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.

 

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.

March 2021 Newsletter

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Spring is almost here! With April 15th right around the corner, get answers to common tax questions in this month’s newsletter. Also included is a look at how bank reconciliations still play an important part of your financial health and a reminder to every small business owner to classify their workers correctly or pay a heavy price with the tax authorities.

Please call 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.

Answers to Common Tax Questions

With the April 15 tax filing deadline right around the corner, here are answers to some common tax questions.

  • When will I get my refund? The pandemic and additional stimulus payments will, in all probability, delay refund payments. But as of now here are the old wait times to receive your refund.* E-file return with a direct deposit – 1 to 3 weeks

    * E-file return with a mailed check – 1 month

    * Paper file return with a direct deposit – 3 weeks

    * Paper file return with a mailed check – 2 months

    NOTE: If you want exact information on the status of YOUR refund go to www.irs.gov/refund and follow their instructions.

  • What’s the most common delay in completing a tax return? Missing items! W-2 and 1099 forms are some of the most common tax documents to go missing. If you have multiple jobs, whether full-time or part-time, you’ll be getting multiple documents in the mail. It’s easy to lose track of all these documents if you don’t have one place you put them once received.
  • Can I still get a stimulus payment? If you’re still waiting on either the 2020 or 2021 stimulus payment, file your 2020 tax return and claim the Recovery Rebate Credit. This is why it is important to keep track of any payments you receive from the government during the year. You will need them to account for any missing payments or underpayments.
  • Can I correct a tax form that has an incorrect dollar amount? If you receive a tax document with incorrect information, contact the company that issued the document and try to get it fixed immediately. If you can’t get a corrected form right away, include both the incorrect form and the correct dollar amount when turning in your tax documents to have your return prepared.
  • Can I deduct charitable contributions if I don’t itemize? In 2020 you can claim a $300 charitable contribution deduction regardless of whether or not you itemize your deductions. If you missed this window of this above-the-line donation in 2020, never fear as it is also available in 2021 with an increased limit to $600 for married couples. So save those donation receipts!
  • Is this taxable? While there are always exceptions, the most common taxable items that are questioned include unemployment benefits and withdrawals from non-Roth retirement accounts. Some things, like Social Security, are often, but not always, taxable.

The New World of Bank Reconciliations

Here’s a look at the new world of bank reconciliations and some ideas to use to ensure your bank account is accurate.

The bank reconciliation purpose

In a nutshell, a bank reconciliation ensures your account is accurate. This is done by comparing all your activity with what the bank is reporting.

The importance of timely bank reconciliations

There are several reasons for conducting these account reviews on a timely basis:

  • Catch a mistake by the bank. Banks make mistakes. Reconciliations can help you catch these bank errors. And errors are more common with digital payment systems…often a small transposition or machine misread of a number can create a payment error.
  • Catch a mistake by you. Yep, it’s difficult envisioning making an error, but that happens, too. It is easy to record the wrong payment amount. The only way to catch this is to look at your account and compare it to what you think you paid.
  • Catch unauthorized use. If someone hacks into your mobile phone’s payment app and spends $20 of your money, how would you ever find out? Reconciliations uncover fraudulent activity you may have missed.
  • Properly monitor automatic payments. With monthly payments automatically coming out of your account, it is easy to forget to account for these payments and have less in your account than you think you do. Timely reconciliations also help you identify ongoing payments that should be discontinued.

Tips for reconciling your accounts

Here are some tips for reconciling in the new world of banking.

  • Reconcile every week (or every day!). Gone are the days when you need to wait for your monthly bank statement in the mail to reconcile your account. Use your bank’s online tools to reconcile once a week or even once a day. This will help identify problems as they occur and is especially important in identifying possible hacking or theft.
  • Use your favorite app to capture your spending. Secure online applications are now replacing the traditional check register. You’ll still need to be disciplined to use the online tool when you spend money, so look for an application that is easy to record your spending.
  • Combine reconciling with budgeting. Use your reconciliations as an opportunity to become better with budgeting your money. Use reporting functions to help classify your deposits and payments. Then compare them with what you think they should be. This moves the discipline from simple reconciliation to a more planned approach to comparing your budget to actual spending.

The way bank reconciliations are done may have changed over the past 20 years, but the vital role they play in maintaining your financial health will never disappear.

Get Your Contractor or Employee Classification Right! Tax challenges can be VERY expensive

As a small business owner, you may face the issue of whether to classify workers as employees or as independent contractors.

Classifying your workers as independent contractors generally saves you money. That’s because you avoid paying employment taxes and benefits on their behalf.

If the IRS determines that you misclassified your employees as contractors, you could end up paying all of the employment taxes and benefits that would have been paid over the years. Depending on the size of your work force, the cost to your business could be substantial.

In determining whether the person providing a service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. There are three primary categories of control and independence that the IRS considers when determining if a worker is a contractor or an employee:

  • Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? If yes, the worker is an employee.
  • Financial. Are the business aspects of the worker’s job controlled by the payer? This includes things like how the worker is paid, whether expenses are reimbursed and whether the employer provides tools and supplies. If yes, the worker is an employee.
  • Type of relationship. Are there written contracts or employee-type benefits? If contracts are involved, the worker may be a contractor. If benefits such as a pension plan, insurance and vacation pay are made available, the worker most likely is an employee.

Deciding whether a worker is a contractor or employee can get complicated. And remember that there are significant financial consequences for incorrectly classifying a worker. Please call if you have a question about how to classify one or more of your employees.

The $24,000 Tax Time Bomb – A terrible tax surprise everyone should know

What follows is a true story. A story with a sad ending. But one that has a lesson for everyone. Stick with the story, with a high degree of certainty you probably know someone in this exact situation.

The ingredients

Back in the 1970s, U.S. Savings Bonds were a popular savings alternative. Grandparents purchased them for kid’s college. Many used them to build funds for retirement. Even better, you paid ½ the face value and later (usually 20 years) the bonds matured at twice what you paid for them. So a $1,000 investment yielded $2,000 when it reached maturity. In our case, this tax bomb had the following ingredients:

  • Converted old Series E savings bonds with deferred interest;
  • Series HH savings bonds with annual taxable interest;
  • Owning un-cashed savings bonds that no longer earn interest;
  • Little help from the bank; and
  • Confusing information from federal tax authorities about impending tax obligations.

The bomb is set

Joe purchased Series E saving bonds each year in the 1970s. With half down and promise of double value upon maturity, Joe amassed a nice $140,000 retirement fund. After 20 years the bonds matured. Joe did not yet need the money, so he converted them to Series H savings bonds. This effectively deferred the interest income on the Series E bonds since the bonds were not cashed.

With the new Series H savings bonds, Joe paid federal income tax each year on the interest earned. Meanwhile the taxable interest from the series E bonds continued to be deferred.

The result? Joe thought he was paying tax on the interest each year…BUT there was a sleeping tax bill on interest of $70,000 just waiting until Joe cashed in his series H bonds!

The bomb explodes

Joe received word that his series H bonds would no longer pay interest. So he tells his grandson to go to a bank and cash in the bonds. Heck, why have bonds that no longer pay interest? And…it’s no big tax deal because he has been paying tax on his Series H bond interest each year. The grandson has financial power of attorney so he does as his grandfather asks.

