Accounting for Small Business

Is Your Hobby a Business?

Is your activity a business or a hobby? It’s important to know because if the IRS views your activity as a hobby rather than as a business, your tax deductions for business-type expenses are subject to certain limitations.

Business Versus Hobby

To qualify as a business, an activity must be conducted for the primary purpose of making a profit. Factors that are considered in determining whether you have a profit-making objective include:

  • How the activity is conducted
  • Your expertise and that of any advisors
  • The time and effort put into the activity
  • Whether you expect that assets used in the activity will appreciate in value
  • Your success in other similar or dissimilar activities
  • Your history of income/loss with respect to the activity
  • The amount of any profit
  • Your financial status
  • The presence of personal pleasure or recreation
  • Generally, the IRS presumes that an activity qualifies as a business if it shows a profit for three out of the last five years.

What’s Deductible?

If your activity is considered a hobby, two rules limit the amount of expenses you can deduct. First, your deduction for hobby expenses (such as rent and advertising) cannot exceed the activity’s gross income. So if your hobby income is $5,000 but your expenses are $6,000, you may take only $5,000 in expenses. You may not use the additional $1,000 to offset other income.

Second, hobby expenses are deductible only to the extent they (when combined with other miscellaneous expenses) exceed 2% of your adjusted gross income (AGI). So in the example above, if your AGI was $100,000, you would be able to deduct only $3,000 of the $5,000 in expenses.

Running your activity in a businesslike way can help you avoid the hobby-loss restrictions. Connect with our Orange County, CA CPA Firm at 949-759-5626 for all the latest and most current tax rules and regulations.

What Start-Up Costs Can You Deduct?

200359336-001Starting a new business is an exciting prospect but there are many serious financial and tax implications that must be considered in order to be successful. Make sure you work with an Orange County, CPA firm that understands the needs of local businesses and can help a business that incorporates in California.

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

    • No deduction is available until the business becomes active.
    • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
    • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

Whether you need individual or business tax advice, give us a call at 949-759-5626 to reach our Orange County CPA firm. We can assist local small businesses with their business accounting needs, and specialize in new businesses advisory. We’ve got the answers you’re looking for, so don’t wait. Call us today.

How to Improve Cash Flow For Your Business

Hand put coin to moneySlow paying customers, seasonal revenue variations, an unexpected downturn in sales, higher expenses — any number of business conditions can contribute to a cash flow crunch. If you own a small business, you may find the suggestions that follow helpful in minimizing cash flow problems.

Billing and collections

Your employees need to work with clear guidelines. If you don’t have a standardized process for billing and collections, make it a priority to develop one. Consider sending invoices electronically instead of by mail. And encourage customers to pay via electronic funds transfer rather than by check. If you don’t offer a discount for timely payment, consider adding one to your payment terms.

Expense management.

Know when bills are due. As often as possible, pay suppliers within the period that allows you to take advantage of any prompt-payment incentives. Remember that foregoing a discount in order to pay later is essentially financing your purchase.

Take another look at your costs for ongoing goods and services, including telecommunications, shipping and delivery, utilities, etc. If you or your employees travel frequently for in-person meetings, consider holding more web conferences to reduce costs.

Inventory

Focus on inventory management, if applicable, to avoid tying up cash unnecessarily. Determine the minimum quantities you need to keep on hand to promptly serve customers. Systematically track inventory levels to avoid overbuying.

Debt management

Consider how you use credit. Before you commit to financing, compare terms from more than one lender and keep the amount to a manageable level. For flexibility, consider establishing a line of credit if you do not already have one. You will be charged interest only on the amount drawn from the credit line.

Control taxes

Make sure you are taking advantage of available tax breaks, such as the Section 179 deduction for equipment purchases, to limit taxes.

Develop a cash flow budget

Projecting monthly or weekly cash inflows and outflows gives you a critical snapshot of your business’s cash position and shows whether you’ll have enough cash on hand to meet your company’s needs.

Don’t get left behind. Contact us today at 949-759-5626 to discover how we can help you keep your business on the right track. Don’t wait, contact our Orange County CPA Firm.

As an S Corporation Shareholder do You Need to Worry about Taxes?

S corporation shareholders have extra reason to worry about their company’s annual performance: It has a direct impact on their own income taxes.

How It Works

Unlike a regular C corporation, an S corporation usually doesn’t pay federal income taxes itself. Instead, each shareholder is allocated a portion of the corporate income, loss, deductions, and credits on a special “K-1″ tax form. The shareholder then must report the items listed on the K-1 on his or her personal tax return.

The K-1 allocations are based on stock ownership percentages. So, for example, if an S corporation has $100,000 of taxable business income for the year, a person who owns 75% of the stock in the corporation would be allocated 75% of that income, or $75,000.

This scheme can get complicated. Case in point: The K-1 may show more income than the shareholder actually received from the company during the year. That’s because the K-1 figure is based on the corporation’s actual taxable income — not on the distributions made to the shareholder.

