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Understanding Tax Breaks for Moving

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Everybody likes tax breaks. For many taxpayers, the tax break they get on the gain from selling a home is one of the most valuable of all. If you’re thinking the time is right to put your house on the market and it has appreciated in value, make sure your gain will qualify for the home-sale gain exclusion before you make your move.

Good Deal

Here’s how the home-sale gain exclusion works: If you make a profit when you sell your principal residence, all or part of your gain may be tax free. Eligible individual filers may exclude up to $250,000 of gain from their income; married couples filing jointly may exclude up to $500,000 of gain.

Ownership and Use Tests

In general, this tax break is available only once every two years. To qualify, you generally must have owned and used the home as your principal residence for at least two years (a total of 24 full months or 730 days) during the five-year period ending on the date of the sale. The ownership and use periods don’t necessarily have to coincide.

Only one spouse must pass the ownership test, although neither spouse may have excluded gain from a previous home sale during the two-year period ending on the sale date. As for the use test, both spouses must pass it. Note that short, temporary absences count as periods of use. So, for example, a three-week vacation tour of Europe would count as time spent in your principal residence.

Reduced Exclusion Possible

If you don’t meet the requirements for the full $250,000/$500,000 exclusion, you might qualify for a reduced exclusion under certain circumstances: if you have to sell your home because of a change in employment, you move for health reasons, or there are other qualifying “unforeseen circumstances.” The amount of the reduced exclusion is based on the portion of the two-year use and ownership periods you satisfy.

Call us today at 512-255-7110 for more tips on how to ensure you’re following business best practices or to learn more about real estate taxes. Our Round Rock CPA Firm offers accounting and tax services to individuals and businesses.

Steps to Creating a Continuation Plan for Your Business

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Are you a business owner who wants to retire someday? Would you like to see the business continue after your departure with younger family members and/or other key employees in charge? Accomplishing the dual goals of retirement and continuity of the business is possible, but it takes planning.

Because every situation is different, your plan should be tailored to achieve the results you desire. That said, you may be interested in an illustration of how a transition plan could be crafted.

Step 1 — Establish a New Entity

A new business entity is formed sometime before your anticipated retirement date. The new entity — let’s assume it is a limited liability company (LLC) called “Company 2” — is capitalized with contributions from the new owners and a small contribution from you.

Step 2 — Transition Operations

Company 2 operates alongside your old company during a buyout period, with you as the managing member. During that period, your old company finishes its existing work and collects its outstanding accounts receivable.

New work is funneled to Company 2 as it comes in. Company 2 rents equipment from your old company and gradually buys the equipment. Any new equipment that must be acquired during the transition period is purchased by Company 2.

Your old company receives a management fee for your assistance during the transition and is reimbursed for any operating expenses it incurs on Company 2’s behalf. You continue to receive a salary from your old company. At a prearranged time and price, the new owners of Company 2 buy out your interest in Company 2.

Step 3 — Liquidate

At the end of the transition period, your company sells its remaining equipment to Company 2 and liquidates, distributing its equity to you.

Benefits

With this plan, liability for claims that could arise from Company’s operations during the transition period are shifted away from your old company, helping to ensure that its equity will be available to you for retirement. Meanwhile, Company’s new owners are in a position to benefit from any future increase in the new company’s value.

Note that this is just one of several ideas for implementing a business transition; any plan should be customized to your specific situation.

The future of your business is too important to leave to chance. Why not get ahead of the curve by starting to think about a continuity plan well in advance?

For more help with your retirement and business continuation plan, give our Round Rock, TX CPA Firm a call today at 512-255-7110.

Why Worker Classification Matters For Your Taxes

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It isn’t easy deciding whether a worker should be treated as an employee or an independent contractor. But the IRS looks at the distinction closely. Our Round Rock CPA Firm works with all types of businesses and we can help advise you on these tricky questions.

Tax Obligations

For an employee, a business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and remit those taxes to the government. Additionally, the employer must pay FICA taxes for the employee (currently 7.65% of earnings up to $118,500 and 1.45% of earnings exceeding that amount). The business must also pay unemployment taxes for the worker. In contrast, for an independent contractor, a business is not required to withhold income or FICA taxes. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply.