Surprise! He receives a notice from the IRS saying he owes them $24,000! This includes plenty of penalties and tax.

Lessons for all of us

  • Never disregard 1099s or printed details. When the grandson cashed the bonds, if he looked closely on the face of the bonds, he may have noticed the deferred interest. But it would contradict what grandpa had told him. Further, his grandpa probably received a Form 1099 that was disregarded because he believed he was already paying the tax.
  • Old savings bonds can be confusing. There are many different issues and flavors of savings bonds. When you see any uncashed bonds, conduct the necessary research to understand your potential obligations. This is especially true for bonds past their maturity date.
  • Ask before you sell. Always understand the tax consequences BEFORE you sell any property. Even the most innocent of transactions can have their own tax time bomb. So call an expert before you buy or sell.
  • Tax planning matters. While Joe would always owe federal income tax when he cashed the bonds, he could have reduced his effective tax rate by cashing them over time instead of all in one year. In this case, it exposed a lot of income to a much higher tax rate. He could have saved over $10,000 in tax with a little planning!

Because neither the bank nor federal taxing authorities believe it is part of their duty to help you make knowledgeable tax decisions, you are on your own. This one-way street of knowledge makes having an expert on your side more important than ever!

Starting a Business Now Could Make a Lot of Sense

The same factors that we’ve been dealing with for the past 12 months during the pandemic can also create an opportunity if you are considering starting a small business.

Problems create opportunity

For one thing, fewer businesses in the marketplace can mean fewer potential competitors. For a start-up company, that can be good news.

Also, a slower economy can mean cheaper prices for certain goods and services you’ll need to get up and running. As companies close branch offices, they may be willing to sell office equipment, furniture, electronics, and other items at discounted rates. Commercial property managers have tons of empty space with no rent income. They may be willing to cut you a deal.

Skilled labor is also more readily available in a slow or uncertain economy. With today’s employment outlook, skilled workers may be willing to take lower salaries, at least for now. As your business prospers, you may be able to ramp up salaries and offer other benefits.

Some time-tested suggestions

If you’re thinking about starting a small business now while the short-term economic outlook is still slow or uncertain, here are some time-tested suggestions:

  • Start small. Test the market for your product or service without risking too many resources. This could be as simple as a concept test that you share with a few prospective customers. Or it might be creating a pop-up restaurant with pick-up or delivery only. Not only does this approach take less money, it also develops a proven business model you can then present to bankers to possibly obtain more funding when you wish to expand. So consider taking it slow and letting it build.
  • Under promise and over deliver. With customers hard to come by in some industries, consider wowing your customers even more than you normally do to try and quickly gain their loyalty. Remember, success is not always defined by what you do or make, but how well you do it!
  • Seek advice. Find other small business owners and pick their brains for suggestions about overcoming obstacles, keeping the business focused, and prospering during hard times.
  • Look for jump starts. Sometimes there is a similar business that could use your help or is willing to sell at a reasonable price. Starting out with a book of business and systems already in place can save a substantial amount of time and money.
  • Create a plan. Start with a feasibility study of your idea and then translate that into a well-developed introductory plan. This review and road map will help you succeed when starting your business.
  • Build a team. Successful businesses have great accountants, legal advisors, and trusted suppliers. Start networking to build your team. You’ll need your team both in the short-term as you start your business and in the long-term as you look to grow your business.

Please call if you’d like additional suggestions for getting your business started.

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.

February 2021 Newsletter

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As the tax filing season gets underway, now is a great time to review some tips to help ensure your tax return is processed without a delay. Also included are reminders of some surprising tax situations this year because of the pandemic. For small businesses there are some organizational hints that seem to work and a thoughtful article for all of us to consider about how we tend to undervalue the worth of our personal identities.

Please call 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.

4 Ways to Make Sure Your Tax Return Doesn’t Get Stuck

Here are four ways to make sure the preparation of your tax return keeps humming along until it gets filed.

  1. Keep tax documents in one place. Missing items is one of the biggest reasons filing a tax return gets delayed! Find a place in your home and put all tax documents in this one place as you receive them. Common missing items this year will include the new 1099-NEC for any taxpayers that are contractors, consultants or part of the gig economy.
  2. Organize documents by type. Every tax professional has a story of someone bringing their documents to them in a shoebox or storage container. All this does is increase the amount of time it takes to prepare your return, so it’s best to sort your documents in tax return order. Pull out last year’s tax return and create folders for each section including income, business/rental information, adjustments to income, itemized deductions, tax credit information and a not-sure bucket.
  3. Create list of special events. You receive a Form W-2 from your employer every year. You may get a 1099-INT from your bank if you earn interest income on your deposit accounts. But selling a home usually doesn’t happen every year. Retiring from a 40-year job doesn’t happen every year. Sending a child to college also doesn’t happen every year (although it might seem like it does!). If you don’t write down these unusual events as they happen, you might forget them when your tax return is being prepared. And you may not remember until the moment your return is about to be filed. This is sure to cause delays.
  4. Don’t forget your signature! You may be surprised to learn that even if you electronically file your tax return, you still must sign Form 8879, which authorizes the e-filing of your return. So whether it’s a traditionally-filed paper tax return or one filed electronically, a signature is required.

These are four of the more common reasons why the preparation of your tax return may get delayed. Be prepared and file your return without a hitch!

Be Prepared For These Pandemic-Related Tax Surprises

Don’t get shocked by a high tax bill! Be prepared for these pandemic-related tax surprises when you file your 2020 tax return.

  • Taxes on unemployment Income. If you received unemployment benefits in 2020, you need to report these benefits on your tax return as taxable income. Check to see if either federal or state taxes were withheld from unemployment payments you received. If taxes were not withheld, you may need to write a check to the IRS when you file your tax return.
  • Taxes from side jobs. Did you pick up a part-time gig to make ends meet? Payments received for performing these jobs may not have had your taxes withheld. If this is the case, you’ll need to pay your taxes directly to the IRS on April 15.
  • Unusual profit-and-loss. If you run a business that was hit by the pandemic, you may find your estimated tax payments were either overpaid or underpaid compared to normal. Now that 2020 is in the books, run a quick projection to ensure you are not surprised with an unexpected tax bill when you file your tax return.
  • Underpayment penalty. If you did not have proper tax withholdings from your paycheck or your estimated tax payments weren’t enough, you could be subject to an underpayment penalty. While it’s too late to avoid a penalty on your 2020 tax return, the solution in the future is to make high enough estimated tax payments each quarter in 2021 or have the appropriate amount withheld from your 2021 paychecks.
  • A chance to claim missing stimulus payments. (A good surprise!) If any of your stimulus payments were for less than what you should have received, you can get money for the difference as a tax credit when you file your 2020 tax return.

Please use these examples to prepare yourself for a potential tax surprise during the uncertainty caused by the ongoing pandemic.

Organized Business Records Save Time and Money

Here are some suggestions to help you master the art of documenting and organizing your business now and in the future.

