some creative ideas:

  • Pay it forward. The next time you are in a drive-through line to pick up food, pay the bill for the car behind you. This unexpected act of kindness is sure to bring a smile.
  • Become a tutor. Many students find virtual classrooms to be challenging and could use some extra help. And you don’t need to be an expert! Even with students re-entering the classroom, your local school may be in need of assistance.
  • Look to your neighborhood. Every neighborhood has someone who could use help. From single parents to seniors, simple everyday chores could be a real chore for them. It might mean mowing the grass or offering to go shopping to pick up items for them while you are out. And if you’re up for it, consider offering free babysitting services for an hour or two so parents can take a well-deserved break.
  • Make an elderly friend. Call a local nursing home or assisted care facility and ask if they have a friendship program that connects you with a resident that could use a pen pal. Get your kids to create a card with a picture to go with a short letter they write themselves. When it’s appropriate after the pandemic, consider regular, in-person visits to say hi to your new pen pals.
  • Do a good deed daily. This is a great way to create the habit of undertaking daily, random acts of kindness. By doing a good deed every day, your vision will change and you’ll see more opportunities to help. Opening a door, picking up trash or helping a single parent who is juggling different tasks are all great examples of this.
  • Bring back forgiveness. When someone makes a mistake, provide an environment to accept an apology and leave room to genuinely forgive. Continue to be a role model in displaying the act of forgiveness.

Giving the gift of grace is not only rewarding for you, but is also contagious to everyone around you.

As always, should you have any questions or concerns regarding your tax situation please feel free to call 615-750-5537.

 

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Tax Filing Deadline Change Information from PHB

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As many of you have now heard, the IRS has extended the 2020 tax filing deadline by one month to May 17.  This extension is an extension of both time to file returns and pay any balance due without additional penalty or interest.  At this time, many states, including Tennessee, have not extended their due dates nor is there an extension on any 1st quarter 2021 estimated tax payments that might be due.

In light of the short notice of this change, we plan to continue to work to file all returns we can by the original April 15 deadline.  We will honor our original cutoff date of March 24 to receive information and guarantee that we’ll complete the return before April 15.  With the extension of time, we will also set a new cutoff date of April 23 to guarantee completion before the new May 17 due date.  If needed, we can also file a regular extension prior to the new May 17 due date which will extend your return due date to October 15.

Finally, many of our staff members have scheduled time off post April 15 in anticipation of a normal filing season.  We will honor these time off requests and while our office will not be closed, we will have various staff members out of the office during April and May.  Please know that we will continue to work toward completing all returns in timely, accurate and efficient manner.

We will continue to monitor this situation and communicate any updates as they become available.  We appreciate and thank all of you for being great clients.