The Affordable Care Act: How will it affect your 2014 taxes?

Staggered start dates. Exceptions. Waivers. Are you still trying to determine how the health care laws will affect your 2014 personal and business federal income tax returns? We can help. Here’s an overview we’ve put together of some current rules. Here’s an overview of some current rules.BarackObamaportrait

Individual penalty. The 2014 Form 1040 has a new line for reporting the “individual responsibility payment.” You’ll owe this penalty if you or your dependents did not have health insurance during the year and don’t qualify for an exemption.

  • The amount you’ll report on your 2014 tax return is the greater of $95 per adult and $47.50 per child, up to a maximum family penalty of $285, or 1% of your “household income formula.”

Individual premium credit. Depending on your income, you may be eligible for a reduction in the cost of your health insurance premium during the year.

  • When you signed up for insurance on the health insurance exchange, you had the option to use the reduction to offset your premiums as you paid them. Alternatively, you can apply for the credit when you file your 2014 federal income tax return.
  • The amount of the credit depends on your income and family size.

Net investment income surtax. You may be familiar with this 3.8% surtax from last year’s return. It applies to net investment income – income such as dividends, interest, and capital gains, less related expenses – when your adjusted gross income (AGI) exceeds certain levels.

  • Those levels have not increased for 2014. When you are married filing jointly, the surtax applies if your AGI exceeds $250,000. When you’re single or filing as head of household, the AGI threshold is $200,000.

Medicare surtax on wages. As in 2013, this 0.9% surtax applies to wages, compensation, and self-employment income when your AGI exceeds $250,000 and you’re married filing jointly. When you’re single or filing as head of household, the AGI threshold is $200,000.

Business health insurance premium credit. Did you pay at least 50% of the health insurance premium costs for your employees during 2014? If you employed fewer than 25 full-time equivalent employees and paid them wages of less than $50,800, you may be able to claim a credit of up to 50% of the premiums you paid.

  • The credit is available even if you claimed it in prior years. Tax-exempt organizations can also benefit.

Business fee. When you self-insure your business health care expenses, you may have to pay a fee to help fund a healthcare research institute. The fee may also apply to your health reimbursement arrangement or health flexible spending arrangement.

Employer penalties. Depending on the number of workers you employ, you may be penalized for not providing health insurance and/or not providing affordable health insurance.

  • Neither penalty applies for tax year 2014. However, you’ll want to review your workforce to determine whether the penalty will affect you in the future.
  • Beginning January 1, 2015, the penalty will apply when 100 or more full-time employees work in your business. The penalty applies in 2016 when your business employs 50 or more full-time workers. When you employ fewer than 50 workers, you’re not subject to the penalty.
  • Employer reporting. The health care laws included a requirement for reporting on Forms W-2 the cost of the health insurance coverage you provide to your employees. However, reporting is optional for 2014 when you file fewer than 250 Forms W-2.

Understanding Sunk Costs in Business Decisions

One of the most difficult business decisions is to walk away from money that you have already spent. These losses are called “sunk” costs. This can be extremely frustrating, but the only efficient way to move forward is by focusing on future costs rather than dwelling on past losses.sinking-ship

Below we have put together some ideas to help you understand sunk costs, and how you should go about making business decisions after experiencing them. Should you have any questions we are only a telephone call away.

When a business incurs costs that can’t be recovered, those costs are of no use when making business decisions. These expenditures, called sunk costs, can include money spent, time, effort and energy used that are no longer recoverable.

For example: You’ve invested $40,000 in a new website, and it’s become apparent that it will cost another $20,000 to complete it. Regardless of what you do going forward, you’ll be unable to get back that initial $40,000. Now an opportunity comes along where you can buy a completed website for $12,000.

At this point, your only choice is whether to spend 20,000 or $12,000 for the same website. Whatever you decide, the initial $40,000 investment will be gone – a sunk cost. All else being equal, the best choice is the $12,000 facility.

Now assume the same $40,000 sunk cost with an additional $12,000 needed for completion. An opportunity to buy a similar completed website for $16,000 arises. Obviously you’ll go forward with the $12,000 completion costs, even though the total cost of the facility will be $52,000 rather than $16,000. The $40,000 sunk cost remains irrelevant.

Another example: Your company has spent time and money developing a new mobile app, and you’re understandably proud of the result. However, when you test market the product on your customers, you discover that most of them have no interest in it and wouldn’t buy it at any price. It is now time to swallow your pride (along with the sunk development costs) and walk away from your product.

It’s hard to forget about time and money you’ve already put into a project, but once such costs become irrecoverable, it’s counterproductive to factor them into your company’s decision making process. From that point forward, your choices should be based only on expected future costs.