  • Document policies and procedures. Write down daily responsibilities, skills needed to complete tasks related to these responsibilities, and the location of all paper and electronic files. Appoint and cross-train backup staff to ensure these daily tasks are done.
  • Document your succession plan. It may not be for another 10 or 20 years, but documenting your succession plan is critical for both you as the owner and for your employees. Consider how much longer you plan on owning the business and who you have in mind to take over after you leave. If you currently don’t have a successor in mind, document your plan to either train or find this person(s).
  • Document your tax planning strategy. Be aware of possible tax incentives, such as credits for hiring certain workers and accelerated depreciation available for acquiring business assets. For example, for asset purchases, retain receipts and record the purchase details. These details include the type of equipment, the acquisition date, the amount of the purchase, the date you began using the equipment, and a schedule of related set-up costs.
  • Organize your daily documents. Organize your desk by shredding documents with sensitive information and scanning older papers into computer files. The most efficient method is to scan, file, and shred as soon as you are finished with a document. If you don’t have time, consider assigning document organization to specific employees and making it a task to be completed on a daily basis.

You’re busy, and you may feel that organizing your records will take more time than you have available. But spend a minute and consider how using these organizational tips may save you not only time, but money as well.

Your Identity is NOT Your Own! How companies use your identity and what you can do to protect it.

One of the most valuable things you own is YOU. Your identity includes the basics – where you live, your age, and your gender. But it also includes your interests, who you know, and what you buy. So, do you know who has your identity? Here’s the life cycle of your identity and what to do to protect it.

It gets collected. Think about the organizations that legally collect information about your identity – your employer, government entities, insurance companies, banks, credit reporting agencies, and non-profit organizations. And then add those companies you give your identity to freely – like Google, Facebook, LinkedIn, Twitter, and any other website or social media platform you visit.

It gets stored. Once your identity gets collected, it then needs to be stored somewhere. Storage is most often on servers or locally on a computer or mobile device. This is one of the core concerns with Tik-Tok, a Chinese-originated short video service. The concern is that a foreign entity will have stored U.S. citizen’s interests and behaviors that can help identify potential targets that can be manipulated.

It gets sold. Once information related to your identity and interests are collected, most organizations then sell it to other companies. Not only is information about your identity sometimes collected without your knowledge, this information is then monetized. Your viewing behavior can also be actively manipulated by the sites you view. So if you read articles about cats, you are going to get a lot more articles about cats and get ads that relate to cat-lover behavior. This is often so subtle, you do not realize it is happening.

It gets accessed. If your information is considered a public record, anybody can see it. Business licenses, property tax records and real estate ownership are just a few examples of personal information that anyone can access.

It gets stolen. Identity thieves are always looking for ways to access your information. Thieves either hack one of the organizations that collects your confidential information or find a way to trick you into giving them your information, with techniques such as phishing emails.

What you can do

  • Opt-out of providing personal information. The best place to start with protecting your identity is knowing who has access to it and asking if they really need it. Consider opting out of providing information if possible.
  • Be vigilant with the data you possess. While you can’t control how secure an insurance company’s servers are, you can control how secure you handle the information and documents you possess. Be on the lookout for phishing emails, verify requests for your information and don’t forget about getting rid of documents the old-fashioned way with a shredder.
  • Deliberately monetize your identity. Stop giving away your identity without a thought. Here’s an idea. Consider you are worth a million dollars. Then see what these services are paying you for your information and how they are using it. If this little exercise gets you to pause before signing up for a new service, then the exercise is worth it!

Protect Your Tax Return With This Secret Weapon!

The Problem

You hang up the phone with a huge smile on your face. You just learned that you’re getting a pretty sizeable tax refund this year. Now all you need to do is kick back and wait a week or two for the IRS to wire the money into your bank account.

This good news, however, is unfortunately short lived. The very next day you get another phone call.

I’m sorry to tell you this, but someone else has already used your Social Security number to file a tax return.”

You’re told that you’ll still be able to eventually get your nice, big tax refund, but it may be several months before you see the money. You first need to work with the IRS to resolve your case of identity theft.

The Solution

There’s a secret weapon you can now use to protect your tax return – an Identity Protection PIN (IP PIN).

Beginning this tax season, all taxpayers who can verify their identities are eligible to obtain an IP PIN. An IP PIN is a 6-digit PIN that offers additional protections when filing your tax return. This one-time-use number is sent to you by the IRS and must be entered on your tax return along with your Social Security number. Since the IP PIN is a one-time-use number, you will receive a new IP PIN number each year from the IRS.

If someone tries to fraudulently file a tax return using your Social Security number, they will be unable to do so without this IP PIN.

What You Need to Do

  • How to get an IP PIN. To obtain an IP PIN, click here to visit the IRS’s Get an IP PIN tool to opt into the IP PIN program.
  • If yo ur identity has already been stolen. If someone uses your Social Security number to fraudulently file a tax return, ask for help to find out next steps for getting your identity fraud case resolved with the IRS.
  • Once in, tough to get out…for now. As this is the first year the IRS is making the IP PIN program available for anyone who wishes to use one, they are not ready to let you opt out once you agree to participate. They anticipate adding the opt-out feature in the near future.

Hiring Family Members – What You Need to Know!

Many business owners hire their children, their spouse, or other family members to work in their business. Sometimes this works out well. Other times it causes problems. Let’s look at the pros and cons of putting family members on your payroll.

Hiring your children

Hiring your kids for a summer or part-time job usually has more tax advantages and fewer drawbacks than hiring other relatives. The financial advantage is that if you’re paying your child to do useful work, the business gets a tax deduction for the wages paid. Your child will probably pay little or no income tax, and the after-tax wages stays in the family.

Follow certain steps to make sure the wages are fully deductible. The child must be doing a real job that helps the business, and the wages must be reasonable for the work performed. Keep detailed records of hours worked and pay salary regularly, preferably on the same schedule as other employees. In other words, treat your child just like any regular employee.

Hiring your spouse or other relatives

An advantage to hiring your spouse or other relatives are that you have an employee whom you know well, and who may be more motivated or more flexible than a non-family member. And in many family-owned businesses, it’s a powerful way to train the next generation who will take over leadership.

That same familiarity can bring disadvantages, however.

Few families are without some internal or intergenerational conflict, and that can be disastrous if it spills over into the workplace. You must also consider the effect on other employees. Any sign of favoritism or unequal treatment can cause resentment and ruin the motivation of other employees.

There could be tax benefits

In addition, depending on how your business is organized and the age of your child, you may be able to avoid paying Social Security, Medicare, and unemployment on their wages. To qualify, you must be a sole proprietor or a husband-wife eligible partnership and your child must be under the age of 18.

Be cautious moving forward

There are plenty of businesses where hiring family members has worked out just fine, but other businesses where it didn’t work out.

So think long and hard before you bring family members into the business. Talk to them and to your key employees beforehand so everyone understands and is comfortable with their roles in the company.

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.

January 2021 Newsletter

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Happy New Year!

The new year begins with more stimulus payments and other financial assistance courtesy of the latest COVID relief legislation. Read about how the new bill affects your tax and financial outlook. Also in this month’s edition is good news for business owners regarding the tax deductibility of expenses paid for using PPP loan funds that are forgiven. You can also determine how much to contribute to your retirement fund in 2021. Please call 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.