Example. Tom starts a new corporation, electing S status. In the first year, Tom draws a $30,000 salary and receives no other distributions from the company. The company’s ordinary business income (after deducting his salary) is $10,000. Since Tom is the only shareholder, all the company’s $10,000 of income is allocated to him on his K-1. Tom must include both the $30,000 of salary and the $10,000 on his personal income-tax return, even though all he actually received from the corporation was his salary.

This result seems harsh, but it’s not the end of the story. Special rules in the tax law prevent the same income from being taxed again. Essentially, Tom will be credited with already having paid taxes on the $10,000 so that any future distribution of the funds will not be taxable.

Tracking Basis

To determine whether non-dividend distributions* are tax free, S corporation shareholders must keep track of their stock basis. The computation generally starts with a shareholder’s initial capital contribution (or the stock’s cost if it was purchased) and changes from year to year as the shareholder is allocated corporate income, loss, etc. Non-dividend distributions that don’t exceed a shareholder’s stock basis are tax free.

Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.

* Most distributions made from an S corporation are non-dividend distributions. Dividend distributions can occur if the company was previously a regular C corporation (or in other limited situations).

Business Start-up Costs — What’s Deductible?

Start UpLaunching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

  • No deduction is available until the business becomes active.
  • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
  • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Example. Gina spent $20,000 on start-up costs before her new business began on July 1, 2015. In 2015, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2015 ($15,000/180 × 6 = $500), a total of $5,500. The remaining $14,500 may be deducted ratably over the remaining 174 months.

 

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

If you want to be more aggressive lowering your tax obligations but stay within the legal limits, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente CA.  Our clients are located throughout Los Angeles and Orange County.

 

Don’t Let Taxes Trip You Up

The last thing you need as a small business owner is to have to spend time unraveling tax problems you could have avoided. There are many tax issues that can trip up small business owners — here are a few.

Mixing Business and Personal

Keeping your personal bank and credit card accounts separate from your business accounts isn’t always easy. But “commingling” business and personal accounts creates a recordkeeping nightmare. When it’s tax time, you may not be able to identify all the appropriate business expenses. As a result, it could be difficult to accurately determine your business income and you might lose deductions.

Not Keeping Track

Keeping track of business expenses can be a challenge. However, you’ll need proof of purchase for any expenses you plan to deduct. Proof can be a canceled check (or legible image of the check) or a credit card, debit card, or electronic funds transfer (EFT) statement showing the payee, the amount of the purchase or transfer, and the transaction date.

You’ll also need an invoice or a receipt identifying the purchase. If the business purpose for the purchase isn’t immediately obvious, attaching a note of explanation or writing directly on the invoice or receipt can save time later should questions arise. There are specific substantiation requirements for business travel and entertainment expenses. Check with us if you have questions.

Making the IRS Wait

The employment taxes you collect should always be remitted to the IRS in a timely manner — without exception. As an employer, you’re responsible for withholding federal income tax and FICA (Social Security and Medicare) taxes from your employees’ wages and remitting them, along with your company’s FICA contributions, to the IRS. Penalties for noncompliance can be harsh.

Misclassifying Workers

Misclassifying workers as independent contractors when they are actually employees can be a thorny issue because they are treated differently for income-tax withholding and employment-tax purposes.

 

> Employees: You must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes.

> Independent contractors: You’re not required to withhold income tax, and the worker is fully liable for his or her own self-employment taxes. FICA and unemployment taxes do not apply.

 

It’s important to get it right to avoid penalties. Generally, the more control you have, the more likely it is that the worker is an employee.

 

Lock In Tax Breaks You Deserve

Tax BreaksIf you run a small business, you already have a full plate. The last thing you need is for the IRS to question any of your business expense deductions. But it could happen. And that’s why having records that prove your expenses is so important. Even deductions for routine business expenses could be disallowed if you don’t have appropriate records.

What Records Are Required?

Except in a few instances, the tax law does not require any special kind of records. You’re free to have a recordkeeping system that is suited to your business, as long as it clearly shows your expenses. In addition to books that allow you to track and summarize your business transactions, you should keep supporting documents, such as:

  • Canceled checks
  • Cash register receipts
  • Credit card sales slips
  • Invoices
  • Account statements

The rules are stricter for travel, entertainment, and transportation expenses. You should retain hotel bills or other documentary evidence (e.g., receipts, canceled checks) for each lodging expense and for any other expense of $75 or more. In addition, you should maintain a diary, log, or account book with the information described below.

Travel. Your records should show the cost of each separate expense for travel, lodging, and meals. For each trip, record your destination, the dates you left and returned, and the number of days spent on business. Also record the business purpose for the expense or the business benefit you gained or expected to gain. Incidental expenses, such as taxi fares, may be totaled in reasonable categories.

Entertainment. Record the date the entertainment took place and the amount of each separate expense, along with the name and address or location of the place of entertainment. Note the business purpose for the expense or the business benefit you gained or expected to gain and the nature of any business discussion or activity that took place. Also list the identities and occupations of the individuals you were entertaining or other information that indicates their business relationship to you.

If the entertainment was directly before or after a business discussion, be sure to indicate the date, place, nature, and duration of the discussion and the individuals who took part in both the discussion and the entertainment activity. For a business meal, you must prove that either you or your employee was present.