You work hard for your money: How every entrepreneur can establish internal controls

As an entrepreneur, you work hard for your money. There is almost nothing worse than experiencing pilferage, embezzlementnt, and other types of misappropriation. Internal controls are extremely important to the entrepreneurial company.

We have put together some practical advice to help you protect the earnings and assets of your company. Should you have any questions we are only a telephone call away.

Entrepreneurs usually can’t afford cfo2go1to hire internal auditors or set up complete separation of duties. You can, however, establish controls in certain high-risk areas, such as the following:

Cash disbursements: If at all possible, the owner/manager should sign checks. This control has a dual purpose: management sees how the company is spending its money, and the cash disbursement function is kept separate from bookkeeping or accounting. If the same person signs checks and enters disbursement transactions in the accounting records, embezzlement is harder to prevent. Requiring two signatures on checks above a certain amount also provides greater control.
Customer collections: The entrepreneur should consider opening the mail. Alternatively, you might ask someone separate from the accounting function to open the mail and prepare the deposit slip. The practice of making daily deposits is also a good practice.

Personnel practices: Perform background checks before hiring key employees, especially those who will be handling cash or other high-risk assets, Unfortunately, financial pressures, addictions, and other factors can corrupt even good employees.

Perhaps an entrepreneur’s greatest control is the “tone at the top.” If management sets a high standard, employees generally follow. However, if a manager is perceived as lax or dishonest – for example, he or she doesn’t respond quickly when evidence of misappropriation surfaces – employees might conclude that theft isn’t such a big deal.

Make sure to remember: A company that fails to establish minimum controls is providing a golden opportunity for fraud. If you’d like help reviewing your firm’s controls, give us a call.

Should You Incorporate Your Business?

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If you’re a sole proprietor, you have probably wondered this at some point. Take a look at the benefits to consider. Most of these benefits also apply to an LLC.

  • Incorporating your business limits the liability of the owner business
  • Where personal services are involved, the individual performing the services may be personally liable for his or her actions even though the business is incorporated
  • When operating as a corporation, it may be easier to raise capital because the business can do so by issuing stock and selling bonds
  • Ownership interest in a corporation is easier to transfer than in a sole proprietorship
  • A corporation files its own tax return and pays its own income tax. Double taxation can generally be avoided by electing S corporation status
  • Corporate form allows for more protection as well as fringe benefits that are deductible by the corporation and tax-free to employees, including an owner-employee

Take a look at our white paper regarding Selecting a Legal Entity: A Brief Guide for the Business Person. Call our office today if you have any further questions regarding the advatanges and disadvantages of incorporating your sole proprietorship and what is best for your company.

Selecting a Legal Entity: A Brief Guide for the Business Person

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I am frequently asked the question, “What kind of legal entity should I use for my business?” In this article, we discuss several different options available when opening a business. This decision will have a significant impact on the way you are protected under the law, and the way you are affected by income tax rules and regulations.

Click below to read about different types of legal entities and how to determine which one best suits your business:

Download our free guide: Selecting a Legal Entity

How do I tell how much my business is worth?

Recently, the media website mediaShephard.com asked me to write an article about the frequently asked question, “How much is my business worth?” As a member of the  mediaShephard’s Panel of Experts, I offered the following thoughts on how to determine your  business’ valuation.  

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This is a very complex question, which I get asked frequently. The value of a business is the present value of the future streams of cash flow. These sorts of projections, however, are very difficult to make with any level of accuracy and credibility.  Therefore, media investment bankers may discuss valuations in terms of multiples of EBITDA (or Earnings before Interest, Taxes, Depreciation and Amortization). This is a surrogate for the future cash flow, mentioned above. Currently multiples range from 5x to 10x of the most recent twelve months’ worth of EBITDA.

What separates a 5x company from a 10x company? Here are my thoughts:

  • Profitability and growth in revenues and profits. Because the value of a company is based upon future cash streams, a company with growing cash streams is worth more than a company with flat or declining revenue and profits.
  • Type of media property. All other things being equal a company with significant internet activities will be worth more than a traditional print media company or a newspaper. Again the future profitability is brighter (or at least seems that way) for an internet company.
  • The industry served by the media company and the growth prospects for that industry. For example, a newspaper-centered business may be worth less than a publication serving pharmaceutical companies, all else being equal, because of the differing future prospects of the industries being served by the publishers.
  • The industry position. Are the media properties leaders in their field or are they tertiary products? The number 1 in a field is worth more than the number 5 in the same field.  Leaders always command higher profits.
  • The size of the business. Let’s say there are two media companies:  one a mature company with revenues of $2 million and the other with revenues of $20 million. It may be difficult for the smaller mature company to find any buyers. It may even be difficult for the seller to find an investment banker or broker who wants to handle such a small transaction.