More Stimulus Payments on the Way – What you need to know NOW!

You could soon see another stimulus payment in your bank account with the recent passage of the Emergency Coronavirus Relief Act of 2020, which means more direct relief to you and your family. Here are some of the major points you need to know that are buried inside this $900 billion piece of legislation.

Direct stimulus payments to you. The legislation includes a $600 payment per person, including adults and dependent children who are under age 17. Payments are based on your 2019 income and should start being distributed shortly, per Treasury Secretary Mnuchin. The payment amount phases out for adjusted gross incomes over $75,000 for single taxpayers and $150,000 for married couples.

Things to consider:

  • If your income in 2019 is over the phaseout threshold, but not over the phaseout threshold for 2020, you will have an opportunity to request the funds on your 2020 tax return.
  • Unlike the first round of stimulus payments in 2020, if you have someone in your household who is ineligible, you can still get payments for those individuals who are eligible.
  • If the number of adults or dependents in your household changed during the year, you will need to keep track of this and be prepared to issue corrections to ensure you receive the correct payment amount.
  • The payment mechanism in place for the initial 2020 direct stimulus payments should help facilitate distributions of this second round of direct stimulus payments.

Extension of unemployment benefits. Federal unemployment benefits of up to $300 per week are extended through March 14. Benefits for self-employed workers, set to expire at the end of 2020, are also extended.

Things to consider:

  • If you have not already done so, you must file for unemployment with your state.
  • These benefits also apply to self-employed and part-time employees. Many workers who were eligible for this unemployment earlier in 2020 did not file because this class of workers is typically not eligible for most state unemployment programs.

New PPP loan funds. There is additional money available from the Small Business Administration (SBA) for a new round of PPP loans. The new loan program is targeted to businesses that need the funds. To qualify, your business must have 300 or fewer employees and have seen a drop in revenue of 25% or more during any quarter in 2020. Some of the money is earmarked for very small borrowers, underserved communities, and small lenders. There are even simplified requirements for forgiveness if the loan amount being applied for is less than $150,000.

Eviction moratoriums and rent assistance. The bill extends until January 31, 2021 a moratorium on evictions that was scheduled to expire at the end of 2020. The bill also includes $25 billion in emergency assistance to renters.

There is much more in this huge bill, including relief for hard-hit industries, education, student loans, and vaccine assistance. Please keep up-to-date as more is learned after a full review of the bill is made available.

PPP Loan Expenses Are Now Tax Deductible

If you or your business received funds from the Paycheck Protection Program (PPP), the recently passed Emergency Coronavirus Relief Act of 2020 will help to dramatically cut your tax bill. Here’s what you need to know.

Background

The PPP program was created by the CARES Act in March 2020 to help businesses which were adversely affected by the COVID-19 pandemic. Qualified businesses could apply for and receive loans of up to $10 million. Loan proceeds could be used to pay for certain expenses incurred by a business, including salaries and wages, other employee benefits, rent and utilities.

If the business used at least 60% of loan proceeds towards payroll expenses, the entire amount of the loan would be forgiven.

The Dilemma

While the CARES Act spelled out that a business’s forgiven PPP loan would not be considered taxable income, the legislation was silent about how to treat expenses paid for using PPP loan proceeds if the loan was ultimately forgiven.

Congress intended for these expenses to be deductible for federal tax purposes. But since the legislation was silent on this issue, the IRS swooped in and deemed these expenses to be nondeductible.

There was considerable debate over the latter half of 2020, with Congressional politicians explaining that their intent was that the expenses be deductible and the IRS responding “Too bad, they’re nondeductible.”

The Solution

Congress overruled the IRS’s position in the Emergency Coronavirus Relief Act of 2020. The legislation officially makes deductible for federal tax purposes all expenses paid for using proceeds from a forgiven PPP loan.

Stay tuned for updates as to how this new legislation affects your business.

2021 Retirement Plan Limits

As part of your 2021 tax planning, now is the time to review funding your retirement accounts. By establishing your contribution goals at the beginning of each year, the financial impact of saving for your future should be more manageable. Here are annual contribution limits for 2021:

Take action

If you have not already done so, please consider:

  • Reviewing and adjusting your periodic contributions to your retirement savings accounts to take full advantage of the tax advantaged limits
  • Setting up new accounts for a spouse or dependent(s)
  • Using this time to review the status of your retirement plan
  • Reviewing contributions to other tax-advantaged plans including flexible spending accounts and health savings accounts

Seven Tips For Financial Wellness In 2021

Common New Year’s resolutions are to lose weight or become more active. Perhaps 2021 is the year to shift focus. Here are seven tips to help you become more financially fit.

  • Create a budget. It’s easy to get into financial trouble if you spend more than you earn. By watching your budget more carefully, you might be surprised by how much you spend in certain areas of your life. Many banks and credit unions offer budgeting tools directly on their websites.
  • Get a free credit report. You can obtain a free copy of your credit report from each of the three major credit reporting agencies every 12 months. Reviewing your reports regularly can help ensure the data in your report is accurate and allows you to contact creditors to dispute any errors.
  • Pay down debt. Start chipping away at your debts through a series of regular payments. Begin with bills that have the highest interest rates. Research whether it makes sense to consolidate debts at a more reasonable interest rate.
  • Review your investments. With recent changes in Washington, D.C. and market volatility, reviewing your investments is more important than ever. Protect yourself against risks by diversifying across different classes of investments. If you have not developed an asset allocation plan, do so. If you have, adjust your portfolio to ensure it is still meeting your objectives.
  • Plan ahead for retirement. Take advantage of tax-favored retirement plans such as a 401(k) at work. Both the contributions and earnings are tax-deferred and can compound over time. The 401(k) limit for 2021 is $19,500 ($26,000 if you’re age 50 or over). Also consider contributing to an IRA, which has a contribution limit of $6,000 ($7,000 if you’re age 50 or older).
  • Check your insurance coverage. Things can change over time, so don’t assume the coverage you acquired years ago still provides adequate protection for your family or business. Take a look at your policies to determine if adjustments are needed.
  • Save for emergencies. And finally, would you be financially prepared if your business failed or you lost your job? The COVID-19 pandemic has reminded us the importance of establishing an emergency fund that can last for several months if you lost your salary or business revenue dramatically declines.

Acting on all these tips may seem a bit overwhelming. By focusing on a few now, before you know it, your financial wellness will improve over time.

Make Preparations for Form 1099s This Year – Be looking for new Form 1099-NEC!

Here are three tasks to consider that will make meeting your business’s information reporting requirements less stressful this tax season.