Employees Versus Independent Contractors

To determine whether a worker is an independent contractor or employee, the IRS examines factors in three categories:

Behavioral control — the extent to which the business controls how the work is done, whether through instructions, training, or otherwise.
Financial control — the extent to which the worker has the ability to control the economic aspects of the job. Factors considered include the worker’s investment and whether he or she may realize a profit or loss.
Type of relationship — whether the worker’s services are essential to the business, the expected length of the relationship, and whether the business provides the worker with employee-type benefits, such as insurance, vacation pay or sick pay, etc.
In certain cases where a taxpayer has a reasonable basis for treating an individual as a non-employee (such as a prior IRS ruling), non-employee treatment may be allowed regardless of the three-prong test.

If the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Year-end Statements

Generally, if a business has made payments of $600 or more to an independent contractor, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.

Consequences of Misclassification

Where the employer misclassifies the employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold the employee’s income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.

Correcting Mistakes

Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program (VCSP). For employers that meet the program’s eligibility requirements, the VCSP provides the following benefits:

Workers improperly classified as independent contractors are treated as employees going forward.
The employer pays 10% of the most recent tax year’s employment-tax liability for the identified workers, determined under reduced rates (but no interest or penalties).
The government agrees not to raise the issue of the workers’ classification for prior years in an employment-tax audit.

Please contact us today at 512-255-7110 to see how we can help you sort through the IRS rules and fulfill your tax reporting obligations. Or, learn more about our Business and Financial Consulting on our website.

What You Need to Know Before You Rent Your Vacation Home

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Renting out a second home can help defray the cost of owning and maintaining the property. And there may be valuable tax benefits from the rental arrangement as well. At Richard A. Crow & Associated, we’re Round Rock, TX CPAs that specialize in all things real estate accounting and tax. Here are some things to think about if you are going to rent out a vacation property.

Two Week Rule

Your rental income won’t be taxable as long as you limit the number of rental days to 14 or fewer each year. In this situation, you won’t be able to deduct your rental expenses (other than property taxes and qualifying mortgage interest).

More Than 14 Rental Days

Once you exceed 14 rental days, all rental income becomes taxable to you. But you may deduct various rental expenses. There are different limits on rental deductions depending on your personal use of the home.

All expenses associated with renting out the property, such as utilities and maintenance, are potentially deductible if you limit personal use of the home to no more than the greater of (1) 10% of the total number of days the home is rented or (2) 14 days. However, if there’s a rental loss, the tax law’s passive activity rules may limit your loss deduction.
Where personal use exceeds the 10% or 14-day threshold, your tax deductions for rental expenses generally will be limited to the amount of rental income you collect. No loss is allowed.

To learn more about vacation homes and taxes, give us a call today at 512-255-7110. Our knowledgeable and trained staff is here to help with any of your real estate tax and accounting needs.

5 QuickBooks Reports You Need to Run in January

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The new year has begun. Does your accounting to-do list look like a clean slate, or are critical tasks from last year still nagging?

Getting all of your accounting tasks done in December is always a challenge. Besides the vacation time you and your employees probably took for the holidays, there are those year-end, Let’s-wrap-it-up-by-December-31 projects.

How did you do last month? Were you ready to move forward when you got back to the office in January? Or did you run out of time and have to leave some accounting chores undone?

Besides paying bills and chasing payments, submitting taxes and counting inventory in December, there’s another item that should have been on your to-do list: creating end-of-year reports. If you didn’t get this done, it’s not too late. It’s important to have this information as you begin the New Year. QuickBooks can provide it.

A Report Dashboard

You may be using the Reports menu to access the pre-built frameworks that QuickBooks offers. Have you ever explored the Report Center, though? You can get there by clicking Reports in the navigation toolbar or Reports | Report Center on the drop-down menu at the top of the screen.

QuickBooks’ Report Center introduces you to all of the software’s report templates and helps you access them quickly.

As you can see in the image above, the Report Center divides QuickBooks’ reports into categories and displays samples of each. Click on one of the tabs at the top if you want to:

  • Memorize a report using any customization you applied.
  • Designate a report as a Favorite
  • See a list of the most Recent reports you ran.
  • Explore reports beyond those included with QuickBooks, Contributed by Intuit or other parties.