The following are other important factors:

  • The existence of a strategic buyer. A strategic buyer may be a competitor who believes that acquiring your company will add more value to their company, perhaps because of technology that the seller [or buyer] has, for example. Generally strategic buyers are willing to pay more than a non-strategic buyer.
  • External factors such as the level of interest rates and the availability of capital/loans. If a buyer has to finance the purchase of an acquisition, the availability and cost of such financing will have an impact on how much they can afford to pay.
  • The quality of your management team and whether you and other team members are willing to stay with the company after the acquisition.  Buyers often prefer to retain a management team, at least for a short period of time.  They may offer earn-out, stay bonuses or other incentives to do so, which should be taken into account when assessing the overall purchase price.

Owners interested in selling their company should speak to and develop relationships with the investment bankers/brokers who handle deals in their industry. Also make sure that they handle companies of your size. Again, the mature company with $2 million in revenue may not be of interest to one of the larger well known investment bankers / brokers. There are a number of independent investment bankers, however, who may be interested.

Finally there is the question of which investment banker to hire. Let’s say that you speak to 3 investment bankers who estimate a selling price of your company to be $10 million, $11 million and $20 million, respectively. You should be wary of the broker who suggests a price of $20 million. Since all brokers are paid based upon a percentage of the selling price, all of them have the incentive to sell your company for the highest price possible.  While the broker that suggested $20 million might seem appealing, are they going to be able to actually consummate such a transaction? The inflated asking price may actually turn off potential buyers. This may hinder being able to close a transaction. I have seen brokers who do this regularly and cannot close the transaction. Meanwhile you are counting on $20 million and this is not going to happen.

One way to get a realistic view of the true value of your company is to ask each banker/broker to explain the reasoning behind their valuations–are they comparing your company to the recent transactions of similar companies, are they using reasonable estimates for financial projections of your company’s growth, or are they just guessing at a big number in order to get your business?

And finally there are the accounting records. You should make sure to have proper accounting records and methods because any serious seller will insist on seeing them. I have seen deals that did not close because the seller’s accounting methodology was questionable. You should “scrub” your accounting records. Involve a CPA.

If you have any questions, we offer our readers a free one-hour consultation. Please call 516-605-0276 for an appointment

Manage Your 2014 Tax Bill by Knowing Medicare Surtaxes

We’re now in our second year of the new Medicare surtaxes. If these surtaxes affect you, we will help you develop a tax plan to take them into account and keep them to a minimum.

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Take Steps to Deal with Medicare Surtaxes 

1. Earned income

  • To help minimize the surtax on earned income, try to defer excess discretionary earnings (such as commissions or bonuses) to a lower-income year.
  • If you are self-employed, consider maximizing payments of deductible expenses in high-income years while deferring late-year customer billings to the following year.
  • Think about increasing your withholding or quarterly estimate payments to cover any additional liability.


2. Investment income

  • The surtax on net investment income is trickier but provides more planning opportunities. To reduce this surtax:
    • Consider liquidating depreciating stocks to offset capital gains.
    • Shift some investments to tax-deferred annuities, municipal bonds, or other vehicles that don’t generate taxable income.
    • Maximize deductible contributions to traditional IRAs, 401(k) plans, or similar sheltered investments. Their earnings are excluded from NII, and the contributions reduce your MAGI.
    • Donate appreciated stocks to charities rather than selling them.
    • Try to make otherwise taxable investments through a Roth IRA. The earnings won’t be part of NII, and subsequent tax-free withdrawals won’t count toward the thresholds.

Marriage: Tax Penalty or Bonus

Summertime is the traditional season for weddings. If you’re planning a wedding this summer, you should take a look at how marriage could affect your tax bill.

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Marriage: Tax Penalty or Bonus?

1. Tax Penalty.

  • The so-called “marriage penalty,” is the term applied to the amount of additional taxes some couples pay after they marry.
    • If you and your spouse earn similar amounts of income, you may pay more tax as a married couple than each of you would as single individuals because your joint income pushes you into a higher tax bracket.
  • Other provisions that can create a marriage penalty include phase-outs of personal exemptions and itemized deductions.
    • The new Medicare taxes can create a penalty because the threshold for applying them is $200,000 for singles and $250,000 for couples filing jointly.
    • If one spouse has a retirement plan at work and the other contributes to an IRA, you may not be able to deduct the full amount of your IRA contributions after you’re married.

2. Tax Benefit.

  • The tax code can also create “marriage bonuses” which are situations when tax liability can decrease after you marry.
    • For example, if only one spouse has income, the wider brackets for marrieds at certain tax rates will give the couple a lower tax bill than paying as a single on the same amount of income.
  • Other marriage bonuses: A wage-earning spouse can make an additional IRA contribution for a nonworking spouse, and married homeowners get double the $250,000 gain exclusion when they sell a home.
    • What to do: Analyze the benefits of potential current income tax savings against your future goals.
    • For example, plans for distributing corporate income or selling the business have tax consequences that will affect your decision.