  • Review your general ledger. Even if you’ve already identified 1099 vendors in your payables system, review current year expenses to make sure no new or infrequent payments have been overlooked. For example, it’s easy to forget that fees totaling $600 or more paid to service providers must be reported on a Form 1099. But be careful! There is a new form this year, Form 1099-NEC. Be sure to know whether you should use the existing Form 1099-MISC or the new Form 1099-NEC.
  • Verify vendor information. Check your files for up-to-date Forms W-9, the form you use to request a vendor’s federal taxpayer identification number (TIN). In general, you should have Form W-9 on file for each vendor who provides services, even if the transaction is a one-time event. Why? Filing mismatched 1099 forms – where the combination of name and TIN do not match IRS records – will result in a notice, and possibly penalties. To avoid problems, consider signing up for the TIN Matching Program, an online service run by the IRS, so you can verify identification numbers prior to filing 1099s.
  • Order forms. If you plan to file paper forms this year, the copy you mail to the IRS must be on forms preprinted with scan-friendly ink. You’ll also need Form 1096, the annual summary, for each type of information return you file.

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 have any control over, or responsibility for, the content of any such Websites. All rights reserved.

December 2020 Newsletter

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Happy December!  What a year it’s been! Working from a home office has become a reality for many of us this year. But what, exactly, are the rules to be able to deduct your home office expenses on your tax return? Read about some ideas to help you qualify for the deduction. Also in this month’s edition is an article outlining common tax surprises, and some ideas for small businesses to build strong, banking relationships during these uncertain times.

Please call 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.

Dates to remember:

January 15 – 4th Quarter Estimated Payments Due

Final year-end actions to  keep in mind:

Deductible gifts, Capital gains/losses, Charitable giving, Dividend income

Turn Your Home Office Into a Tax Deduction

If you are working from home for the first time in 2020, you may be wondering if your home office is tax deductible. The bad news? If you’re working from home for an employer, you normally can’t deduct your home office expenses.

Here’s a quick look at the basic requirements to be able to deduct your home office expenses, along with some suggestions for how to qualify for the deduction if you’re currently working for your company as an employee.

The basics

There are two requirements for having a tax-deductible home office:

  • Your home office is only used for business purposes. Your home office must be used exclusively for operating your business. It can’t double as the family media center or living room. To meet this requirement, set up your office in a separate area of your house. Then if you get audited by the IRS, there is no doubt that your office is used exclusively for business purposes.
  • Your home office is your primary place of business. You need to demonstrate that your home office is the primary place you conduct your business. The IRS has clarified that you can meet clients and conduct meetings at separate office locations, but your home office must be the only location where your administrative work is completed. So if you meet with clients or work on any part of your business away from your home office, keep a journal of each specific activity undertaken and describe how it doesn’t violate the primary place-of-business rule.

Looking at these two criteria, everyone that is now required to work from home probably meets both qualifications. If you’re a W-2 employee, however, you can’t deduct your home office expenses on your tax return.

Solving the problem

Here are three options for solving your problem of being a W-2 employee and qualifying to deduct your home office expenses on your tax return.

  • Become an independent contractor. The easiest way to deduct your home office expenses is by switching from being an employee to an independent contractor. With a number of firms cutting pay and hours due to the pandemic, it may be worth exploring. There’s a big warning label if you go this route, however. You will need to account for lost benefits such as health insurance, and the additional cost of self-employment taxes. If you can meet the IRS requirements for becoming an independent contractor, it may be worth doing the math and considering all the deductions your home office may make available to you.
  • Start a side business. If becoming an independent contractor for your current employer isn’t an option, consider starting a side business. You can deduct all business-related expenses on your tax return, including your home office expenses. If you go this route, ensure your home office is in a different location in your home than your other work space.
  • Consider your entire household. Even if you don’t qualify for the home office deduction, maybe someone else living in your home does qualify. So look into your options to see if a family member can take advantage of the home office deduction.

What if none of these options for deducting home office expenses are feasible for you? While you won’t be able to deduct your home office expenses on your tax return, you may still be able to end up financially ahead with the help of your employer.

Get reimbursed by your company

There’s no question you are picking up some of the expense of your home office with added electrical, heating, telephone, internet and other expenses. One way companies are solving this is by allowing employees to submit valid expense reports to cover some of these extra costs. They do this by setting up an accountable plan. With financial pressures on businesses, this might be a tough subject to broach, but if the system is already in place you may be able to find a way to get some of your home office expense reimbursed.

So if you’re stuck working as a W-2 employee, look into whether your employer offers reimbursement for home office expenses.

Figuring out how to properly deduct your home office or get reimbursed by your employer can be a lot more completed than it appears. If you need help, please call.

Common IRS Surprises

No one likes surprises from the IRS, but they do occasionally happen. Here are some examples of unpleasant tax situations you could find yourself in and what to do about them.

  • An expected refund turns into a tax payment. Nothing may be more deflating than expecting to get a nice tax refund and instead being met with the reality that you actually owe the IRS more money.What you can do: Run an estimated tax return and see if you may be in for a surprise. If so, adjust how much federal income tax is withheld from your paycheck for the balance of the year. Consult with your company’s human resources department to figure out how to make the necessary adjustments for the future. If you’re self-employed, examine if you need to increase your estimated tax payments due in January, April, June and September.
  • Getting a letter from the IRS. Official tax forms such as W-2s and 1099s are mailed to both you and the IRS. If the figures on your income tax return do not match those in the hands of the IRS, you will get a letter from the IRS saying that you’re being audited. These audits are now done by mail and are commonly known as correspondence audits. The IRS assumes their figures are correct and will demand payment for the taxes you owe on the amount of income you omitted on your tax return.What you can do: Assuming you already know you received all your 1099s and W-2s and confirmed their accuracy, verify the information in the IRS letter with your records. Believe it or not, the IRS sometimes makes mistakes! It is always best to ask for help in how to correspond and make your payments in a timely fashion if they are justified.
  • Getting a tax bill for an emergency retirement distribution. Due to the pandemic, you can withdraw money from retirement accounts in 2020 without getting a 10% early withdrawal penalty, but you’ll still have to pay income taxes on the amount withdrawn. If you don’t plan for this extra tax you will be surprised with an additional tax bill. And you may still get an underpayment penalty bill from the IRS because you did not withhold enough during the year. You may also still receive an early withdrawal penalty in error because the IRS is still scrambling to update their systems with all of this year’s tax relief changes.What you can do: Set aside a percentage of your distribution for taxes. Your account administrator may withhold funds automatically for you when you request the withdrawal, so check your statements. Your review should be for both federal and any state tax obligations. If the withholding is not sufficient, consider sending in an estimated tax payment. And if you are charged a withdrawal penalty, ask for help to correspond with the IRS to get this charge reversed.

No one likes surprises when filing their taxes. With a little planning now, you can reduce the chance of having a surprise hit your tax return later.

A Happy Banker Makes for a Happy Business

With the onset of COVID-19, small business banks are more nervous about potential loan losses than ever. Here are several tips for your business to maintain a great working relationship with your lender. These same tips can also be used if you want to plant seeds with your banker for potential future loans.