Transportation. As with travel and entertainment, you should record the amount and date of each separate expense. Note your business destination and the business purpose for the expense. If you are deducting actual car expenses, you’ll need to record the cost of the car and the date you started using it for business (for depreciation purposes). If you drive the car for both business and personal purposes or claim the standard mileage rate, keep records of the mileage for each business use and the total miles driven during the year.

Don’t Mix Business and Personal Expenses

Things can get tangled if you intermingle business and personal expenses. You can avoid headaches by having a separate business bank account and credit card.

If you want to be more aggressive lowering your tax obligations but stay within the legal limits, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente CA.  Our clients are located throughout Los Angeles and Orange County.

 

Foreign Bank Accounting Reporting – FBAR – IRS Priority List

IRSIf you have a foreign bank account that has not been reported to the IRS, then you could be facing serious civil penalties and even criminal penalties. These penalties fall under the Foreign Bank Account Report, FBAR violations.

To illustrate, the IRS Dirty Dozen tax scam list for 2016 clearly illustrates the emphasis placed upon hiding money or foreign bank accounts (see excerpt below).

The Internal Revenue Service today said avoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“Our continued enforcement actions should discourage anyone from trying to illegally hide money and income offshore,” said IRS Commissioner John Koskinen. “We have voluntary options to help taxpayers get their taxes and filing obligations in order.”

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 54,000 disclosures and we have collected more than $8 billion from this initiative alone. The IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

The IRS continues to beat this drum more aggressively each year. If you would like to discuss this situation, simply call 949-486-2011 and ask for Jerry Morey, CPA.  

 

Morey & Associates CPA is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente.  We work with businesses throughout Los Angeles and Orange County.  For additional expertise, we provide boutique services for dentists, doctorsreal estate accounting and high net worth accounting.

Net Operating Losses Provide Tax Benefits

Net Operating LossFor many businesses, profits vary from year to year. However, with proper planning, even a bad year can be helpful from a tax perspective. Where business deductions exceed gross income, a taxpayer may have a net operating loss (NOL) that can be used to offset income in another tax year, potentially generating a refund of previously paid taxes.

Who May Use an NOL?

NOLs are available to individual business owners, corporations, estates, and trusts. Partnerships and S corporations do not take NOL deductions, though their partners and shareholders may use “passed through” losses on their own returns.

How Is an NOL Applied?

The general rule is that a taxpayer may carry an NOL back two years and forward 20 years, though certain limited exceptions may apply. For example, an individual with an NOL that was caused by a casualty, theft, or disaster may use a three-year carryback period.

In general, the taxpayer will carry back an NOL to the earliest year it can be used and then carry it forward, year by year, until it is used up. The taxpayer may also elect to forego the two-year carryback and carry the loss forward for the 20-year period. However, the general preference is to use an NOL sooner rather than later because a dollar of tax saved today is generally worth more than a dollar saved in the future.

How Is an NOL Calculated?

Calculations of NOLs can be complicated. For example, a noncorporate taxpayer’s NOL is calculated without regard to any personal exemptions or NOLs from other years, and certain deductions for capital losses and nonbusiness items are limited.

If you are tired of overpaying taxes, call 949-759-5626 and ask for Jerry Morey.  Lowering your taxes legally is our specialty.

Office Space Decisions for Small Business Owner

Office SpaceBuy or lease?

It’s a decision many Orange County businesses face. Owning real estate certainly can have advantages, including the opportunity to build equity. But many small businesses in need of space choose the rental route instead.

Cash Flow Considerations

By leasing, a company can avoid taking on debt to acquire a property. Less debt on the balance sheet may allow the company to finance other things, such as receivables or inventory and equipment purchases. And the upfront cash commitment needed to enter a lease agreement may be much lower than the down payment required for a property purchase.

Shopping Tips

If your business is looking around for the right rental location, here are a few suggestions to keep in mind. Not all of these tips are appropriate for all businesses, but some may help you get a lead on a good spot — and a good deal.

  • Find an eager landlord. Rental spots that have been on the market for a while could have some negative features, but they may be worth a look. If you find a location that suits you, you might also find a landlord who is anxious to negotiate.
  • Think about the term. A long-term lease locks in your rental rate — and that can be an advantage if you expect the market to trend upward. But leasing for short periods is often less expensive than leasing for longer periods. If your business is in its formative years, significant changes may lie ahead, so a short-term arrangement could be more practical, too. Adding an “option to renew” clause can help keep your costs down and your options open.
  • Divide and conquer. Could you make do with two smaller spaces instead of one large space? The more flexible you can be, the better your chances of finding a good deal.
  • Check rental comps. Commercial property markets can be very localized. Rents may vary considerably between one locality and another just a few miles away. Unless you’re limited to a specific location, compare rates in several areas.

At Morey & Associates, we help many of our small business clients with the office space decision and help them lower their overall taxes.  If you are struggling with this decision, simply call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates works with all types of small businesses throughout Orange County to minimize their taxes legally.  We provide additional expertise in real estate accounting, dental practice accounting and high net worth accounting.