Manage Your 2014 Tax Bill with Summertime Tax Planning

Midyear planning is critical to individuals, as well as businesses. There’s enough of the year behind you to establish a track record and enough time ahead to make changes that matter.

Summer: the season for sun, sandals, and tax planning. Kick back in your lounge chair and review the following suggestions for easing your 2014 federal income tax bill.

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1. Bump up pre-tax retirement plan contributions.
  • Elective contributions – the ones you ask your employer to withhold from your paycheck – reduce current-year taxable income.
  • Compare the amount you’re presently depositing in your account to the maximum allowed, and make adjustments now to spread the impact over the rest of the year.
    • ​The maximum 401(k) contribution for 2014 is $17,500.
    • If you’re 50 or older this year, add an additional $5,500.

2. Open an education savings account.

  • There is not a federal tax deduction for contributions to a 529 education plan. However, if you are currently setting aside money to pay for your child’s college espenses in a taxable account, you could open a 529 plan instead.
  • Earnings on plan assets grow tax-deferred and can be tax-free when withdrawals are used for qualified education expenses.

3. Reset basis with capital loss carryfowards.

  • Would you benefit from selling an appreciated stock and using your loss carryforward to shelter the income?
  • Planning point: Reacquiring the stock immediately after selling at a gain doesn’t incur the wash sale rules. At the same time, you get an increased basis to offset future gains.

4. Hold off on retirement plan withdrawals.

  • In the early years of retirement, withdraw funds from taxable accounts in the most tax-efficient manner possible.
  • For example, you could sell long-term stocks with a high basis first. The current tax saving is complemented by a longer-term benefit: continued tax-deferred growth in your retirement accounts

5. Plan for required minimum distributions.

  • What do you intend to do with the funds you’re required to take from retirement accounts once you reach age 70½?
    • Tax-efficient investing strategies can reduce the tax on the income you earn on the distributed amount.
    • Another suggestion: Using the funds for charitable donations can offset some of the tax from the distribution.​

6. Shift Income.

  • Broaden your tax-planning focus to include family members.
    • ​For instance, say your parents or children are in a lower tax bracket than you are. Employing them in your sole proprietorship can provide net tax savings.

7. Gifting offers similar benefits. 

  • You no longer pay tax on the income from the gifted asset while the income tax paid by the recipient may be minimal or deferred. (Be aware of the kiddie tax.)
    • For 2014, gifts under $14,000 qualify for the annual gift tax exclusion.

8. Track passive activity losses.

  • Make sure you’re on track to meet the active or material participation rules for your real estate rentals and other passive activities.
  • The requirements vary, but generally you must be involved in the activity in a material way, and you must have evidence proving your involvement, such as a logbook.

9. Know the alimony rules.

  • If you are already paying alimony or finalizing a divorce that will result in alimony, be sure you’re following the rules so you can claim a deduction.
  • Among other requirements, payments must be made to a former spouse in cash under a divorce or separation decree, and must cease upon the recipient’s death.

10. Preserve Deductions.

  • You’ve heard it before: Recordkeeping is essential.
    • ​Examples of tax breaks that may be disallowed if you cannot provide proof include: charitable contributions, gambling losses, vehicle costs, and travel and entertainment expenses.
  • ​If you neglected to start tracking these expenses at the beginning of the year, get going now.

11. Check dependent status. 

  • Keep your college student qualified as your dependent by monitoring the “support” test.
    • The rule: Generally, your child cannot provide over one-half of his or her own support during the year.
    • Other relatives may qualify as your dependents, including parents in nursing homes.

12. Check payments. 

  • Update your withholding or estimated tax payments in light of life changes such as marriage, divorce, or starting a new business.
    • Overpaying your 2014 tax reduces your available cash flow.
    • Underpaying your 2014 tax can lead to penalties and interest.

13. Review health insurance subsidies.

  • Review your eligibility for the advance premium tax credit
    • Premium tax credit – a refundable credit that reduces the premium you pay for a health policy purchased on a government exchange.
    • If you elected to have the credit applied to your premium and your 2014 income is higher than you expect, you may have to pay back all or part of the credit.

Road map to Startup NY

A Roadmap for Startup NY
The first step in the process comes from the Universities and Colleges; they must apply to New York State and receive approval. Once they have been approved, the business must apply to the approved University or College. After this, the University or College must approve the business. However, we have been told that businesses with over 100 net new jobs may deal directly with New York State Empire Development and bypass these past two steps. In the final step the approved application needs to go on to New York state officials. New York State will help any interested businesses in finding an approved University or College.

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