  • Produce timely financial statements. Your lender may require you to produce financial statements over the duration of your loans to ensure that you have enough cash to make consistent, on-time payments. Strive to produce up-to-date financial statements and send them to your bank before they ask for them. Not only will timely financial statements make your lenders happy, the pro-active nature of your financials will show a level of transparency to them. Be prepared to include a note explaining major changes and schedule regular phone calls to go over the business.
  • Implement solid internal controls. How does a lender have faith that the dollar amounts on your financial statements are accurate? By properly implementing internal controls. You’ll have a happy banker if your company can provide evidence that your internal controls are operating properly.
  • Communicate. If your business encounters turbulent financial waters, the best thing to do is immediately let your lender know about it. Better yet, by keeping in constant communication, your lender will most likely be able to spot if your business starts experiencing a downturn and will try devising a plan before you begin missing payment deadlines.

Remember your banker probably has their hands full right now. These tips allow them to spend more time on their problem loans, and one of them will not be yours.

 

Ideas For Better Savings Rates

Before the housing bubble burst in 2008, you could find high yield savings accounts that were paying rates over 5.0 percent. Today? These same banks are paying less than .10 percent.

So where are you supposed to put your money? Is there anywhere else you can put your hard-earned cash and generate a modest return? Here are several suggestions.

  • Social Lending. Consider a social lending site like LendingClub, a peer-to-peer loan network that allows you to invest in other people’s loans. Typical rates that you can earn range between seven and 20 percent. There is a required initial deposit of at least $1,000.Risks: Social lending is not for the faint of heart. You are acting as a bank and have to be prepared to take loan losses…just like a bank.
  • Brokerage Accounts. Brokerage accounts often have a number of options to earn ongoing interest higher than most banks. It includes investing in dividend-bearing stocks, bonds and other CDs. Many of these options will provide higher savings yields than banks, but you need to know the risks of your options before you invest.Risks: Each product offered within your brokerage account will have its own risks. For instance, dividend stock returns are not guaranteed and underlying shares can lose value. So never invest in something you don’t understand. The good news is many investment savings alternatives are insured by the FDIC and SIPC.
  • High Yield Savings Accounts. High yield accounts don’t have very high interest rates. But an account earning .4% to .7% is better than nothing. For a balance of $30,000, this yields about $200 annually. These types of accounts can be found at both online and brick-and-mortar banks and typically pay a better rate than traditional savings and checking accounts.Risks: Only choose well-respected, well-managed institutions when selecting an online account. And as always, be especially careful to take security precautions when moving funds online. Also double check to ensure your funds are FDIC insured.

The low rate environment is being influenced by the vast spending of the federal government. So until the fed moves rates up, you are going to need to stay vigilant to try to keep your hard-earned savings rates above the rate of inflation.

Using Depreciation to Control a Loan Forgiveness Tax Surprise

Bonus depreciation and Section 179 expense can be a valuable tool to help you manage your business’ profit margin this year. Here are some thoughts to consider.

The problem

Many businesses struggling during the pandemic took out Small Business Association Payroll Protection Program loans (SBA PPP loans). The SBA’s willingness to forgive these loans is now creating a potential tax obligation. This is because the expenses used to offset this loan can no longer be deducted from the business.

So the loan forgiveness could create an unexpected taxable event.

A possible solution

Instead of paying some of the loan back to cover the tax created by the loan forgiveness, consider investing some of the funds in necessary capital purchases. You could then use special depreciation rules to manage your tax obligation. This can be done by using:

  • Bonus depreciation. For assets that you purchase during the current fiscal year, you can deduct 100% of an asset’s cost using bonus depreciation. You can use this option to expense 100% of an asset’s cost using bonus depreciation this year.Note: This bonus depreciation is 100% in 2020 and 2021. After that the bonus depreciation amount phases out through 2025.
  • Section 179 depreciation. Section 179 depreciation works similarly to using bonus depreciation, as you can deduct 100% of an asset’s cost that you purchase and place in service during the current year. You can deduct up to $1.04 million of qualified Section 179 purchases in 2020.

The downside

Whenever you use these special tax rules, you will lose the ability to take this depreciation for these capital purchases in future years, so some tax planning is required. But at least you will be able to use some of the forgiven loan proceeds to help your business, versus paying it back in the way of additional tax.

Even worse, recent IRS notices suggest the PPP loan forgiveness needs to be reflected in this year’s tax return, so you have little time if you wish to take advantage of bonus depreciation and Section 179 this tax year. To consider this option, you will need to select qualified assets and ensure they are placed in service before the end of your tax year. But if used correctly, depreciation can be used to offset business income and lower your taxes. Please call if you want to discuss your situation.

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.

November 2020 Newsletter

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With all the talk during the pandemic to save money, it is possible to go too far. Included here are some ideas to make sure this does not happen to you. If your small business is struggling on how to make ends meet during this challenging time, we offer some hints to effectively price your products.  Please call 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.

Saving Too Much Can Sometimes Be Expensive

When it comes to money topics, you’re always hearing how to save more. But even with the best of intentions, you can run into trouble when you try to save too much. Here are four ways that savings can get in your way and how you can correct them.

Savings that turns into spending. Buying something on sale to save money is still spending. Focus on the amount of money you have to part with, instead of focusing on the great deal. These deals use the human emotion of the fear of losing out, causing you to spend money you did not plan on spending in the first place.

What you can do: Plan your purchases. If something on your list of planned purchases is then on sale, you will truly be saving money. So instead of saving 50% on a new lawn mower, save 100% because you already have one that works just fine.

Savings that turns into hoarding. This could happen if you have a hard time parting with things for fear you might be able to use it in the future. This could be as simple as buying a new set of dishes or a new pair of shoes and hanging on to the old ones just in case. Each time you acquire something new without throwing out the old, your house gets stuffed with items you don’t need.

What you can do: When you need to replace something, try to sell the old item right after bringing in the new item(s). Not only will this keep the clutter out of your home, it will effectively lower the cost of the replacement. And periodically review the contents of your household. Have you used it in the last 12 months? If not, chances are good that you won’t need it in the foreseeable future.

Not replacing things when you should. This savings behavior might actually be costing you money. For example, that old water heater still works, but it could be so inefficient that it is costing a ton in excess electricity or gas. The same could be true with an old car’s maintenance bills or even wearing clothes even though you’ve worn holes in them.

What you can do: Consider replacements as investments. For instance, replacing the old brakes in your car is an investment in your safety. Replacing your worn out shoes is an investment in your comfort. Replacing your toothbrush that is falling apart is an investment in your health.

Risking damages or dangers. It’s great to save money by doing something by yourself, but know your limits. Sure, cutting down that old tree by yourself can save you a ton of money. But the emergency room is full of do-it-yourself savers who lack the experience to do it safely. The same can be true with making financial decisions or even wading through the tax code on your own.

What you can do: Know your limits and ask for help. Sometimes paying a little more is worth it if it means avoiding a potentially dangerous or financially negative situation.

 

How to Walk the Tightrope When Raising Prices

Raising prices can be fraught with risk during good economic times. So what happens if you try to raise prices during bad economic times?

As Hamlet would say, “Ah, there’s the rub.” If you raise prices, you risk losing clients to competitors. If you don’t, decreasing revenue or rising costs can capsize your company. So what’s a small business supposed to do?

The Art of Pricing

Raising (and, sometimes, even lowering) prices can be a balancing act. As with any major business decision, pricing should take into account various factors. Here are several to consider.