Recommended Reports

Here are the reports we think you should run as soon as possible if you didn’t have a chance to in December:

Budget vs Actual

We hope that by now you’ve at least started to create a budget for this coming year. If not, the best way to begin is by looking at how close you came to your numbers last year. QuickBooks actually offers four budget-related reports, but Budget vs Actual is the most important; it tells you how your actual income and expenses compare to what was budgeted.

Budget Overview is just what it sounds like: a comprehensive accounting of your budget for a given period. Profit & Loss Budget Performance is similar to Budget vs Actual. It compares actual to budget amounts for the month, fiscal year-to-date, and annual. Budget vs Actual Graph provides a visual representation of your income and expenses, giving you a quick look at whether you were over or under budget during specific periods.

Income & Expense Graph

You’ve probably been watching your income and expenses all year in one way or another. But you need to look at the whole year in total to see where you stand. This graph shows you both how income compares to expenses and what the largest sources of each are. It doesn’t have the wealth of customization options that other reports due, but you can view it by date, account, customer, and class.

A/R Aging Detail

QuickBooks’ report templates offer generous customization options.

Which customers still owe you money from last year? How much? How far past the due date are they? This is a report you should be running frequently throughout the year. Right now, though, you want to clean up all of the open invoices from last year. A/R Aging Detail will show you who is current and who is 31-60, 61-90, and 91+ days old. You might consider sending Statements to those customers who are way past due.

A/P Aging Detail

Are you current on all of your bills? If so, this report will tell you so. If some bills slipped through the cracks in December, contact your vendors to let them know you’re on it.

Sales by Item Detail

January is a good time to take a good look at what sold and what didn’t before you start placing orders for this coming year. We hope you’re watching this closely throughout the year, but looking at monthly and annual totals will help you identify trends – as well as winners and losers.

QuickBooks offers some reports in the Company & Financial and Accountant & Taxes categories that you can create, but which really require expert analysis. These include Balance Sheet, Trial Balance, and Statement of Cash Flows. You need the insight they can offer on at least a quarterly basis, if not monthly. Connect with us, and we can set up a schedule for looking at these.

Social media posts

January is a good time to run reports you didn’t have time to in December. Talk to us about which are most important.

QuickBooks provides templates for some reports that you probably need help analyzing, like Balance Sheet. We can help with these.

Have you explored QuickBooks’ Report Center? It offers a variety of tools and guidance for managing reports.

Did you create a budget last year? Now’s the time to run QuickBooks’ Budget vs Actual report. To learn more about how to QuickBooks work for your business, you can learn more about our Round Rock QuickBooks Accounting Services or call us today at 512-255-7110. You can also request a free consultation online to get started right now!

10 Things to Know About an LLC

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At Richard A. Crow and Associates, we are a well-established Round Rock CPA firm that has helped many businesses simplify the incorporation and business formation process. You probably know of several businesses whose formal names end with the acronym LLC. And you probably also know that LLC stands for limited liability company. But there are some things you may not know about an LLC.

What is an LLC?

A Limited Liability Company or LLC is a legal entity that allows you to protect your personal assets from the company’s liabilities. If your business is structured this way the “members” or owners will have no personal responsibility for the financial obligations of the business. With an LLC the business itself does not report taxes on its profits but uses “pass-through” taxation where the income and deductions are reported on the personal income tax returns of the members.

10 things you may not know about an LLC

  1. An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.*
  2. Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
  3. The owners of an LLC are called “members.” There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
  4. Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
  5. An LLC may borrow money in its own name and is responsible for repayment of the debt.
  6. An LLC is usually treated as a partnership for federal income-tax purposes. (The remaining four points assume partnership treatment.)
  7. Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
  8. LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
  9. If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
  10. For tax purposes, an LLC’s income and losses are divided among its members according to the terms of their agreement. Tax allocations must correspond to economic allocations of profit and loss.  An LLC is but one structure you might consider using for a business venture. We can help you determine which type of arrangement will best meet your objectives.

Whether you need help choosing the right entity for your new business or are looking for qualified business consulting services, Richard A. Crow and Associates can help. We’ve got the answers you’re looking for, so don’t wait! Call us today at 512-255-7110 or learn more about our New Business Advisory Services.

 

* Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.