Analyze costs. First, you need to carefully analyze the costs needed to bring your products or services to market. Such expenses might include raw materials, storage, personnel, advertising, delivery, rent, equipment, taxes and insurance. Failure to cover all these costs in your price will inevitably lead to shrinking profits.

Establish profit margin. Next, it’s important to establish an acceptable profit margin. This is where the art of pricing begins. To find your company’s sweet spot with regards to pricing, consider researching competitors in your region to determine their pricing for comparable products, raising your finger to the wind to discern the business climate and asking your customers about their preferences.

Listen to your customers. Your customers will tell you if you raised prices too high. They’ll either continue to buy your product or seek out a competitor.

Consider incremental price increases. Small, incremental price increases tend to be more palatable to customers than a few large changes. We see this every day in the rising cost of gasoline, utilities and taxes. Many customers can handle incremental inflation…just don’t shock them with a huge increase all at once.

When considering pricing, it’s important to take a long, hard look at both your costs and the quality of your products and services. Customers will generally pay a premium for goods and services that provide greater value. Successful business owners endeavor to increase both the actual quality of their products and the perception of that quality in the minds of customers. Do both well, and a price increase may be in order.

 

Steer Clear of Money-Making Scams While You’re Stuck at Home

Scammers are targeting people looking to make money while stuck at home.

While there are plenty of legitimate opportunities to earn extra cash, the Federal Trade Commission (FTC) says to steer clear from the following money-making scams:

At-Home Medical Billing Businesses. Many medical billing business opportunities are worthless. Their promoters don’t tell the truth about earnings potential and fail to provide key information.

Envelope-Stuffing Schemes. Offers that promise quick and easy income from stuffing envelopes at home virtually never pay off.

Telemarketing Resale Scams. Selling brand-name merchandise from home can be a great way to work at home making some extra money. But fraudsters sometimes call to lure you into a resale proposition. They’re the ones who make the money – and they make it from you.

Work-at-Home Businesses. Many work-at-home opportunities are promoted by scam artists. If you pay in, it’s likely that you will spend more than you can earn.

How to Protect Yourself

  • Do your research. Talk to other people and read reviews about the work-from-home opportunity you are considering. Also consider checking out a company with your local consumer protection agency, your state’s Attorney General office or the Better Business Bureau.
  • Request the FTC’s one-page disclosure document. Sellers of work-from-home opportunities are required by the FTC to give you a one-page disclosure document that offers key pieces of information about the opportunity. Click here to see what the document looks like.
  • Ask follow-up questions. In addition to reviewing the disclosure document, ask the sellers various follow-up questions such as the following: What tasks will you have to perform? Will you be paid a salary or be on commission? What is the basis for the company’s claims about what you can earn? When will you get your first paycheck?

Reporting a Scam

If you have spent time and money on a work-at-home program and now believe it may not be legitimate, contact the company and ask for a refund. If you can’t resolve any disputes with the company, file a complaint with the FTC at ftc.gov/complaint or call 877-FTC-HELP.

Also file a complaint with your state’s Attorney General office or the state where the company is located.

 

Retirement Savings Tips for Small Business Owners

As an owner of a small business, you’ve proven that you’re a self-starter by operating a successful private enterprise. Of equal importance is applying your skills towards saving for your future. Here are some of the most popular tax-advantaged retirement vehicles for small business owners in 2020 and some tips on saving for retirement.

Options if you’re not currently enrolled in a plan

For small business owners not currently enrolled in a retirement plan, here are three of the most popular retirement account options:

  • Simplified Employee Pension (SEP) IRA Account. Contribute as much as 25% of your business’s net profit up to $57,000 for 2020.
  • 401(k) Plan. Contribute up to $57,000 of your salary and/or your business’s net profit.
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA Account. You can put all your business’s net profit in the plan, up to $13,500 plus an additional $3,000 if you’re 50 or older.

Which plan should you choose? SEP and SIMPLE IRAs are ideal for either sole proprietors or really small businesses (no more than one or two dozen employees). Due to higher administrative costs, 401(k) plans are usually more suited for larger small businesses (more than one or two dozen employees).

Tips to maximize your retirement contributions

For small business owners who are currently enrolled in a retirement plan, here are some suggestions for maximizing your annual contributions into your retirement accounts:

Pay yourself first. Instead of funding your retirement account with whatever is left over after paying your monthly bills, decide at the beginning of each month how much you want to set aside to fund your retirement. Make funding your retirement each month as important as your other bills. Then assume that you pay your retirement bill first. If you run out of money before paying all your bills, decide if there are any expenses that can be pared back for subsequent months so you can meet your monthly retirement savings goal.

List your retirement contributions on your income statement. It is easy to forget about retirement planning when running the day-to-day operations of your business. To keep retirement contributions top-of-mind, record these as a separate line item on your business’s income statement.

Review your tax situation at least twice a year. Tax planning is now more important than ever with the uncertainty caused by the recent pandemic. So review your tax situation at least twice every 12 months to see how to maximize each year’s retirement contributions.

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

October 2020 Newsletter

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Does your monthly income seem a little higher than normal? If so, that may actually be a sign of trouble ahead. Find out how a tax trap could be lurking in your paycheck. Also read about your options for what to do with your 401(k) when switching jobs and how to build your emergency fund.

Please call 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.

Is a Tax Trap Lurking in Your Paycheck?

Does your paycheck look a little higher than normal? If so, it could be a tax trap.

The Problem

A payroll tax holiday effective September 1 was recently signed via a presidential executive order. Payroll tax holidays typically provide forgiveness of Social Security and Medicare taxes that are normally withheld from your paycheck.

This year’s tax holiday, however, is NOT necessarily a forgiveness of Social Security and Medicare taxes because the order is not yet supported by an underlying legislative action. So even if your employer removes your Social Security and Medicare tax from recent paychecks, there is a possibility you will need to pay it back at a later date. That could mean a pretty large tax bill for you in early 2021!

What you need to do

  • Compare paychecks. Get your last paycheck from August and your first paycheck from September. Compare the amount of Social Security and Medicare taxes withheld from your August paycheck to your September paycheck. If the amounts are the same, then your Social Security and Medicare taxes are still being withheld.
    If you notice that the amounts are different, or that no Social Security or Medicare taxes are withheld from your September paycheck, then that’s a signal you may have a tax repayment bill in early 2021.
  • Remember to keep checking each paycheck. Companies are struggling to figure out if they are required to comply with the presidential executive order, payroll providers are trying to figure out how to comply, and everyone is wondering whether the tax obligation will be permanently forgiven.
  • Be prepared to pay it back. If no Social Security or Medicare taxes have been withheld from your paycheck through the end of 2020, be prepared to write Uncle Sam a check to pay these taxes in early 2021. If possible, open a savings account to set aside the Social Security and Medicare taxes that were not withheld from your paychecks. When it comes time to pay your taxes, the money will be ready to go.
  • Check back here for updates. There’s a chance Congress passes a law that forgives the Social Security and Medicare taxes not withheld from your paychecks. If this happens, you will have a nice start on an emergency savings fund should you need it.

If you have any questions about how this payroll tax executive order affects you, please call.

Switching Jobs? Here’s What To Do With Your 401(k).

Suppose you’re switching jobs if you were furloughed because of the pandemic or you’re simply searching for greener pastures. If you have a 401(k) from your soon-to-be former employer, you must decide what to do with your retirement account when you leave. Here are your four options:

  • Leave the money in your previous employer’s pension plan.
  • Roll over the money to your new employer’s pension plan.
  • Roll over the money into an IRA.
  • Take the money and run.

So which of these options should you choose? Here are some things to consider as you think about what to do with your 401(k) account:

Keep the borrowing option open. If you want to borrow money from your employer-sponsored 401(k) account in the future, consider rolling the money into your new employer’s 401(k) plan. While you can borrow money out of your 401(k), that option is not allowed with an IRA. And if you leave your 401(k) at a former employer, they often will not let you borrow funds if you are not currently employed.

Take the money. This year may be the best time to make a withdrawal from a retirement account. In a normal year, when you make an early withdrawal from a retirement account, you owe income taxes on the amount of the distribution plus a 10% early withdrawal penalty. In 2020, this 10% penalty has been suspended. So while you’ll still pay taxes on the distribution, you may be able to avoid the early withdrawal penalty.

Invest the money. While it might be tempting to borrow or take an early distribution from your retirement account, you’ll also be depleting future earnings intended for your retirement years. So consider whether you truly need the money now to pay for an emergency or if you’re ok leaving it in your 401(k).

Whatever you decide, it is always best to transfer the funds directly from one retirement account to another. This direct transfer eliminates the possibility of your fund movement being characterized as a distribution subject to income tax. If in doubt, ask for help.

How to Build Your Emergency Fund – When You Have No Money

This year’s pandemic highlights the importance of having enough money set aside in an emergency fund to cover six to nine months of key expenses should you lose your job.

But how do you build an emergency fund if you don’t have any extra money? The easiest way to accomplish this is by reducing your expenses. Here are some creative ways to increase your cash flow by cutting your spending.

How much you need

First, determine how much of an emergency fund you need. Identify the essential monthly bills and multiply by the number of months of funds you’ll need. At minimum include the following:

  • Food
  • Housing costs, including rent or mortgage payments
  • Medical insurance
  • Transportation
  • Phone service and other utilities

Ideas to fund your emergency account

  • Temporarily suspend nonessential monthly expenses. Ditch your $150 cable bill for a $20 streaming service. Cook your meals from scratch instead of purchasing pre-packaged food. Eliminate or re-think your entertainment spending. Until you get your emergency fund fully funded, consider less expensive alternatives for items you normally purchase.
  • Radical cutbacks for a set period of time.  Instead of downsizing from cable to a streaming service, what about getting rid of television subscription fees altogether? Consider if there are areas you’d be willing to make a radical (and temporary) change to free up some cash.
  • Track your spending. When you go on a diet, nutritionists often recommend counting calories. When going on a spending diet, consider tracking your purchases. You will quickly see items that are not essential. Spending at coffee shops, paying for multiple streaming services and paying for extra cell phone services are just a few examples. You may discover problem areas you didn’t know about once you start writing down your spending in a notebook or on a spreadsheet.
  • Stick to a shopping list. Avoid impulse purchases by making a list of items you need to purchase, then sticking to the list. At the beginning of every month, write down the household items you need to purchase that month and do your best not to deviate from it. You can use this strategy with both in-person and online shopping. Remember, merchants are scientists when it comes to tempting you with impulse purchases.

You may need to get creative with your approach, but finding the money to build your emergency fund is essential, now more than ever.

Don’t Make These Business Website Mistakes

Your company’s online presence leaves a lasting impression—positive or negative. When people check out your homepage, will they stick around? Will they buy? Will they return? Make your website easy to use and current, and new orders may be just a click away. Annoy visitors and they’ll flee to a competitor.

Steer clear of the following website mistakes:

Designing the website for you—not the customer. Studies have shown that online visitors form an opinion of a company’s brand in about three seconds. If your home page is well designed, they may stick around for another ten to twenty seconds. Don’t waste these precious moments spouting details about the firm’s stellar history and the owner’s credentials. Consumers are visiting your website to get answers. Provide these answers quickly or they’ll click elsewhere.

Heavy graphics, poor load time. Many consumers are surfing the web from smart phones and tablets. Don’t make them waste valuable time waiting for a fancy webpage to load. Consider projecting a professional image with text-based content that answers the most pressing questions about your products and services. Graphics can work well, but only if size and load times are fully vetted to ensure a seamless load experience.

Unfriendly navigation. If your homepage looks cluttered, potential customers will become frustrated. Make it easy for users to navigate your site from home page to supplemental pages and back again. Use a handful of clearly-labeled tabs in a top level menu. Deliberately design each page to have the same look and feel.

Stale data. When you visit a webpage and note that it was last updated five years ago, do you sense a vibrant, cutting-edge enterprise? Keep your site up to date. Consider subscribing to content services that will keep your information fresh. Remember, developing a web presence is not an event, it is an ongoing journey. Your site must display current prices, merchandise that’s available right now, with up-to-date details about new product offerings.

Sloppy content. A website riddled with typos, grammatical mistakes and industry jargon will turn customers away. Visitors may ask themselves if your business doesn’t care about the quality of its website, how can they trust your products and services?

A carefully crafted website can draw customers in, enhance their buying experience and leave a lasting impression of professionalism and quality.

Generate Business Buzz With a Press Release

When crafting your business’s marketing strategy, don’t forget about developing a relationship with the press. Although newspapers and magazine circulation has drastically decreased over the past 20 years, the demand for content still exists via online platforms.

Here are several suggestions for crafting a press release to tell your business’s story and how to best connect with local, regional or national reporters.

Forget the hard sell. Think like a reporter with a deadline. Pitch a story, not your company. Ask yourself why would this publication’s readers care about your story. Your press release must deliver actual news or interesting information. It should read like a news story with a catchy headline.

Do your homework. Read the publication that you’d like to see your story appear in to learn about its writing style and what types of stories it prefers to publish. Focus on articles that overlap with your company’s offerings. Identify the common interests of the publication’s readers and tailor your press release to their needs. Consider how your idea might extend the subject matter further or offer an alternative solution to a problem.

Send story ideas to the right person. Larger publications and broadcasting outlets often have various departments, each of which may be inundated with press releases from governments, businesses and non-profit organizations. So it’s important to identify the reporter or editor who normally handles stories related to your industry, and send your press release to that specific person.

Follow a standard news story outline. For most newspaper, magazine or internet venues, you’ll want to follow a tried-and-true story format. Start with a catchy headline followed by an introductory paragraph that answers who, what, when, where and so what. Follow-up with paragraphs that include quotations from interesting people, statistics, a brief company history or newsworthy trends.

Keep it short and simple. A standard press release typically runs 400 to 500 words, just enough to grab the reader’s interest. Don’t include exaggerations or claims that can’t be readily supported or make readers reach for a dictionary with complicated jargon.

Follow up. After you’ve sent the press release, reach out to the reporter or editor to see if they have any questions. If your story is picked for publication, a reporter will reach out to you for additional information.

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.